<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 000-23883
PRIMESTAR, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1441684
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8085 South Chester Street, 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
None of PRIMESTAR, Inc.'s shares of common stock were publicly traded as of
July 31, 1998. The number of shares outstanding of PRIMESTAR, Inc.'s common
stock as of July 31, 1998 was:
Class A common stock 179,143,933 shares;
Class B common stock 8,465,324 shares; and
Class C common stock 13,332,365 shares.
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ---------
amounts in thousands
Assets
- ------
<S> <C> <C>
Cash and cash equivalents $ -- 6,084
Accounts receivable 104,995 40,386
Less allowance for doubtful accounts 11,160 5,307
---------- ---------
93,835 35,079
---------- ---------
Property and equipment, at cost:
Satellites -- 463,133
Satellite reception equipment 1,295,521 674,387
Subscriber installation costs 431,521 227,131
Support equipment 67,613 34,389
---------- ---------
1,794,655 1,399,040
Less accumulated depreciation 364,214 277,103
---------- ---------
1,430,441 1,121,937
---------- ---------
Intangible assets, net of accumulated amortization
(note 7) 1,450,931 --
Deferred financing costs and other assets,
net of accumulated amortization 44,189 41,756
---------- ---------
$3,019,396 1,204,856
========== =========
</TABLE>
(continued)
I-1
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ---------
amounts in thousands
Liabilities and Stockholders' Equity
- ------------------------------------
<S> <C> <C>
Accounts payable $ 164,770 50,755
Accrued expenses 157,206 106,295
Subscriber advance payments 71,036 29,675
Due to PRIMESTAR Partners L.P. -- 463,133
Debt (note 8) 1,562,259 418,729
Deferred income taxes 163,009 --
---------- ---------
Total liabilities 2,118,280 1,068,587
---------- ---------
Stockholders' Equity (note 9):
TCI Satellite Entertainment, Inc. ("TSAT")
preferred stock, $.01 per value; authorized
5,000,000 shares; none issued -- --
TSAT Series A common stock; $1 par value; authorized
185,000,000 shares; issued 58,239,136 shares in 1997 -- 58,239
TSAT Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,465,324 shares in 1997 -- 8,465
PRIMESTAR, Inc. ("PRIMESTAR") preferred stock, $.01
par value; authorized 350,000,000 shares; none
issued -- --
PRIMESTAR Class A common stock, $.01 par value;
authorized 850,000,000 shares;
issued 179,143,933 in 1998 1,791 --
PRIMESTAR Class B common stock, $.01 par value;
authorized 50,000,000 shares;
issued 8,465,324 in 1998 85 --
PRIMESTAR Class C common stock, $.01 par value;
authorized 30,000,000 shares;
issued 13,332,365 in 1998 133 --
PRIMESTAR Class D common stock, $.01 par value;
authorized 150,000,000 shares;
none issued -- --
Additional paid-in capital 1,510,135 523,685
Accumulated deficit (611,028) (454,120)
---------- ---------
Total stockholders' equity 901,116 136,269
---------- ---------
Commitments and contingencies
(note 12)
$3,019,396 1,204,856
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------ ---------------------------------
1998 1997 1998 1997
------------------ ---------------- --------------- ----------------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment
rental $ 354,675 126,729 508,932 240,230
Installation 16,837 10,652 31,080 20,415
--------- ------- -------- --------
371,512 137,381 540,012 260,645
--------- ------- -------- --------
Operating costs and expenses:
Charges from PRIMESTAR
Partners L.P. (note 10) -- 63,110 82,235 122,369
Operating (note 10) 182,753 4,815 192,600 11,072
Selling, general and administrative (note 10) 118,334 47,385 173,675 91,773
Transition (note 10) 20,756 -- 20,756 --
Stock compensation (note 10) 5,117 1,158 9,986 1,552
Depreciation 112,390 58,643 177,495 113,266
Amortization 32,368 -- 32,368 --
--------- ------- -------- --------
471,718 175,111 689,115 340,032
--------- ------- -------- --------
Operating loss (100,206) (37,730) (149,103) (79,387)
Other income (expense):
Interest expense (49,447) (12,025) (63,624) (21,408)
Share of losses of PRIMESTAR Partners L.P. -- (5,768) (5,822) (7,929)
Other, net (110) 464 (731) 1,134
--------- ------- -------- --------
(49,557) (17,329) (70,177) (28,203)
--------- ------- -------- --------
Loss before income taxes (149,763) (55,059) (219,280) (107,590)
Income tax benefit (note 11) 62,372 -- 62,372 --
--------- ------- -------- --------
Net loss $ (87,391) (55,059) (156,908) (107,590)
========= ======= ======== ========
Basic and diluted loss per
common share (note 5) $(.43) (.83) (1.17) (1.61)
========= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six months ended June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
TSAT common stock PRIMESTAR common stock
------------------------------------ --------------------------------------------
Series A Series B Class A Class B Class C Class D
----------------- ----------------- ------- ----------- ------------- -------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 58,239 8,465 -- -- -- --
Net loss -- -- -- -- -- --
Recognition of stock compensation related
to stock options and restricted stock
awards -- -- -- -- -- --
Issuance of TSAT Series A Common Stock
related to restricted stock awards 50 -- -- -- -- --
Issuance of TSAT Series A Common Stock
upon conversion of convertible
securities of Tele-Communications, Inc. 989 -- -- -- -- --
Issuance of PRIMESTAR common stock in
Restructuring (note 1) (59,278) (8,465) 1,791 85 133 --
Distributions to TSAT (note 10) -- -- -- -- -- --
-------- ---------------- ------- ----------- ------------- -------
Balance at June 30, 1998 $ -- -- 1,791 85 133 --
======== ================ ======= =========== ============= =======
<CAPTION>
Additional Total
paid-in Accumulated stockholders'
capital deficit equity
---------- ----------- -------------
amounts in thousands
<S> <C> <C> <C>
Balance at January 1, 1998 523,685 (454,120) 136,269
Net loss -- (156,908) (156,908)
Recognition of stock compensation related
to stock options and restricted stock
awards 1,578 -- 1,578
Issuance of TSAT Series A Common Stock
related to restricted stock awards (50) -- --
Issuance of TSAT Series A Common Stock
upon conversion of convertible
securities of Tele-Communications, Inc. -- -- 989
Issuance of PRIMESTAR common stock in
Restructuring (note 1) 984,962 -- 919,228
Distributions to TSAT (note 10) (40) -- (40)
---------- -------- --------
