<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-21317
TCI SATELLITE ENTERTAINMENT, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1299995
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8085 South Chester, Suite 300
Englewood, Colorado 80112
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 712-4600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days [X] Yes [_] No
The number of shares outstanding of TCI Satellite Entertainment, Inc.'s
common stock as of April 30, 1998, was:
Series A common stock - 59,280,466 shares; and
Series B common stock - 8,465,324 shares.
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
1998 1997
---------- ------------
amounts in thousands
Assets
- ------
Cash and cash equivalents $ -- 6,084
Accounts receivable 28,600 40,386
Less allowance for doubtful accounts 4,366 5,307
---------- ---------
24,234 35,079
---------- ---------
Prepaid expenses 1,507 1,262
Investment in, and related advances to,
PRIMESTAR Partners L.P.
("PRIMESTAR Partners") (note 8) 5,346 11,093
Property and equipment, at cost:
Satellite reception equipment 683,155 674,387
Subscriber installation costs 241,061 227,131
Support equipment 34,197 34,389
Satellites (note 9) 463,133 463,133
---------- ---------
1,421,546 1,399,040
Less accumulated depreciation 311,821 277,103
---------- ---------
1,109,725 1,121,937
---------- ---------
Deferred financing costs and other assets,
net of accumulated amortization 29,198 29,401
---------- ---------
$1,170,010 1,204,856
========== =========
(continued)
I-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
March 31, December 31,
1998 1997
---------- ------------
amounts in thousands
Liabilities and Stockholders' Equity
- ------------------------------------
Accounts payable $ 34,815 50,755
Accrued charges from PRIMESTAR
Partners (note 8) 51,801 48,591
Accrued charges from TCI Communications, Inc.
("TCIC") (note 11) 14,589 14,225
Accrued commissions 2,383 10,435
Accrued interest payable 3,108 8,658
Other accrued expenses 29,959 24,386
Subscriber advance payments 26,561 29,675
Due to PRIMESTAR Partners (note 9) 463,133 463,133
Debt (note 10) 474,865 418,729
---------- ----------
Total liabilities 1,101,214 1,068,587
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value;
Authorized 5,000,000;
none issued -- --
Series A common stock, $1 par value;
authorized 185,000,000; issued
59,277,912 in 1998, and 58,239,136
in 1997 59,278 58,239
Series B common stock, $1 par value;
authorized 10,000,000 shares; issued
8,465,324 in 1998 and 1997 8,465 8,465
Additional paid-in capital 524,690 523,685
Accumulated deficit (523,637) (454,120)
---------- ----------
Total stockholders' equity 68,796 136,269
---------- ----------
Commitments and contingencies
(note 9)
$1,170,010 1,204,856
========== ==========
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three months ended
March 31,
--------------------------
1998 1997
-------- -------
amounts in thousands
Revenue:
Programming and equipment rental $154,257 113,501
Installation 14,243 9,763
-------- -------
168,500 123,264
-------- -------
Operating costs and expenses:
Charges from PRIMESTAR Partners (note 8)
Programming 57,461 39,323
Satellite, marketing and distribution 24,774 19,936
Other operating (note 11) 9,847 6,257
Selling, general and administrative (note 11) 55,341 44,388
Stock compensation (note 11) 4,869 394
Depreciation 65,105 54,623
-------- -------
217,397 164,921
-------- -------
Operating loss (48,897) (41,657)
Other income (expense):
Interest expense (14,177) (9,383)
Share of losses of PRIMESTAR Partners (note 8) (5,822) (2,161)
Other, net (621) 670
-------- -------
(20,620) (10,874)
-------- -------
Loss before income taxes (69,517) (52,531)
Income tax benefit (note 12) -- --
-------- -------
Net loss $(69,517) (52,531)
======== =======
Basic and diluted loss per common share (note 6): $ (1.03) (.79)
======== =======
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Common stock Additional Total
-------------------- Paid-in Accumulated stockholders'
Series A Series B capital deficit equity
-------- -------- ---------- ----------- -------------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $58,239 8,465 523,685 (454,120) 136,269
Net loss -- -- -- (69,517) (69,517)
Recognition of stock compensation
related to stock options and
restricted stock awards -- -- 1,005 -- 1,005
Issuance of Series A Common Stock related to
restricted stock awards 50 -- -- -- 50
Issuance of Series A Common Stock upon
conversion of convertible securities of
Tele-Communications, Inc. (note 4) 989 -- -- -- 989
-------- ------- --------- --------- ----------
Balance at March 31, 1998 $59,278 8,465 524,690 (523,637) 68,796
======== ======= ========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Three months ended
March 31,
--------------------
1998 1997
-------- --------
amounts in thousands
(see note 7)
Cash flows from operating activities:
Net loss $(69,517) (52,531)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 65,105 54,623
Share of losses of PRIMESTAR Partners 5,822 2,161
Accretion of debt discount 4,682 1,993
Stock compensation 4,869 394
Other non-cash items 7,956 641
Changes in operating assets and liabilities:
Change in receivables 10,845 3,501
Change in prepaids and other assets (736) (321)
Change in accruals and payables (10,209) 4,740
Change in subscriber advance payments (3,114) 1,088
-------- --------
Net cash provided by operating activities 15,703 16,289
-------- --------
Cash flows from investing activities:
Capital expended for property and equipment (73,966) (40,371)
Capital expended for satellites -- (4,399)
Additional investments in and advances to
PRIMESTAR Partners (75) (6,584)
Repayment of advances to PRIMESTAR Partners -- 7,609
-------- --------
Net cash used in investing activities (74,041) (43,745)
-------- --------
Cash flows from financing activities:
Borrowings of debt 113,000 405,061
Repayments of debt (61,735) (299,068)
Payment of deferred financing costs -- (18,161)
Increase in due to PRIMESTAR Partners -- 4,399
Proceeds from issuance of common stock 989 215
-------- --------
Net cash provided by financing activities 52,254 92,446
-------- --------
Net increase (decrease) in cash and cash
equivalents (6,084) 64,990
Cash and cash equivalents:
Beginning of period 6,084 6,560
-------- --------
End of period $ -- 71,550
======== ========
See accompanying notes to consolidated financial statements.