Balance at June 30, 1998 1,510,135 (611,028) 901,116
========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------------------
1998 1997
--------------------- -----------------
amounts in thousands
(see note 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(156,908) (107,590)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 209,863 113,266
Share of losses of PRIMESTAR Partners L.P. 5,822 7,929
Deferred tax benefit (62,372) --
Accretion of debt discount 10,452 6,644
Stock compensation 9,986 1,552
Other non-cash items 1,856 1,962
Changes in operating assets and liabilities, net of
the effect of acquisitions:
Change in receivables (22,520) (563)
Change in other assets (299) 82
Change in accruals and payables 45,644 16,053
Change in subscriber advance payments 890 4,718
--------- --------
Net cash provided by operating activities 42,414 44,053
--------- --------
Cash flows from investing activities:
Cash paid in Restructuring (54,045) --
Capital expended for property and equipment (216,198) (85,804)
Capital expended for satellites -- (5,265)
Additional investments in and advances to
PRIMESTAR Partners L.P. (75) (6,991)
Repayment of advances to PRIMESTAR Partners
L.P. -- 7,663
--------- --------
Net cash used in investing activities (270,318) (90,397)
--------- --------
Cash flows from financing activities:
Borrowings of debt 451,561 405,061
Repayments of debt (222,025) (299,172)
Payment of deferred financing costs (8,705) (18,452)
Increase in due to PRIMESTAR Partners L.P. -- 5,265
Proceeds from issuance of common stock 989 225
--------- --------
Net cash provided by financing activities 221,820 92,927
--------- --------
Net increase (decrease) in cash and cash
equivalents (6,084) 46,583
Cash and cash equivalents:
Beginning of period 6,084 6,560
--------- --------
End of period $ -- 53,143
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) Organization and Basis of Presentation
--------------------------------------
PRIMESTAR, Inc. ("PRIMESTAR" or the "Company") and certain of its
subsidiaries were incorporated on August 27, 1997, and subsequently, ten
shares of the Company's common stock were issued to TSAT for a capital
contribution of $10.
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, the Company, Time Warner Entertainment Company,
L.P. ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of
Delaware, Inc. ("MediaOne"), and GE American Communications, Inc. ("GE
Americom"), and (ii) an Asset Transfer Agreement dated as of February 6,
1998, (the "TSAT Asset Transfer Agreement") between TSAT and the Company,
a business combination (the "Restructuring") was consummated whereby (a)
TSAT contributed and transferred to the Company (the "TSAT Asset Transfer")
all of TSAT's assets and liabilities except (I) the capital stock of Tempo
Satellite, Inc. ("Tempo"), a wholly-owned subsidiary of TSAT that holds
certain authorizations granted by the Federal Communications Commission
(the "FCC") and other assets and liabilities relating to a proposed direct
broadcast satellite ("DBS") system being constructed by Tempo, (II) the
consideration received by TSAT in the Restructuring and (III) the rights
and obligations of TSAT under agreements with the Company and others and
(b) (I) the business of PRIMESTAR Partners L.P. (the "Partnership"), (II)
the business of distributing the PRIMESTAR(R) programming service
("PRIMESTAR(R)"), including certain related assets (collectively, the
"PRIMESTAR Assets") and related liabilities (collectively the "PRIMESTAR
Liabilities") of each of TWE, Newhouse, Comcast, Cox and affiliates of
MediaOne, and (III) the interest in the Partnership (the "Partnership
Interest") of each of TWE, Newhouse, Comcast, Cox, affiliates of MediaOne
and GE Americom (collectively, the "Non-TSAT Parties") were consolidated
into the Company.
As a result of the Restructuring, the Company owns and operates the
PRIMESTAR(R) digital satellite business. The Company currently offers a
direct to home satellite service with over 160 channels of digital video
and audio programming throughout the continental U.S. The PRIMESTAR(R)
direct to home service is transmitted via a satellite ("GE-2") owned by GE
Americom and located at the 85 West Longitude ("W.L.") orbital position.
Prior to the Closing Date, the PRIMESTAR(R) service was owned and operated
by the Partnership and separately distributed and serviced by the
authorized distributors (the "Distributors"), all of whom were affiliated
with one or more of the partners of the Partnership (the "Partners").
(continued)
I-6
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The TSAT Asset Transfer has been 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 the Company immediately following the consummation
of the Restructuring. The remaining elements of the Restructuring, as set
forth above, have been accounted for using the purchase method of
accounting. The fair value of the consideration issued to the Non-TSAT
Parties has been allocated to the assets and liabilities acquired based
upon the estimated fair values of such assets and liabilities. Such
allocation is based upon a preliminary appraisal of the estimated fair
values and is subject to adjustment upon the receipt of a final appraisal.
In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
Newhouse, TWE and GE Americom received from the Company (i) in the case of
Cox and MediaOne, an amount of cash and in the case of TSAT, Newhouse, TWE,
Comcast and GE Americom, an assumption of indebtedness by the Company, (ii)
shares of Class A Common Stock, $.01 par value per share, of the Company,
("PRIMESTAR Class A Common Stock"), (iii) in the case of TSAT only, shares
of Class B Common Stock, $.01 par value per share, of the Company
("PRIMESTAR Class B Common Stock"), and (iv) except in the case of TSAT and
GE Americom, shares of Class C Common Stock, $.01 per value per share, of
the Company ("PRIMESTAR Class C Common Stock"), in each case in an amount
determined pursuant to the Restructuring Agreement. The total
consideration paid by PRIMESTAR to the Non-TSAT Parties (including assumed
liabilities) aggregated approximately $2.2 billion.
Holders of PRIMESTAR Class A Common Stock are entitled to one vote for each
share of such stock held, holders of PRIMESTAR Class B Common Stock are
entitled to ten votes for each share of such stock held and holders of
PRIMESTAR Class C Common Stock are entitled to ten votes for each share of
such stock held, on all matters presented to such stockholders.
As of June 30, 1998, the approximate ownership of PRIMESTAR's common stock
was as follows:
<TABLE>
<CAPTION>
Ownership Voting
Name of Beneficial Owner Percentage Power
- ------------------------ ---------- -----
<S> <C> <C>
TSAT 37.23% 38.02%
TWE and Newhouse (collectively) 30.02% 30.66%
Comcast 9.50% 9.70%
MediaOne 9.69% 9.90%
Cox 9.43% 9.63%
GE Americom 4.13% 2.09%
</TABLE>
(continued)
I-7
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On a pro forma basis, the Company's revenue, net loss, and net loss per
share would have been increased by $204,063,000, $90,510,000 and $0.45,
respectively, for the six months ended June 30, 1998; and revenue, net
loss, net loss per share would have been increased by $326,058,000,
$131,498,000 and $0.65, respectively, for the six months ended June 30,
1997 had the Restructuring been consummated on January 1, 1997. The
foregoing unaudited pro forma financial information is based upon
historical results of operations adjusted for acquisition costs and, in the
opinion of management, is not necessarily indicative of the results had the
Restructuring been consummated on January 1, 1997.
The accompanying consolidated financial statements include the accounts of
PRIMESTAR and those of all majority-owned subsidiaries. All significant
intercompany transactions have been eliminated.
The accompanying interim consolidated financial statements of PRIMESTAR 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 PRIMESTAR as of June 30, 1998 and the
results of its operations for the periods ended June 30, 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 TSAT Merger
---------------
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(the "TSAT Merger Agreement"), between TSAT and the Company, it is
contemplated that TSAT will be merged with and into the Company, with the
Company as the surviving corporation (the "TSAT Merger"). In connection
therewith (i) each outstanding share of Series A Common Stock of TSAT 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 of
TSAT will be converted into the right to receive one share of PRIMESTAR
Class B Common Stock, subject to adjustment. Each share of PRIMESTAR's
common stock then held by TSAT will be canceled.
(continued)
I-8
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Restructuring (including the TSAT Asset Transfer) and the TSAT Merger
are collectively referred to herein as the "Roll-up Plan". As described
below, consummation of the TSAT Merger is subject to regulatory approval
and other conditions to closing set forth in the TSAT Merger Agreement.
The respective obligations of the parties to the TSAT Merger Agreement to
consummate the TSAT Merger are subject to the satisfaction or waiver of a
number of conditions, including, among others, (a) occurrence of one of the
following: (i) FCC approval of TSAT's pending application to transfer
control of Tempo to the Company, (ii) divestiture by TSAT of the
construction permit issued by the FCC to Tempo authorizing construction of
a high-power DBS system (together with related authorizations, the "FCC
Permit"), or (iii) FCC permission to consummate the TSAT Merger without
divestiture of the FCC Permit; (b) the absence of any legal restraint or
prohibition preventing consummation of the TSAT Merger and (c) receipt of
approval for listing on the National Market tier of the Nasdaq Stock Market
of the shares of PRIMESTAR Class A Common Stock and PRIMESTAR Class B
Common Stock issuable to the stockholders of TSAT pursuant to the TSAT
Merger Agreement, subject to official notice of issuance. In addition, the
Company has the right to terminate the TSAT Merger Agreement and abandon
the TSAT Merger, under certain circumstances. In light of the foregoing
conditions, there can be no assurance that the TSAT Merger will be
consummated as currently contemplated by the TSAT Merger Agreement.
The TSAT Merger will be treated as the acquisition of TSAT by the Company.
Such acquisition will be accounted for at TSAT's historical cost since (i)
the percentage of the Company owned by TSAT prior to the consummation of
the TSAT Merger will be approximately equal to the percentage of the
Company to be owned by TSAT stockholders following consummation of the TSAT
Merger and (ii) the TSAT Merger and the Restructuring are both a part of
the Roll-up Plan.
(continued)
I-9
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) The ASkyB Transaction
---------------------
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement dated as of June 11, 1997 among the Partnership, 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 the Partnership, the Company agreed to
acquire from MCI two high power communications satellites currently under
construction, certain authorizations granted to MCI by the FCC to operate a
direct broadcast satellite business at the 110 W.L. orbital location using
28 transponder channels, and certain related contracts. In consideration,
ASkyB would receive non-voting convertible securities of PRIMESTAR,
comprising, subject to closing adjustments, approximately $600 million
liquidation value of non-voting convertible preferred stock, $.01 par value
per share, of the Company (the "PRIMESTAR Convertible Preferred Stock")
(convertible into approximately 52 million shares of non-voting Series D
Common Stock, $.01 par value per share, of the Company (the "PRIMESTAR
Class D Common Stock"), subject to adjustment) and approximately $442
million principal amount of convertible subordinated notes of the Company
(the "PRIMESTAR Convertible Subordinated Notes") (convertible into
approximately 38.5 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 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 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.
As described below, consummation of the ASkyB Transaction is contingent on,
among other things, receipt of all necessary government and regulatory
approvals, and accordingly, no assurance can be given that the ASkyB
Transaction will be consummated.
(continued)
I-10
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On May 12, 1998, the Department of Justice (the "DOJ") filed a civil
antitrust action opposing the ASkyB Transaction (the "DOJ Action"), and the
Federal District Court has set a trial date for February 1, 1999. The DOJ
Action seeks to prevent the Company 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 the Company's stockholders
affiliated with the cable industry to divest their ownership interests in
the Company.
The Company 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 the Company's current
plans with respect to a high power digital satellite business. Moreover,
any protracted litigation with the DOJ could result in significant legal
expenses to the Company. The Company does not believe, however, that the
DOJ Action and any resulting litigation will have a significant impact on
the operation or operating results of the Company's existing medium power
satellite television business.
The Company 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 the Company and its
stockholders, or on any terms. Additionally, the terms of any such consent
decree could have a material adverse effect on the Company's high power
strategy.
Consummation of the ASkyB Transaction is also subject to certain other
conditions, including, among others, either (i) the receipt of an order
adopted by the FCC with respect to the grant of the license to MCI for the
authorization to construct, launch and operate satellites in the DBS
orbital locations at 110 W.L. providing 28 transponder channels of service
and assignment of such license to the Company or its designee or (ii) the
implementation of an Acceptable Alternative Arrangement (as defined). On
August 15, 1997, the Partnership (on behalf of the Company) and MCI filed
an application with the FCC for consent to the assignment to the Company of
the high power DBS authorizations and certain other assets owned by MCI
(the "Assignment Application"). The Assignment Application must be
approved by the FCC before the consummation of the ASkyB Transaction. The
FCC placed the Assignment Application on Public Notice for comments. While
MCI has a contractual obligation to maintain its due diligence at the FCC
with respect to its DBS authorizations that are subject to the Assignment
Application, there can be no assurance that MCI will do so.