I-5
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
March 31, 1998
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
TCI Satellite Entertainment, Inc. and those of all majority-owned
subsidiaries ("TSAT" or the "Company"). All significant inter-company
transactions have been eliminated.
The accompanying interim financial statements of TSAT are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made which are necessary to present fairly the
financial position of TSAT as of March 31, 1998 and the results of its
operations for the periods ended March 31, 1998 and 1997. The results of
operations for any interim period are not necessarily indicative of the
results for the entire year. These financial statements should be read in
conjunction with the financial statements and related notes thereto
included in TSAT's December 31, 1997 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts have been reclassified for comparability with the 1998
presentation.
(2) The Roll-up Plan
----------------
On March 6, 1998, the TSAT stockholders voted to approve a proposal to
adopt the provisions of certain agreements and the transactions
contemplated thereby collectively, referred to herein as the "Roll-up
Plan." The Roll-up Plan is a two-step transaction.
(continued)
I-6
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Restructuring
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998, (the
"Restructuring Agreement"), among TSAT, PRIMESTAR, Inc. ("PRIMESTAR"), Time
Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox"), MediaOne of Delaware, Inc., ("MediaOne"), US WEST Media Group,
Inc. and GE American Communications, Inc. ("GE Americom"), and (ii) an
Asset Transfer Agreement dated as of February 6, 1998, (the "TSAT Asset
Transfer Agreement") between TSAT and PRIMESTAR, a business combination
(the "Restructuring") was consummated whereby (a) TSAT contributed and
transferred to PRIMESTAR (the "TSAT Asset Transfer") all of TSAT's assets
and liabilities except (I) the capital stock of TSAT's wholly-owned
subsidiary, Tempo Satellite, Inc. ("Tempo"), (II) the consideration to be
received by TSAT in the Restructuring and (III) the rights and obligations
of TSAT under certain agreements with PRIMESTAR and others, and (b) the
business of PRIMESTAR Partners and the business of distributing the
PRIMESTAR(R) programming service ("PRIMESTAR(R)") of each of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne was consolidated into PRIMESTAR.
In connection with the TSAT Asset Transfer, PRIMESTAR assumed all of TSAT's
indebtedness on such date, and TSAT received from PRIMESTAR such number of
shares of Class A Common Stock, $.01 par value per share, of PRIMESTAR
("PRIMESTAR Class A Common Stock") and Class B Common Stock, $.01 par value
per share, of PRIMESTAR ("PRIMESTAR Class B Common Stock" and together with
the PRIMESTAR Class A Common Stock, "PRIMESTAR Common Stock"),
respectively, as equals the number of shares of Series A Common Stock of
TSAT ("Series A Common Stock") and Series B Common Stock of TSAT ("Series B
Common Stock"), respectively, issued and outstanding on the Closing Date,
in accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement plus one share of PRIMESTAR Class A Common Stock for each share
of Series A Common Stock issuable at the Closing Date ("Issuable TSAT
Shares") pursuant to certain TSAT stock options, restricted stock awards
and other arrangements. TSAT received 66.3 million shares of PRIMESTAR
Class A Common Stock and 8.5 million shares of PRIMESTAR Class B Common
Stock, and as a result, owns approximately 37% of the outstanding shares of
common equity of PRIMESTAR at the closing of the Restructuring,
representing approximately 38% of the combined voting power of such common
equity.
As a result of the TSAT Asset Transfer, TSAT is a holding company, with no
substantial assets or liabilities other than (i) 100% of the outstanding
capital stock of Tempo, (ii) its ownership interest in PRIMESTAR, and (iii)
its rights and obligations under certain agreements with PRIMESTAR and
others.
(continued)
I-7
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The TSAT Asset Transfer will be recorded at TSAT's historical cost, and
TSAT has been identified as the acquiror for accounting purposes and the
predecessor for financial reporting purposes due to the fact that TSAT owns
the largest interest in PRIMESTAR immediately following consummation of the
Restructuring. The remaining elements of the Restructuring, as set forth
above, will be treated as the acquisition by PRIMESTAR of the (i)
PRIMESTAR(R) subscribers and certain related assets and liabilities and
(ii) the partnership interest in PRIMESTAR Partners of the parties to the
Restructuring Agreement other than TSAT (the "Non-TSAT Parties"), and such
acquisition will be accounted for using the purchase method of accounting.
The fair value of the consideration issued to the Non-TSAT Parties will be
allocated to the assets and liabilities acquired based upon the estimated
fair values of such assets and liabilities.
TSAT Merger
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(the "TSAT Merger Agreement"), between TSAT and PRIMESTAR, which provides
for the second step of the Roll-up Plan, it is contemplated that TSAT will
be merged with and into PRIMESTAR, with PRIMESTAR as the surviving
corporation (the "TSAT Merger"). In connection therewith (i) each
outstanding share of Series A Common Stock will be converted into the right
to receive one share of PRIMESTAR Class A Common Stock, and (ii) each
outstanding share of Series B Common Stock will be converted into the right
to receive one share of PRIMESTAR Class B Common Stock, subject to
adjustment. Each share of PRIMESTAR Common Stock then held by TSAT will be
canceled. The number of shares of PRIMESTAR Common Stock issued to TSAT
shareholders will be less than the number of shares of PRIMESTAR Common
Stock owned by TSAT prior to the TSAT Merger to the extent Issuable TSAT
Shares are not issued and outstanding at the time of the TSAT Merger.
Consummation of the TSAT Merger is subject to regulatory approval and other
conditions to closing set forth in the TSAT Merger Agreement. Accordingly,
there can be no assurance that the TSAT Merger will be consummated.
The TSAT Merger will be treated as the acquisition of TSAT by PRIMESTAR.
Such acquisition will be accounted for at TSAT's historical cost since (i)
the percentage of PRIMESTAR owned by TSAT prior to consummation of the TSAT
Merger will be approximately equal to the percentage of PRIMESTAR to be
owned by TSAT shareholders following consummation of the TSAT Merger and
(ii) the TSAT Merger and the Restructuring are both part of the Roll-up
Plan.