(continued)
I-11
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Numerous parties have filed comments and petitions to deny with regard to
the Assignment Application. The petitions and comments urge the FCC to
either deny the Assignment Application or to condition its approval. The
Partnership, MCI and News Corp. filed separate oppositions to these
petitions. Replies were filed on October 20, 1997. The issues raised in
these petitions, comments and replies include the following: (1) opposition
to the Partnership or the Company holding the 110 W.L. authorization; (2)
opposition to the Partnership or the Company simultaneously holding
authorizations for both the 110 W.L. orbital position (28 transponders) and
the 119 W.L. orbital position (11 transponders), which together represent
approximately 40% of the total transponder capacity in the three orbital
positions allocated to the U.S. for DBS service that provide full CONUS
visibility; (3) requests for extension of the FCC's rules governing access
to certain satellite delivered programming services controlled by News
Corp. and expansion of those rules to programming not delivered by
satellite (such as broadcast television stations) and (4) issues relating
to the possible applicability of the foreign ownership restrictions of
Section 310(b) of the Communications Act of 1934, as amended. There can be
no assurance that the FCC's review of these and other documents or the
Assignment Application will be favorable, or that the FCC will not impose
conditions unacceptable to the Company, MCI, ASkyB or News Corp. in
connection with its review.
(4) 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 did not differ
from those amounts reported as net loss in the consolidated statements of
operations.
(5) Loss Per Common Share
---------------------
The loss per common share for the six months ended June 30, 1998 and 1997
is based on the weighted average number of shares outstanding during the
period (200,942,000 and 66,631,000 for the three months ended June 30, 1998
and 1997, respectively; and 134,287,000 and 66,625,000 for the six months
ended June 30, 1998 and 1997, respectively).
(6) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
Cash paid for interest was $51,179,000 and $5,913,000 during the six months
ended June 30, 1998 and 1997, respectively. Cash paid for income taxes was
not material during such periods.
Accrued capital expenditures of $16,256,000 at June 30, 1998 have been
excluded from the accompanying statements of cash flows.
(continued)
I-12
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Significant non-cash investing and financing activities for the six months
ended June 30, 1998 are reflected in the following table (amounts in
thousands):
Cash paid in Restructuring:
Fair value of assets acquired $ 2,200,120
Liabilities assumed, net of current
assets (1,001,466)
Deferred tax liability (225,381)
Common stock issued (919,228)
-----------
$ 54,045
===========
(7) Intangible Assets
-----------------
Intangible assets at June 30, 1998 are comprised of the following
(amounts in thousands):
Customer relationships $ 390,000
Tradenames 230,000
Satellite rights 463,133
Excess cost over acquired net assets 400,166
----------
1,483,299
Accumulated amortization (32,368)
----------
$1,450,931
==========
Customer relationships, tradenames and excess cost over acquired net assets
are amortized using the straight-line method over their estimated useful
lives - 4 years, 20 years and 20 years, respectively.
Satellite rights represent PRIMESTAR's right to use Tempo's two high power
communications satellites (the "Tempo Satellites") as described in note 12.
The Company will amortize such rights over the estimated useful life of the
Tempo Satellites once the Company launches a high power service utilizing
the Tempo Satellites.
(continued)
I-13
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Debt
----
The components of debt are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------- -------------------
amounts in thousands
<S> <C> <C>
Senior Credit Facility (a) $ 252,700 48,000
Interim Loan Agreement (b) 350,000 --
Partnership Credit Facility (c) 575,000 --
Senior Subordinated Notes (d) 200,000 200,000
Senior Subordinated Discount Notes (d) 178,727 168,781
Other 5,832 1,948
---------- -------
$1,562,259 418,729
========== =======
</TABLE>
(a) In connection with the Restructuring, the Company amended and restated
its bank credit facility. As amended, the Senior Credit Facility
provides for maximum commitments of up to $700 million, comprising
$550 million of revolving loan commitments and $150 million of term
commitments, subject to the Company's compliance with operating and
financial covenants and other customary conditions. At June 30, 1998,
$417.3 million of such maximum commitments were unused. Commencing
March 31, 2001, the revolving loan commitments will be reduced
quarterly, and outstanding borrowings under the term loan commitments
will be payable in quarterly installments, in each case in accordance
with a schedule, until final maturity at June 30, 2005.
Borrowings under the Senior Credit Facility bear interest at variable
rates. In addition, the Company must pay a commitment fee equal to
0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Such
commitment fees were not significant during the six months ended June
30, 1998.
Borrowings under the Senior Credit Facility are guaranteed by all
restricted subsidiaries of the Company (defined under the Senior
Credit Facility to mean each of the Company's domestic subsidiaries 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. The Senior Credit Facility contains
covenants regarding debt service coverage and leverage, as well as
negative covenants restricting, among other things indebtedness, liens
and other encumbrances, mergers or consolidation transactions,
transactions with affiliates, investments, capital expenditures, and
payment of dividends and other distributions.
(continued)
I-14
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) On the Closing Date, the Company entered into a senior subordinated
credit agreement (the "Interim Loan Agreement") with certain financial
institutions (the "Lenders") with respect to a $350 million unsecured
senior subordinated interim loan (the "Interim Loan"). The Interim
Loan Agreement provided for commitments of $350 million. The
commitments were fully funded to the Company on the Closing Date.
The obligations under the Interim Loan Agreement are due in full one
year from the Closing Date. However, the Company has the option to
convert any outstanding principal amount of the Interim Loan to a term
loan on such date (the "Conversion Date"). If converted to a term
loan, the term loan would mature on April 1, 2008.
In addition, on the Conversion Date, the Company is obligated to enter
into a stock warrant agreement with the Lenders providing for the
issuance of warrants to purchase common stock of the Company. The
number of such warrants is to be equal to 2% of the Company's
outstanding common stock on the Conversion Date. The warrants are to
be exercisable over a ten-year period at a nominal exercise price.
The outstanding principal under the Interim Loan Agreement bears
interest at a rate per annum equal to the greater of 10% or, at the
election of the Lenders, (i) a rate per annum that is equal to the
corporate base rate, as provided for in the Interim Loan Agreement,
(ii) the Federal Funds effective rate, plus 0.50%, or (iii) the London
interbank offered rate ("LIBOR") for such period, plus in each case
the Applicable Spread (as defined in the Interim Loan Agreement). The
Applicable Spread is 475 basis points until June 30, 1998 and
increases periodically thereafter, with a final increase to 750 basis
points from and after April 1,1999.