(continued)
I-8
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Proposed ASkyB Transaction
--------------------------
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement, dated as of June 11, 1997 among PRIMESTAR Partners,
The News Corporation Limited ("News Corp."), MCI Telecommunications
Corporation, the principal domestic operating subsidiary of MCI
Communications Corporation ("MCI"), American Sky Broadcasting LLC, a
wholly-owned subsidiary of News Corp. ("ASkyB") and for certain purposes
only, each of the partners of PRIMESTAR Partners (collectively, the
"Partners"), PRIMESTAR will acquire form MCI two high-power communications
satellites currently under construction, certain authorizations granted to
MCI by the Federal Communications Commission ("FCC") to operate a direct
broadcast satellite business at the 110 West Longitude ("W.L.") orbital
location using 28 transponder channels, and certain related contracts. In
consideration, ASkyB will receive approximately $600 million liquidation
value of non-voting convertible preferred stock, $.01 per value per share,
of PRIMESTAR (the "PRIMESTAR Convertible Preferred Stock") (convertible
into approximately 52 million shares of non-voting Series D Common Stock,
$.01 par value per share, of PRIMESTAR (the "PRIMESTAR Class D Common
Stock"), subject to adjustment) and approximately $516 million principal
amount of convertible subordinated notes of PRIMESTAR (the "PRIMESTAR
Convertible Subordinated Notes") (convertible into approximately 45 million
shares of PRIMESTAR Class D Common Stock).
The PRIMESTAR Convertible Subordinated Notes will be due and payable, and
the PRIMESTAR Convertible Preferred Stock will be mandatorily redeemable,
on the tenth anniversary of the date of issuance. The PRIMESTAR
Convertible Preferred Stock will accrue cumulative dividends at the annual
rate of 5% of the liquidation value of such shares and the PRIMESTAR
Convertible Subordinated Notes will have an interest rate of 5%. Dividends
on the PRIMESTAR Convertible Preferred Stock and interest on the PRIMESTAR
Convertible Subordinated Notes will be payable in cash or, at the option of
PRIMESTAR, in shares of the non-voting PRIMESTAR Class D Common Stock, for
a period of four years. Thereafter, all dividend and interest payments
will be made solely in cash. Such convertible securities, and the shares
of PRIMESTAR Class D Common Stock to be issued to ASkyB or any of its
affiliates upon conversion of such PRIMESTAR Convertible Preferred Stock
and PRIMESTAR Convertible Subordinated Notes, or in payment of dividend or
interest obligations thereunder, will be non-voting; however, shares of
PRIMESTAR Class D Common Stock will in turn automatically convert into
shares of PRIMESTAR Class A Common Stock, on a one-to-one basis, upon
transfer to any person other than ASkyB, News Corp. or any of their
respective affiliates.
On May 12, 1998, the U.S. Department of Justice ("DOJ") filed a civil
antitrust action opposing the ASkyB Transaction. The action seeks to
prevent PRIMESTAR from acquiring the direct broadcast satellite assets of
News Corp. and MCI or, in the alternative, to allow such acquisition to go
forward and require PRIMESTAR's stockholders affiliated with the cable
industry to divest their ownership interests in PRIMESTAR.
PRIMESTAR intends to take all appropriate action to pursue its rights,
including vigorously contesting this matter in the courts. However, no
assurance can be given as to the outcome of this matter, and an unfavorable
decision could have a material adverse effect on PRIMESTAR's current plans
with respect to a high power digital satellite business. Moreover, any
protracted litigation with the DOJ could result in significant additional
legal expenses to PRIMESTAR. PRIMESTAR does not believe, however, that the
DOJ action and any resulting litigation will have a significant impact on
the operation of operating results of the Company's existing medium power
satellite television business.
PRIMESTAR also intends to pursue further discussions with the DOJ regarding
a potential consent decree to permit the ASkyB Transaction to go forward.
However, no assurance can be given that a negotiated resolution of this
matter is possible on terms acceptable to PRIMESTAR and its stockholders,
or on any terms, and the terms of any such consent decree could have a
material adverse effect on PRIMESTAR's current high power strategy.
(continued)
I-9
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) TSAT Spin-off Transaction
-------------------------
General
On December 4, 1996 (the "Spin-off Date"), Tele-Communications, Inc.
("TCI") distributed (the "Spin-off") 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 Stock") and Tele-Communications, Inc. Series B TCI
Group Common Stock (the "Series B TCI Group Stock" and together with the
Series A TCI Group Stock, the "TCI Group Stock"). The Spin-off did not
involve the payment of any consideration by the holders of TCI Group Stock
(such holders, the "TCI Group Stockholders"), and was intended to qualify
as a tax-free spin-off. TCI Group Stockholders received one share of
Series A Common Stock for each ten shares of Series A TCI Group Stock owned
and one share of Series B Common Stock for each ten shares of Series B TCI
Group Stock owned.
Since the Spin-off, TSAT and TCI have operated independently. For purposes
of governing certain of the ongoing relationships between TSAT and TCI
after the Spin-off, and to provide mechanisms for an orderly transition,
TSAT and TCI entered into various agreements, including the "Reorganization
Agreement" (see below), the "Fulfillment Agreement" (see note 11), the
"Transition Services Agreement" (see note 11), and an amendment to TCI's
then existing "Tax Sharing Agreement (see note 12).
Reorganization Agreement
Pursuant to the Reorganization Agreement, TSAT assumed TCI's obligations
under options granted on the Spin-off Date to certain key employees of TCI
(who are not employees of TSAT) representing, in the aggregate, 1,660,190
shares of Series A Common Stock and TSAT granted to TCI an option to
purchase up to 4,765,000 shares of Series A Common Stock, at an exercise
price of $1.00 per share, as required by TCI from time to time to meet its
obligations under the conversion features of certain convertible securities
of TCI as such conversion features were adjusted as a result of the Spin-
off.
(5) Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income,
("SFAS No. 130") which establishes standards for reporting and disclosure
of comprehensive income and its components (revenues, expenses, gains and
losses). SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods to be provided for comparative purposes. The Company's
total comprehensive loss for all periods presented herein would not have
differed from those amounts reported as net loss in the consolidated
statements of operations.
(6) Loss Per Common Share
---------------------
The basic and diluted loss per common share is based on 67,633,000 and
66,619,000 weighted average shares outstanding during the three months
ended March 31, 1998 and 1997, respectively. Excluded from the computation
of diluted loss per common share for the three months ended March 31 1998
and 1997 are options and convertible securities to acquire 7,172,000 and
7,619,000 shares of Series A Common Stock, respectively, because inclusion
of such options would be anti-dilutive.
(continued)
I-10
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Supplemental Disclosures to Combined Statements of Cash Flows
-------------------------------------------------------------
Cash paid for interest was $13,844,000 and $4,746,000 during the three
months ended March 31, 1998 and 1997, respectively. Cash paid for income
taxes was not significant during either of such periods.
Accrued capital expenditures of $21,646,000 at March 31, 1998 have been
excluded from the accompanying statements of cash flows.
(8) Investment in PRIMESTAR Partners
--------------------------------
Summarized unaudited operating information for PRIMESTAR Partners is as
follows:
Three months ended
March 31,
------------------------
1998 1997
--------- ---------
amounts in thousands
Results of Operations
---------------------
Revenue $ 196,189 139,206
Operating, selling, general and
administrative expenses (218,905) (141,670)
Depreciation and amortization (1,053) (768)
--------- ---------
Operating loss (23,769) (3,232)
Other expense, net (4,276) (3,320)
--------- ---------
Net loss $ (28,045) (6,552)
========= =========
Prior to the Restructuring, PRIMESTAR Partners provided programming
services to TSAT and other authorized PRIMESTAR(R) distributors in exchange
for a fee based upon the number of subscribers receiving programming
services. In addition, PRIMESTAR Partners arranged for satellite capacity
and uplink services, and provided national marketing and administrative
support services in exchange for a separate authorization fee.
(9) Satellites
-----------
Tempo DBS System
TSAT, through Tempo, holds a permit (the "FCC Permit") issued by the FCC
authorizing construction of a high-power direct broadcast satellite ("DBS")
system consisting of up to two satellites delivering DBS service in 11
frequencies at the 119 degrees W.L. orbital position.
Tempo is also a party to a construction agreement (the "Satellite
Construction Agreement") with Space Systems/Loral, Inc. ("Loral"), pursuant
to which Tempo has arranged for the construction of two high power
communications satellites (the "Tempo Satellites") at a fixed contract
price of $487,159,500, and has an option to purchase up to three additional
satellites.
(continued)
I-11
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
One of the Tempo Satellites ("Tempo DBS-1") was launched into
geosynchronous orbit on March 8, 1997. Since the launch of Tempo DBS-1,
Loral has notified TSAT of at least eight separate occurrences of power
reductions on Tempo DBS-1. TSAT does not currently know the extent of such
power reductions, and cannot confirm the precise causes thereof; however,
such reductions could eventually affect the proposed operation of Tempo
DBS-1, either alone or together with other events that may arise during the
expected life of the satellite. As a result of such power reductions, in-
orbit testing has been extended and Tempo DBS-1 has not yet been accepted.
Pursuant to the Satellite Construction Agreement, Loral bears the risk of
loss of the Tempo Satellites until Tempo accepts delivery of the Tempo
Satellites. TSAT currently believes that Tempo DBS-1 may not fully comply
with specifications, but has not yet determined the extent of any such non-
compliance. Tempo and Loral are currently engaged in negotiations
regarding this matter, including the timing, extent and methodology of any
further tests to be conducted and the terms of any monetary settlement with
respect to the satellite to which Tempo may be entitled under the Satellite
Construction Agreement. Certain launch defects or damages affecting Tempo
DBS-1 could cause a substantial monetary loss to TSAT or, following
consummation of the TSAT Merger, PRIMESTAR.
Under the FCC Permit, the time by which the Tempo Satellites must be
operational was due to expire in May 1998. TSAT believed that it had
complied with its FCC obligations with respect to the 119 degrees W.L.
orbital position, including the obligation that its satellite at that
position become operational, and also believed that it was in compliance
with its FCC obligations with respect to constructing a satellite to
operate 11 channels at 166 degrees W.L. Nevertheless, on April 3, 1998,
Tempo filed a request with the FCC for an extension of that deadline
pending FCC review of (i) TSAT's request for consent to the transfer of
control of Tempo to PRIMESTAR (the "Transfer Application") and (ii)
PRIMESTAR Partner's application for consent to the assignment to PRIMESTAR
of the high power DBS authorizations and certain assets owned by MCI (the
"Assignment Application") should the FCC determine that an extension is
necessary for Tempo to maintain its FCC authorizations at 119 degrees W.L.
and 166 degrees W.L.
On April 30, the FCC determined that Tempo's satellite at 119 W.L. was not
operational. It did find, however, that an extension of time was warranted
for that orbital location and granted and extension to Tempo for 119 W.L.,
with the condition that it not enter into a lease agreement with PRIMESTAR
or any similar lease arrangement prior to the FCC's decision on the
Transfer Application and the Assignment Application. In addition the FCC
denied the extension of Tempo's permit for 166 W.L. Interested parties,
including EchoStar and Dominion Video Satellite, Inc. who filed against
Tempo's extension request, have 30 days to file a Petition for
Reconsideration or a Petition for Review before the decision becomes final.
Likewise, the FCC, on its own motion may reconsider its decision.
Therefore, there can be no assurance that the FCC's decision will not
change or be modified prior to it becoming final.
Upon delivery of each of the Tempo Satellites, Tempo is obligated to make a
$10 million incentive payment to Loral. Tempo is eligible to receive a pro
rata warranty payback of each such incentive payment to the extent that
transponder failures occur during the twelve-year period following
delivery. Satellite incentive payments and any related warranty paybacks
are treated as adjustments of the cost of the applicable Tempo Satellite.
(continued)
I-12
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Tempo Option
In February 1990, Tempo entered into an 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 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. The aggregate funding
provided to Tempo by PRIMESTAR Partners ($463,133,000 at March 31, 1998) is
reflected in "Due to PRIMESTAR Partners" in the accompanying consolidated
balance sheets.
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 the second
Tempo Satellite ("Tempo DBS-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 a $1,000,000 exercise fee (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
Tempo Satellites not previously funded by PRIMESTAR Partners. Such amounts
have been paid to TSAT.