At any time after the Conversion Date, the applicable spread is to be
850 basis points. In addition, at the request of any Lender, the
interest rate on all or any portion of the term loan owing to such
Lender will be converted to a fixed rate equal to the rate in effect
as of the date such Lender gave notice to the Company.
Interest is payable monthly in arrears on the last day of each month
until the Conversion Date. Thereafter, interest is payable quarterly
in arrears, except for any term loan converted to a fixed rate loan,
in which event interest is payable on March 31 and September 30 of
each year. If interest payable by the Company exceeds 15%, the
Company may elect to pay all or a portion of the interest in excess of
15% by issuance of notes in an aggregate principal amount equal to the
amount of the interest being so paid.
(continued)
I-15
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the Conversion Date, the Company may prepay the Interim Loan
without penalty. After the Conversion Date, certain limited
prepayments are permitted until April 1, 2001 out of the proceeds of
certain equity offerings or upon consummation of the ASkyB
Transaction. Otherwise, prepayment is not permitted until on or after
April 1, 2003. Prepayment penalties apply to any prepayment prior to
April 1, 2006, which penalties are calculated with reference to the
interest rate in effect at the time of prepayment. The Interim Loan
Agreement provides for mandatory prepayments of the Interim Loan upon
the occurrence of certain asset sales, dispositions of Tempo
Satellites, capital contributions, securities issuances and a change
of control (as defined in the Interim Loan Agreement) of the Company.
(c) The Partnership Credit Facility currently allows for borrowings up to
$585 million, and borrowings thereunder are collateralized by letters
of credit (the "Partnership Letters of Credit"), which were arranged
for by affiliates of the Partners (or, in the case of TSAT, affiliates
of Tele-Communications, Inc., "TCI") other than GEAS. In connection
with the Restructuring, the Partnership became an indirect, wholly-
owned subsidiary of the Company. In addition, the Partners and TCI
agreed to maintain their respective Partnership Letters of Credit
through June 1999, and the Company entered into Reimbursement
Agreements with respect to such letters of credit, whereby the Company
agreed to indemnify the parties arranging for such letters of credit
from and against all obligations thereunder and under the existing
reimbursement agreements and/or other existing documentation relating
thereto, including all existing and future payment obligations. The
obligations of the Company under such Reimbursement Agreements are
subordinated in right of payment to all other indebtedness of the
Company for borrowed money.
Borrowings under the Partnership Credit Facility bear interest at
variable rates. In addition, the Company must pay quarterly, in
arrears, a commitment fee of 3/16% per annum on the daily unused
portion of the facility. Such commitment fees were not significant
during the six months ended June 30, 1998.
The maturity date of the Partnership Credit Facility is September 30,
1998, and the Company is currently negotiating the terms of an
extension or an amendment to the Partnership Credit Facility. No
assurance can be given that any such extension or amendment will be
available on acceptable terms.
(d) On February 20, 1997, TSAT issued 10-7/8% Senior Subordinated Notes
due 2007 having an aggregate principal amount of $200,000,000 (the
"Senior Subordinated Notes") and 12-1/4% Senior Subordinated Discount
Notes due 2007 having an aggregate principal amount at maturity of
$275,000,000 (the "Senior Subordinated Discount Notes", and together
with the Senior Subordinated Notes, the "Notes"). PRIMESTAR assumed
the Notes in connection with the Restructuring.
(continued)
I-16
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash interest on the Senior Subordinated Notes is payable semi-
annually in arrears on February 15 and August 15. Cash interest will
not accrue or be payable on the Senior Subordinated Discount Notes
prior to February 15, 2002. Thereafter cash interest will accrue at a
rate of 12-1/4% per annum and will be payable semi-annually in arrears
on February 15 and August 15, commencing August 15, 2002, provided
however, that at any time prior to February 15, 2002, the Company may
make a Cash Interest Election (as defined) on any interest payment
date to commence the accrual of cash interest from and after the Cash
Election Date (as defined). The Notes will be redeemable at the
option of the Company, in whole or in part, at any time after February
15, 2002 at specified redemption prices. In addition, prior to
February 15, 2000, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the Notes
at specified redemption prices.
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issuances or on the current rates
offered to the Company for debt of the same remaining maturities. With the
exception of the Notes which had an aggregate fair value of $386,545,000 at
June 30, 1998, PRIMESTAR believes that the fair value and the carrying
value of its debt were approximately equal at June 30, 1998.
(9) Stockholders' Equity
--------------------
Preferred Stock
---------------
The Restated Certificate of Incorporation of the Company authorizes the
PRIMESTAR Board of Directors (the "Board") to provide for the issuance of
all or any shares of preferred stock of the Company in one or more series
and to fix for each series the number of shares constituting such series
and such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions thereof
as shall be stated and expressed in the resolution or resolutions adopted
by the Board providing for the issuance of such series. As of June 30,
1998, no shares of preferred stock have been authorized. If the ASkyB
Transaction is consummated on its proposed terms, the Board will authorize
a series of preferred stock to be designated the PRIMESTAR Convertible
Preferred Stock, as described in note 3.
Common Stock
------------
Holders of PRIMESTAR Class A Common Stock are entitled to one vote for each
share of such stock held, holders of PRIMESTAR Class B Common Stock are
entitled to ten votes for each share of such stock held and holders of
PRIMESTAR Class C Common Stock are entitled to ten votes for each share of
such stock held. Holders of PRIMESTAR Class D Common Stock are not
entitled to any voting rights with respect to such shares, except as may be
required by law.
(continued)
I-17
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Each share of PRIMESTAR Class B Common Stock is convertible, at the option
of the holder, into one share of PRIMESTAR Class A Common Stock. Each
share of PRIMESTAR Class C Common Stock is convertible, at the option of
the holder, into one share of PRIMESTAR Class B Common Stock, and will be
mandatorily and automatically so converted upon the tenth anniversary of
the Closing Date. Each share of PRIMESTAR Class D Common Stock will be
mandatorily and automatically convertible into one share of PRIMESTAR Class
A Common Stock upon transfer to any person other than ASkyB, News Corp. or
any of their affiliates.