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 with respect to its purchase or lease of satellite capacity.
Although TSAT and PRIMESTAR Partners have not entered into an agreement
with respect to the purchase or lease of 100% of the capacity of the
proposed Tempo DBS system pursuant to the Tempo Option, TSAT believes that
its obligations to PRIMESTAR Partners with respect to such advances will be
satisfied in connection with the completion of such purchase or lease.
However, if notwithstanding the exercise of the Tempo Option such purchase
or lease of satellite capacity is not completed, TSAT believes that
alternative courses of action are available that would allow TSAT to
recover its costs of constructing the Tempo Satellites.
(continued)
I-13
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Debt
-----
The components of debt are as follows:
March 31, December 31,
1998 1997
--------- ------------
amounts in thousands
Bank Credit Facility $ 99,500 48,000
Senior Subordinated Notes 200,000 200,000
Senior Subordinated Discount Notes 173,463 168,781
Other 1,902 1,948
-------- -------
$474,865 418,729
======== =======
All of the Company's debt was assumed by PRIMESTAR in connection with the
Restructuring.
(11) Transactions with Related Parties
---------------------------------
During 1997, TCIC provided certain installation, maintenance, retrieval and
other customer fulfillment services to TSAT pursuant to a fulfillment
agreement (as amended, the "Fulfillment Agreement"). During the three
months ended March 31, 1997, TSAT's capitalized installation costs included
amounts charged by TCIC to TSAT of $15,358,000. Maintenance, retrieval and
other operating expenses charged by TCIC to TSAT aggregated $2,615,000
during the three months ended March 31, 1997.
From January 1, 1997 through July 21, 1997, charges for customer
fulfillment services provided by TCIC were made pursuant to the Fulfillment
Agreement, as originally executed by TSAT and TCIC (the "Original
Fulfillment Agreement"). Effective July 22, 1997, the Original Fulfillment
Agreement was amended to, among other items, (i) change the termination
date to December 31, 1997 and, (ii) reduce the scheduled rates for the
customer fulfillment services provided by TCIC to rates that are comparable
to those that were used to allocate fulfillment charges to TSAT prior to
the Spin-off. In September and October, 1997, TSAT entered into agreements
with eight regional fulfillment companies to perform the services no longer
performed by TCIC following the termination of the Fulfillment Agreement.
(continued)
I-14
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCIC also provided corporate administrative and certain telephony services
to TSAT pursuant to a transition services agreement (the "Transition
Services Agreement"). As compensation for the services rendered and for
the benefits made available to TSAT pursuant to the Transition Services
Agreement, TSAT was required to pay TCI a monthly fee of $1.50 per
qualified subscribing household or other residential or commercial unit
(counted as one subscriber regardless of the number of satellite
receivers), up to a maximum of $3,000,000 per month, and to reimburse TCI
quarterly for direct, out-of-pocket expenses incurred by TCI to third
parties in providing the services. Charges under the Transition Services
Agreement aggregated $3,174,000 and $2,945,000 during the three months
ended March 31, 1998 and 1997, respectively. The Transition Services
Agreement was terminated in connection with the consummation of the
Restructuring.
During the three months ended March 31, 1998 and 1997, TSAT purchased from
TCIC at TCIC's cost certain telephony services aggregating $1,354,000 and
$1,402,000 respectively.
Beginning in March 1997, and through the Closing Date, TCIC provided TSAT
with customer support services from its Boise, Idaho call center ( the
"Boise Call Center"). The Boise Call Center responded to calls that
exceeded the capacity of TSAT's national call center. Amounts charged by
TCIC to TSAT for such services aggregated $5,026,000 and $238,000 during
the three months ended March 31, 1998 and 1997, respectively.
Since the Spin-off Date, the effects of transactions between TSAT and TCI
have been reflected in a non-interest bearing account that is settled
periodically in cash.
Certain key employees of TSAT hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates
of the compensation related to the options and/or stock appreciation rights
granted to employees of TSAT have been recorded in the accompanying
consolidated financial statements, but are subject to future adjustment
based upon the market value of the underlying common stock of TCI and,
ultimately, on the final determination of market value when the rights are
exercised. Compensation expense (income) recognized by TSAT related to such
options aggregated $3,814,000 and $(38,000) during the three months ended
March 31, 1998 and 1997, respectively.
(continued)
I-15
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Income Taxes
------------
Through the Spin-off Date, TSAT's results of operations were included in
TCI's consolidated U.S. Federal income tax returns, in accordance with the
existing tax sharing arrangements among TCI and its consolidated
subsidiaries. Effective July 1, 1995, TCI, TCIC and certain other
subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
Agreement"), which formalized such pre-existing tax sharing arrangements
and implemented additional provisions regarding the allocation of certain
consolidated income tax attributes and the settlement procedures with
respect to the inter-company 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, (the "Code") and any applicable state, local and foreign tax law
and related regulations. In connection with the Spin-off, the Tax Sharing
Agreement was amended to provide that TSAT be treated as if it had been a
party to the Tax Sharing Agreement, effective July 1, 1995.
In connection with the Restructuring, TSAT and TCI entered into a tax
sharing agreement dated June 1997, to confirm that pursuant to the amended
Tax Sharing Agreement (i) neither TSAT nor any of its subsidiaries has any
obligation to indemnify TCI or the TCI shareholders for any tax resulting
from the Spin-off failing to qualify as a tax-free distribution pursuant to
Section 355 of the Code; (ii) TCI is obligated to indemnify TSAT and its
subsidiaries for any taxes resulting from the Spin-off failing to qualify
as a tax-free distribution pursuant to Section 355 of the Code; (iii) to
the best knowledge of TCI, TSAT's total payment obligation under the Tax
Sharing Agreement could not reasonably be expected to exceed $5 million;
and (iv) the sole agreement between TCI, on the one hand, and TSAT or any
of its subsidiaries, on the other, relating to taxes is the Tax Sharing
Agreement
TSAT recognized no income tax benefit during either of the three month
periods ended March 31, 1998 and 1997. As a result of the Spin-off, TSAT
is no longer a part of the TCI consolidated tax group, and accordingly, is
only able to realize income tax benefits for financial reporting purposes
to the extent that such benefits offset TSAT's income tax liabilities or
TSAT generates taxable income. For financial reporting purposes, all of
TSAT's income tax liabilities had been fully offset by income tax benefits
at March 31, 1998 and December 31, 1997. Additionally, during the first
several years following the Spin-off, TSAT 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
I-16
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
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 TSAT and should be read in
conjunction with (i) the accompanying financial statements of TSAT, and (ii) the
financial statements, and related notes thereto, of TSAT, and Management's
------------
Discussion and Analysis of Financial Condition and Results of Operations
- ------------------------------------------------------------------------
included in TSAT's Annual Report on Form 10-K for the year ended December 31,
1997.
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of TSAT, 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 satellite delivered television programming; uncertainties inherent in
proposed business strategies, new product launches and development plans,
including uncertainties regarding the Roll-up Plan; the ASkyB Transaction;
TSAT's high-power strategy; future financial performance, including
availability, terms and deployment of capital; the ability of vendors to deliver
required equipment, software and services; availability of qualified personnel;
changes in, or the failure or the inability to comply with, government
regulations, including, without limitation, regulations of the FCC, and adverse
outcomes from regulatory proceedings; changes in the nature of key strategic
relationships with partners and joint venturers; competitor responses to TSAT'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 PRIMESTAR Partners' existing medium power
satellite television business; and other factors referenced in this Report.
These forward-looking statements speak only as of the date of this Report. TSAT
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in TSAT's expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
I-17
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Material Changes in Results of Operations
- -----------------------------------------
As described in note 2 to the accompanying consolidated financial
statements, the Restructuring was consummated on April 1, 1998. As a result of
such consummation, TSAT is a holding company whose primary assets are (i)
Tempo's authorizations granted by the FCC and other assets and liabilities
relating to a proposed direct broadcast system being constructed by Tempo and
(ii) its investment in PRIMESTAR. Until the consummation of the TSAT Merger (of
which there is no assurance), TSAT's operations will consist primarily of
accounting and legal expenses incurred to maintain TSAT as a public company and
TSAT's share of PRIMESTAR's earnings or losses. PRIMESTAR is a significantly
larger entity than TSAT, and it is anticipated that PRIMESTAR will initially
incur significantly greater losses than TSAT due primarily to disproportionately
higher levels of depreciation, amortization and interest expense. In addition,
it is anticipated that PRIMESTAR will develop a high-power DBS service, and that
PRIMESTAR may determine to migrate some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service. Under such circumstances,
PRIMESTAR would necessarily be operating under a different cost structure than
that of TSAT's medium-power business. In addition, TSAT has entered into certain
binding agreements, including, among others, the TSAT Merger Agreement. Upon
consummation of the TSAT Merger, TSAT will be consolidated into PRIMESTAR and
TSAT will no longer be a separate public company. No assurance can be given
that the TSAT Merger will be consummated.
During the three months ended March 31, 1998 and 1997, and the years ended
December 31, 1997, 1996 and 1995, (i) TSAT'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 27.1%, 27.2%,
30.1%, 38.5% and 24.7%, respectively, and (ii) the average subscriber life
implied by such subscriber churn rate was 3.7 years, 3.7 years, 3.3 years, 2.6
years and 4.0 years, respectively.
TSAT believes that the higher 1996 churn rate is primarily attributable to
the fact that subscribers were allowed to initiate service with no credit
approval during the fourth quarter of 1995 and the first six months of 1996.
Service to a significant number of such subscribers was terminated during 1996
after their accounts became delinquent. Such delinquent accounts contributed to
a significant increase in TSAT's bad debt expense during 1996. TSAT has
addressed this issue by implementing more stringent credit policies. TSAT
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.
During 1997, TSAT began offering a marketing program that allows
subscribers to purchase TSAT's proprietary satellite reception equipment at a
price that is less than TSAT's cost. Losses incurred by TSAT on such sales of
satellite reception equipment are charged to selling expense in the periods such
sales are consummated and aggregated $7,321,000 during the three months ended
March 31, 1998.
I-18
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Material Changes in Results of Operations (continued)
- ------------------------------------------------------
The number of TSAT's customers and active authorized satellite receivers or
integrated receivers/decoders ("Authorized Units") are as follows:
March 31, December 31,
--------------------- -------------------
1998 1997 1997 1996
--------- ------- ------- -------
Customers 914,000 734,000 851,000 702,000
Authorized Units 1,062,000 842,000 985,000 805,000
To the extent not otherwise described, increases in TSAT's revenue and
operating, selling, general and administrative expenses, as detailed below, are
primarily related to growth in customers as reflected in the foregoing table
Certain financial information concerning TSAT's operations is presented
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1998 1997
---------------------- ---------------------
Percentage Percentage
of total of total
Amount revenue Amount revenue
-------- ---------- -------- ----------
Revenue:
<S> <C> <C> <C> <C>
Programming and equipment rental $154,257 92% $113,501 92%
Installation 14,243 8 9,763 8
-------- ---- -------- ----
Total revenue 168,500 100 123,264 100
-------- ---- -------- ----
Operating costs and expenses:
Charges from PRIMESTAR Partners:
Programming (57,461) (34) (39,323) (32)
Satellite, national marketing and
distribution (24,774) (15) (19,936) (16)
-------- ---- -------- ----
(82,235) (49) (59,259) (48)
-------- ---- -------- ----
Other operating (9,847) (6) (6,257) (5)
Selling, general and administrative:
Selling and regional marketing (38,648) (23) (26,335) (21)
Other general and administrative (16,693) (10) (18,053) (15)
-------- ---- -------- ----
(55,341) (33) (44,388) (36)
-------- ---- -------- ----
Operating Cash Flow (1) 21,077 12 13,360 11
Stock compensation (4,869) (3) (394) --
Depreciation (65,105) (38) (54,623) (45)
-------- ---- -------- ----
Operating loss $(48,897) (29)% $(41,657) (34)%
======== ==== ======== ====
</TABLE>
I-19
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
(1) Operating Cash Flow, which represents operating income before depreciation
and stock compensation, is a commonly used measure of value and borrowing
capacity. Operating Cash Flow is not intended to be a substitute for a
measure of performance in accordance with generally accepted accounting
principles and should not be relied upon as such.