Employee Stock Purchase Plan
----------------------------
Prior to the Restructuring, TSAT maintained an employee stock purchase plan
(the "TSAT Plan") pursuant to which employees could contribute up to 10% of
their compensation. TSAT, by annual resolution of the TSAT Board of
Directors, could elect to contribute up to 100% of the amount contributed
by employees. In connection with the Restructuring and effective June 30,
1998, the TSAT Plan was merged with and into the Partnership's amended and
restated retirement plan, which has been renamed the PRIMESTAR, Inc. 401(k)
Savings Plan.
(10) Transactions With Related Parties
---------------------------------
Pursuant to the terms of the TSAT Merger Agreement, PRIMESTAR shall
reimburse TSAT for all reasonable costs and expenses incurred by TSAT (i)
to comply with its tax and financial reporting obligations, (ii) to
maintain certain insurance coverage and (iii) to maintain its status as a
publicly traded company. During the three months ended June 30, 1998, such
reimbursements aggregated $43,000. Such reimbursements have been treated
as distributions to TSAT, and accordingly, have been reflected as a
reduction of PRIMESTAR's equity.
The Company is a party to a satellite transponder service agreement, as
amended (the "GE-2 Agreement") with an affiliate of GE Americom for
satellite service on GE-2. As originally executed, the GE-2 Agreement had
an initial term extending through February 2003 at an annual rate of
$86,340,000, with an option to extend the term through the end-of-life of
GE-2. The option to extend has expired without exercise. However, the
Company remains in discussions with GE Americom regarding other
alternatives for extension of the GE-2 Agreement, and the Company continues
to assess other medium and/or high power alternatives. No assurance can be
given that the parties will agree to such extension or that other
alternatives will be confirmed.
Since April 1, 1998, a subsidiary of TCI has provided satellite uplink
services to the Company. Charges for such services aggregated $4,014,000
for the three months ended June 30, 1998.
Beginning in March 1997, TCI began providing the Company with customer
support services from TCI's Boise, Idaho call center (the "Boise Call
Center"). Amounts charged by TCI to the Company for such services
aggregated $10,243,000 and $2,273,000 during the six months ended June 30,
1998 and 1997, respectively.
(continued)
I-18
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCI and the Non-TSAT Parties, other than GE Americom, have arranged for
letters of credit (the "GE-2 Letters of Credit") to support the Company's
obligations under the GE-2 Agreement. Pursuant to the Restructuring
Agreement, the Company reimburses TCI and the Non-TSAT Parties for fees
related to the Partnership Letters of Credit and the GE-2 Letters of
Credit. Such reimbursements aggregated $5,474,000 during the six months
ended June 30, 1998.
Subsequent to the Restructuring, the Non-TSAT Parties continued to operate
certain non-strategic local offices (the "Transition Offices") for
approximately three months (the "Transition Period") while the
responsibilities of such offices were transferred to other PRIMESTAR
offices. By the end of the Transition Period, all of the Transition
Offices had been closed. Transition expenses represent costs incurred
through June 30, 1998 and charged to the Company by the Non-TSAT Parties to
operate the Transition Offices during the Transition Period.
Certain key employees of the Company hold stock options in tandem with
stock appreciation rights with respect to certain common stock of TCI.
Estimates of the compensation related to the options and/or stock
appreciation rights granted to employees of the Company have been recorded
in the accompanying 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 recognized by the
Company related to such options aggregated $8,408,000 and $688,000 during
the six months ended June 30, 1998 and 1997, respectively.
Prior to the Restructuring, the Partnership provided programming services
to TSAT and other authorized distributors in exchange for a fee based upon
the number of subscribers receiving programming services. In addition, the
Partnership arranged for satellite capacity and uplink services, and
provided national marketing and administrative support services in exchange
for a separate authorization fee.
During 1997, TCI provided certain installation, maintenance, retrieval and
other customer fulfillment services to the Company pursuant to a
fulfillment agreement (as amended, the "Fulfillment Agreement"). During
the six months ended June 30, 1997, the Company's capitalized installation
costs included amounts charged by TCIC to the Company of $32,009,000.
Maintenance, retrieval and other operating expenses charged by TCIC to the
Company aggregated $4,490,000 during the six months ended June 30, 1997.
The Fulfillment Agreement terminated December 31, 1997.
(continued)
I-19
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TCI also provided corporate administrative services to the Company pursuant
to a transition services agreement (the "Transition Services Agreement").
Pursuant to the Transition Services Agreement, the Company was required to
pay TCI a monthly fee of $1.50 per qualified subscriber 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
$5,664,000 during the six months ended June 30, 1998 and 1997,
respectively. The Transition Services Agreement was terminated in
connection with the consummation of the Restructuring.
(11) Income Taxes
------------
The Company accounts for its income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date.
The Company recognized no income tax benefit during the six months ended
June 30, 1997. The Company is only able to realize income tax benefits for
financial reporting purposes to the extent that such benefits offset the
Company's income tax liabilities or the Company generates taxable income.
Prior to the Restructuring, all of the Company's income tax liabilities for
financial reporting purposes had been fully offset by income tax benefits.
(12) Commitments and Contingencies
-----------------------------
At June 30, 1998, PRIMESTAR's future minimum commitments to purchase
satellite reception equipment aggregated approximately $160 million.
As part of the compensation paid to the Company's various sales agents, the
Company has agreed to pay certain residual sales commissions during
specified periods following the initiation of service (generally five
years). During the six months ended June 30, 1998 and 1997, residual sales
commissions to such sales agents aggregated $11,344,000 and $8,204,000,
respectively, and were charged to expense in the accompanying consolidated
statements of operations of the Company.
(continued)
I-20
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1990, Tempo entered into an option agreement with the
Partnership granting the Partnership 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 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 the Partnership
subsequently entered into two letter agreements (the "Tempo Letter
Agreements") which provided for, among other things, the funding by the
Partnership of milestone and other payments due under a satellite
construction agreement, and certain related costs, through advances by the
Partnership to Tempo. The aggregate funding provided to Tempo by the
Partnership ($463,133,000 at June 30, 1998) is reflected as satellite
rights and is included in intangible assets in the accompanying June 30,
1998 consolidated balance sheet. On February 7, 1997, the Partners
Committee of the Partnership adopted a resolution affirming that the
Partnership had unconditionally exercised the Tempo Option.
The Tempo Letter Agreements permit the Company to apply its advances to
Tempo against any payments due under the Tempo Option with respect to its
purchase or lease of satellite capacity. Although TSAT and the Company
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, the Company believes that it will recover its costs in connection
with the completion of such purchase or lease.
Pursuant to the Restructuring Agreement, the Company and its subsidiaries,
jointly and severally, are required to indemnify each holder of PRIMESTAR
Class C Common Stock (collectively, the "Class C Stockholders"), GE
Americom, each affiliate of a Class C Stockholder or GE Americom, and each
of their respective officers, directors, employees and agents against and
hold them harmless from (i) any and all losses, liabilities, claims,
damages, costs and expenses suffered or incurred by any such indemnified
party arising out of or resulting from any liabilities of such Class C
Stockholder or GE Americom assumed by the Company in the Restructuring,
(ii) any and all losses, liabilities, claims, damages, costs and expenses
arising out of or resulting from the operation by the Company, its
subsidiaries, or any of their respective predecessors of the digital
satellite business or the ownership by the Company, its subsidiaries or any
of their respective predecessors of any assets used primarily therein,
whether before, on or after the Closing Date and (iii) any and all losses,
liabilities, claims, damages, costs and expenses arising out of or
resulting from the business, affairs, assets or liabilities of the Company
and its subsidiaries, whether arising before, on or after the Closing Date.
(continued)
I-21
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Restructuring Agreement also provides for each of Comcast, Cox,
MediaOne, TWE, Newhouse and GE Americom, severally and not jointly, to
indemnify the Company, its subsidiaries and agents against and hold them
harmless from any and all losses, liabilities, claims, damages, costs and
expenses arising out of or resulting from (A) (i) the operation by such
indemnitor, its subsidiaries or any of their respective predecessors of any
business other than the PRIMESTAR(R) distribution business or the digital
satellite business or (ii) the ownership by such indemnitor, its
subsidiaries or any of their respective predecessors of any assets other
than PRIMESTAR Assets or assets used primarily in the digital satellite
business, in any such case whether before, on or after the Closing Date or
(B) the business, affairs, or liabilities, other than PRIMESTAR
Liabilities, of such indemnitor after the Closing Date.
In addition, the Restructuring Agreement provides for each of Comcast, Cox,
MediaOne and GE Americom, severally and not jointly, to indemnify the
Company, its subsidiaries and each of their respective officers, directors,
employees and agents against and hold them harmless from, any and all
losses, liabilities, claims, damages, costs and expenses arising out of or
resulting from the breach of such indemnitor's representation and warranty
relating to the assets and liabilities of its respective subsidiary or
subsidiaries which, prior to the Restructuring, provided PRIMESTAR(R)
service ("PRIMESTAR Subs").
Pursuant to the Restructuring Agreement, each of Comcast, Cox and GE (each,
in such capacity, a "Merger Indemnitor") is required to indemnify the
Company, its affiliates and each of their respective officers, directors,
employees, stockholders, agents and representatives against and hold them
harmless from (i) all liability for all taxes, other than transfer taxes,
applicable to the conveyance and transfer of PRIMESTAR Assets and PRIMESTAR
Liabilities pursuant to any Asset Transfers attributable to the operation
or ownership of such party's PRIMESTAR Assets and Partnership Interest
("Covered Taxes") during the taxable period ending on or before the Closing
Date or the portion that ends on the Closing Date of any taxable period
that begins before and ends after the Closing Date (the "Pre-Closing Tax
Period"), (ii) all liability for Covered Taxes of any corporation which,
prior to the Closing, was affiliated with the Merger Indemnitor's PRIMESTAR
Sub or with which the Merger Indemnitor's PRIMESTAR Sub, prior to the
Closing, filed a consolidated, combined, unitary or aggregate tax return,
(iii) all liability for Covered Taxes resulting from the merger of the
Merger Indemnitor's PRIMESTAR Sub with and into the Company failing to
qualify under either (I) Section 351(a) of the Internal Revenue code of
1986, as amended (the "Code"), coupled with a deemed liquidation of the
Merger Indemnitor's PRIMESTAR Sub under Section 332 of the Code or (II)
Section 368(a) of the Code (except, in either such case, for any failure to
so qualify attributable to any action taken after the Closing by PRIMESTAR
or any of its subsidiaries, other than any such action expressly required
or contemplated by the Restructuring Agreement), and (iv) all liability for
any reasonable legal, accounting, appraisal, consulting or similar fees and
expenses relating to the foregoing.
(continued)
I-22
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Restructuring Agreement also provides for each of MediaOne, Newhouse
and TWE (each, in such capacity, a "Contribution Indemnitor") to indemnify
the Company, its affiliates and each of their respective officers,
directors, employees, stockholders, agents and representatives against and
hold them harmless from (i) in the case of a transfer of assets (other than
stock of a corporation ) to PRIMESTAR by such Contribution Indemnitor, all
liability for Covered Taxes attributable to the operation or ownership of
such assets during the Pre-Closing Tax Period, (ii) in the case of a
transfer of stock of a corporation (a "Contributed Corporation") to the
Company by such Contribution Indemnitor, all liability for Covered Taxes of
the Contributed Corporation for the Pre-Closing Tax Period, (iii) in the
case of a Contributed Corporation, all liability for Covered Taxes of any
corporation which, prior to the Closing as affiliated with the Contributed
Corporation or with which the Contributed Corporation, prior to the
Closing, was affiliated with the Contributed Corporation or with which the
Contributed Corporation, prior to the Closing, filed a consolidated,
combined, unitary or aggregate tax return, and (iv) all liability for any
reasonable legal, accounting, appraisal, consulting or similar fees and
expenses relating to the foregoing.
Notwithstanding the foregoing, each Merger Indemnitor and Contribution
Indemnitor is not required to indemnify and hold harmless the Company and
its affiliates and each of their respective officers, directors, employees,
stockholders, agents and representatives, and the Company is required to
indemnify each such indemnitor, its affiliates and each of their respective
officers, directors, employees, stockholders, agents and representatives
against and hold them harmless from, (i) all liability for Covered Taxes of
PRIMESTAR for the taxable period that begins after the Closing Date or the
portion that begins after the Closing Date of any taxable period that
begins before and ends after the Closing Date, (ii) all liability for
Covered Taxes resulting from the merger of the Merger Indemnitor's
PRIMESTAR Sub with and into the Company failing to qualify under Section
368(a) of the Code if such failure is attributable to any action taken
after the Closing by the Company or any of its subsidiaries (other than any
such action expressly required or contemplated by the Restructuring
Agreement), and (iii) all liability for any reasonable legal, accounting,
appraisal, consulting or similar fees and expenses relating to the
foregoing.