Revenue increased $45,236,000 or 37% during the three months ended March
31, 1998, as compared to the corresponding prior year period. Such increase is
the result of a $40,756,000 or 36% increase in programming and equipment rental
revenue and a $4,480,000 or 46% increase in installation revenue. The increase
in programming and equipment rental revenue is primarily the result of an
increase from the 1997 period to the 1998 period in the average number of
customers. Additionally, TSAT's average monthly programming and equipment
rental revenue per customer increased from $53 during the 1997 period to $58
during the 1998 period. Such increase was primarily the result of rate
increases implemented in May 1997 as well as an increase in the average monthly
revenue derived from pay-per-view services. The increase in installation
revenue is the net result of an increase from the 1997 period to the 1998 period
in the number of installations performed and a decrease from $107 during the
1997 period to $98 during the 1998 period in the average installation revenue
from each customer installed.
PRIMESTAR Partners provided programming services to TSAT and other
authorized PRIMESTAR(R) distributors in exchange for a fee based upon the number
of customers receiving programming services. PRIMESTAR Partners also arranged
for satellite capacity and uplink services, and provided national marketing and
administrative support services, in exchange for a separate authorization fee
from each authorized PRIMESTAR(R) distributor, including TSAT, based on such
distributor's total number of Authorized Units. The aggregate charges for such
services increased $22,976,000 or 39% during the three months ended March 31,
1998, as compared to the corresponding prior year period. The average aggregate
monthly amount per customer charged by PRIMESTAR Partners was $31 and $28 during
the three months ended March 31, 1998 and 1997, respectively.
Other operating costs and expenses, which are primarily comprised of
amounts related to customer fulfillment activities, increased $3,590,000 or 57%
during the three months ended March 31, 1998, as compared to the corresponding
prior year period. The majority of such increase is due to an increase in
installation costs related to customers who purchase their equipment.
Selling, general and administrative expenses increased $10,953,000 or 25%
during the three months ended March 31, 1998, as compared to the corresponding
prior year period. Selling and regional marketing expenses, which represented
23% of revenue during the 1998 period, include sales commissions, marketing and
advertising expenses, and costs associated with the operation of a customer
service call center and five regional sales offices. In total, selling, general
and administrative expenses represented 33% and 36% of revenue during the three
months ended March 31, 1998 and 1997, respectively. The decrease in such
percentage is primarily attributable to the relatively fixed nature of certain
components of TSAT's selling, general and administrative expenses.
I-20
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Material Changes in Results of Operations (continued)
- -----------------------------------------------------
The $10,482,000 or 19% increase in depreciation expense during the three
months ended March 31, 1998, as compared to the corresponding prior year period,
is the result of an increase in TSAT's depreciable assets due primarily to
capital expenditures with respect to TSAT's satellite reception equipment and
subscriber installation costs.
TSAT incurred interest expense of $14,177,000 and $9,383,000 during the
three months ended March 31, 1998 and 1997, respectively. Substantially all of
such interest was attributable to the December 31, 1996 completion of TSAT's
bank credit facility and the February 1997 issuance of TSAT's Senior
Subordinated Notes and Senior Subordinated Discount Notes.
TSAT's share of PRIMESTAR Partners' net losses increased $3,661,000 during
the three months ended March 31, 1998, as compared to the corresponding prior
year period. Such increase is primarily attributable to increases in PRIMESTAR
Partners' interest expense and operating loss. The increase in interest expense
is attributable to interest incurred on borrowings under the PRIMESTAR Partners'
bank credit facility that were used to fund the construction of Tempo DBS-2.
Prior to the January 1, 1997 determination that construction of Tempo DBS-2 was
substantially complete, interest incurred on the applicable borrowings had been
capitalized by PRIMESTAR Partners. The increase in PRIMESTAR Partners'
operating loss occurred as the increase in PRIMESTAR Partners' revenue did not
fully offset increases in selling, marketing and certain other expenses.
TSAT recognized no income tax benefit during either of the three month
periods ended March 31, 1998 and 1997. As a result of the Spin-off, TSAT is no
longer a part of the TCI consolidated tax group, and accordingly, is only able
to realize income tax benefits for financial reporting purposes to the extent
that such benefits offset TSAT's income tax liabilities or TSAT generates
taxable income. For financial reporting purposes, all of TSAT's income tax
liabilities had been fully offset by income tax benefits at March 31, 1998 and
December 31, 1997. Additionally, during the first several years following the
Spin-off, TSAT believes that it will incur net losses for income tax purposes,
and accordingly, will not be in a position to realize income tax benefits on a
current basis. In connection with the Spin-off, TSAT became a party to the Tax
Sharing Agreement that currently exists among TCI, TCIC and certain other
subsidiaries of TCI.
I-21
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Material Changes in Financial Position
- ---------------------------------------
As a holding company, TSAT's ability to satisfy any liabilities or
obligations is dependent solely upon the earnings of Tempo and PRIMESTAR and the
distribution or the payment of such earnings to TSAT in the form of dividends,
loans or other advances. Moreover, during the term of the TSAT Merger
Agreement, TSAT will be subject to the covenants provided for therein, including
limitations on TSAT's ability to conduct business activities, incur liabilities,
and acquire or dispose of assets. The payment of dividends or the making of
loans or advances to TSAT by Tempo and PRIMESTAR may be subject to statutory,
regulatory or contractual restriction, will be contingent upon the earnings of
those subsidiaries and affiliates, and will be subject to various business
considerations. Moreover, TSAT will not control PRIMESTAR, and PRIMESTAR will
have no obligation, contingent or otherwise, to make any funds available to
TSAT, whether by dividends, loans or other payments (except for the obligation
of PRIMESTAR to reimburse TSAT for certain financial reporting, legal,
accounting and other obligations of TSAT as a public company, including payment
of directors' fees and expenses and maintenance of directors' and officers'
insurance, as provided in the TSAT Merger Agreement). In addition, PRIMESTAR is
subject to loan agreements that prohibit or limit the transfer of funds to TSAT
in the form of dividends, loans, or advances and/or require that any
indebtedness of such subsidiaries or affiliates of TSAT be subordinate to the
indebtedness under such loan agreements.
TSAT's right to participate in the distribution of assets of either
PRIMESTAR or Tempo upon the liquidation or reorganization of such entity would
be subject to the prior claims of the creditors of such entity, including trade
creditors, except to the extent that TSAT may itself be a creditor with
recognized claims against such entity.
Consummation of the TSAT Merger is subject to regulatory and other
conditions, including the right of PRIMESTAR to terminate the TSAT Merger
Agreement under certain circumstances. Accordingly, there can be no assurance
that the TSAT Merger will be consummated. If the TSAT Merger is not consummated
then TSAT will continue to be subject to the risks associated with operating as
a holding company. TSAT has made no decision as to what course of action it
would pursue if the TSAT Merger is not consummated.
Certain contingent liabilities of TSAT related to (i) indemnification
agreements entered into between TSAT and TCIC and (ii) other obligations were
assumed by PRIMESTAR in connection with the Restructuring.
I-22
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
There were no new material legal proceedings or material developments
in previously reported legal proceedings during the quarter ended
March 31, 1998 to which TSAT or any of its consolidated subsidiaries
is a party or of which any of its property is the subject except as
follows:
On September 30, 1997, a civil action entitled Croce Advertising,
------------------
Inc. v. TCI Digital Satellite Entertainment, Inc., d/b/a PRIMESTAR
------------------------------------------------------------------
By TCI and The Hibbert Company d/b/a The Hibbert Group was filed in
------------------------------------------------------
the U.S. District Court for the District of Colorado, Civil Action No.
97-S-2130. On October 20, 1997, Croce; the plaintiff filed an amended
Complaint naming TSAT as a defendant and dropping TCI Digital
Satellite Entertainment, Inc. d/b/a PRIMESTAR By TCI from the action.
Service was made upon TSAT on October 20, 1997. Croce alleged
copyright infringement based on its allegations that after the
parties' relationship was terminated, TSAT reprinted certain marketing
materials created by Croce. Croce's claim for damages included alleged
profits related to the printing of the materials at issue and TSAT's
profits from the use of these materials. Croce also named The Hibbert
Company as a defendant on the copyright infringement claim because The
Hibbert Company printed certain TSAT marketing materials. TSAT agreed
to indemnify The Hibbert Company for costs and damages arising out of
the copyright claim. Croce's remaining claims arose out of the
parties' ongoing dispute concerning unpaid invoices. Croce alleged
TSAT owed $4,962,560.05 on these invoices, plus interest from March 7,
1997, until final resolution. PRIMESTAR agreed to indemnify TSAT for
any potential liability with respect to this matter. In April 1998,
the parties to the action executed a Mutual Release and Settlement
Agreement which provided for the settlement of the litigation in
exchange for the payment of $2.8 million in cash to the plaintiff.
This represents the final resolution of this matter.
Item 2. Changes in Securities.
- ------- ----------------------
During the three months ended March 31, 1998, TSAT issued 988,776
shares of Series A Common Stock to TCI for aggregate consideration of
$988,776. Such shares were issued pursuant to a "Share Purchase
Agreement" between TSAT and TCI to allow TCI to meet its obligations
under the conversion features of certain convertible securities of
TCI. The issuance was made in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act.
II-1
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
At a special meeting of stockholders held on March 6, 1998, the
following matters were voted upon and approved by the stockholders of
TSAT:
(a) A proposal to approve and adopt (i) the Merger and Contribution
agreement dated as of February 6, 1998 (together with the
exhibits and schedules thereto, the "Restructuring Agreement"),
among TSAT, PRIMESTAR, Inc. ("PRIMESTAR"), Time Warner
Entertainment Company, L.P., Advance/Newhouse Partnership,
Comcast Corporation, Cox Communications, Inc., MediaOne of
Delaware, Inc. and GE American Communications, Inc., (ii) the
Asset Transfer Agreement dated as of February 6, 1998 (together
with the exhibits and schedules thereto, the "TSAT Asset Transfer
Agreement"), between TSAT and PRIMESTAR, (iii) the Agreement and
Plan of Merger dated as of February 6, 1998 (together with the
exhibits and schedules thereto the "TSAT Merger Agreement"),
between TSAT and PRIMESTAR, (iv) each of the other agreements
contemplated by the Restructuring Agreement to which TSAT is a
party and (v) the transactions contemplated by the Restructuring
Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger
Agreement and such other agreements (115,999,235 votes For;
139,426 votes Against; 81,938 Abstentions; and 14,462,817 Broker
Non-Votes).
(b) A proposal to approve and adopt the TCI Satellite Entertainment,
Inc. 1997 Nonemployee Director Stock Option Plan, which provides
for the grant of options to purchase up to 500,000 shares of TSAT
Series A Common Stock, and to approve all grants thereunder
(127,320,206 votes For; 2,956,565 votes Against; and 406,645
Abstentions).
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
27 - Financial Data Schedule
(b) Report on Form 8-K filed during quarter ended March 31,
1998 -
Financial
Date of Items Statements
Report Reported Filed
------- -------- ----------
February 11, 1998 Item 5 and Item 7 None
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI SATELLITE ENTERTAINMENT, INC.
Date: May 15, 1998 By: /s/ Gary S. Howard
-----------------------------------
Gary S. Howard
Chief Executive Officer
Date: May 15, 1998 By: /s/ Kenneth G. Carroll
-----------------------------------
Kenneth G. Carroll
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 1998 By: /s/ Scott D. Macdonald
-----------------------------------
Scott D. Macdonald
Vice President and Controller
(Chief Accounting Officer)
II-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TCI
SATELLITE ENTERTAINMENT INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 28,600
<ALLOWANCES> 4,366
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,421,546
<DEPRECIATION> 311,821
<TOTAL-ASSETS> 1,170,010
<CURRENT-LIABILITIES> 0
<BONDS> 474,865
0
0
<COMMON> 67,743
<OTHER-SE> 1,053
<TOTAL-LIABILITY-AND-EQUITY> 1,170,010
<SALES> 0
<TOTAL-REVENUES> 168,500
<CGS> 0
<TOTAL-COSTS> 92,082
<OTHER-EXPENSES> 65,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,177
<INCOME-PRETAX> (69,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (69,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,517)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