In connection with the ASkyB Transaction, the Company will also assume
certain obligations under certain specified contracts and other
arrangements binding upon ASkyB, New Corp. and/or MCI, which will require
the Company to make payments, subject to the terms and conditions of such
contracts and arrangements. At June 30, 1998, the remaining commitments
under such obligations to be assumed aggregated approximately $180 million.
(continued)
I-23
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The International Bureau of the FCC has granted a subsidiary of EchoStar
Communications Corporation ("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 medium power satellite now used to provide the PRIMESTAR(R)
service. Contrary to previous FCC policy, which would have permitted
operation of a satellite at the 83 degrees W.L. orbital position at a power
level of only 60 to 90 watts (subject to coordination requirements),
EchoStar has been 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 from GE-2 by subscribers to the PRIMESTAR(R) medium
power service.
GE Americom and the Partnership have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83 degrees
W.L. These requests, which were opposed by EchoStar and others, currently
are pending at the International Bureau. 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.
Accordingly, the ultimate outcome of this matter cannot presently be
predicted.
GE Americom and the Partnership have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
agreement in respect of such coordination between the Partnership and
EchoStar will be reached, or that if such agreement is reached that
coordination will resolve such interference.
ResNet Communications, LLC ("ResNet LLC"), a limited liability corporation
owned 95.01% by ResNet Communications, Inc. and 4.99% by a subsidiary of
the Company, has agreed to purchase from the Company, at a price that
approximates the Company's cost, up to $40,000,000 in satellite reception
equipment over a five-year period (subject to a one-year extension at the
option of ResNet LLC if ResNet LLC 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 LLC, 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 LLC 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 ownership interests in ResNet
LLC, representing 32% of the total ownership interests in ResNet LLC. The
Company's only recourse with respect to repayment of the loan is conversion
into ownership interests in ResNet LLC stock or warrants. Under current
interpretations of the FCC rules and regulations related to restrictions on
the provision of cable and satellite master antenna television services
(ResNet LLC's business) in certain areas, the Company could be prohibited
from holding 5% or more of the ownership interests in ResNet LLC 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. As of June 30, 1998, ResNet had purchased
$5,319,000 in equipment under this arrangement.
(continued)
I-24
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying financial statements.
I-25
<PAGE>
PRIMESTAR, 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 PRIMESTAR and should be read in
conjunction with (i) the accompanying consolidated financial statements of
PRIMESTAR, and (ii) the financial statements and related notes hereto 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 PRIMESTAR, 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 TSAT Merger; the ASkyB
Transaction; PRIMESTAR'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 PRIMESTAR'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's 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.
PRIMESTAR expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in PRIMESTAR's expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.
I-26
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Results of Operations
- -----------------------------------------
As discussed in note 1 to the accompanying consolidated financial
statements, the Restructuring was consummated on April 1, 1998. As a result of
the Restructuring, the Company owns and operates the PRIMESTAR(R) digital
satellite business. The Company currently offers a direct to home satellite
service with over 160 channels of digital video and audio programming throughout
the continental United States. The PRIMESTAR(R) direct to home service is
transmitted via GE-2. Prior to the Closing Date, the PRIMESTAR(R) service was
owned and operated by the Partnership and separately distributed and serviced by
the Distributors. As a result of the Restructuring, the entire PRIMESTAR(R)
digital satellite business has been consolidated into the Company, and the
Company has initiated a national sales strategy for the PRIMESTAR(R) medium
power service with consistent programming, packaging and pricing.
The Company intends to participate in the high power segment of the digital
satellite industry. Through various agreements with TSAT's wholly-owned
subsidiary, Tempo, the Company currently has rights to the capacity of a DBS
system being constructed by Tempo at the 119 W.L. orbital location, which would
enable the Company to offer a high power service with approximately 120 channels
of digital video and audio programming. If the ASkyB Transaction is ultimately
approved, of which there can be no assurance, the Company would be positioned to
construct a DBS system at the 110 W.L. orbital location that would enable the
Company to offer a high power service with approximately 225 channels of video
and audio programming.
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 the Company immediately following the consummation of the
Restructuring. Accordingly, the periods prior to the Restructuring represent
the results of operations of TSAT, and the periods subsequent to the
Restructuring include the results of operations of TSAT, the Partnership and the
Non-TSAT Parties. 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 the Restructuring.
Primarily as a result of the Restructuring, the Company's number of
customers increased from 914,000 at March 31, 1998 to 2,117,000 at June 30,
1998. During the six months ended June 30, 1998 and 1997 and the year ended
December 31, 1997, (i) the Company's annualized subscriber churn rate (which
represents the annualized number of subscriber terminations divided by the
weighted average number of subscribers during the period) was 29.8%, 29.5% and
30.1%, respectively and (ii) the average subscriber life implied by such
subscriber churn rate was 3.4 years, 3.4 years and 3.3 years, respectively. The
Company has initiated certain programs intended to reduce the Company's churn
rate, and although no assurance can be given, the Company expects that churn
rates for future periods will be lower than the current rate. If such programs
are not successful and the Company's churn rate fails to improve, the financial
condition and results of operations of the Company could be adversely affected.
I-27
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Results of Operations, continued
- ----------------------------------------------------
Certain financial information concerning the Company's operations is
presented below (dollar amounts in thousands):
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Percentage Percentage
of total of total
Amount revenue Amount revenue
----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment rental $ 508,932 94% $ 240,230 92%
Installation 31,080 6 20,415 8
--------- ---- --------- ----
Total revenue 540,012 100 260,645 100
--------- ---- --------- ----
Operating costs and expenses:
Charges from the Partnership (82,235) (15) (122,369) (47)
Operating (192,600) (36) (11,072) (4)
Selling, general and administrative:
Selling and marketing (125,441) (23) (51,901) (20)
Other general and administrative (48,234) (9) (39,872) (15)
--------- ---- --------- ----
(173,675) (32) (91,773) (35)
--------- ---- --------- ----
Transition (20,756) (4) -- --
--------- ---- --------- ----
Operating Cash Flow (1) 70,746 13 35,431 14
Stock compensation (9,986) (2) (1,552) (1)
Depreciation and amortization (209,863) (39) (113,266) (43)
--------- ---- --------- ----
Operating loss $(149,103) (28)% $ (79,387) (30)%
========= ==== ========= ====
</TABLE>
___________________
(1) Operating Cash Flow, which represents operating income before depreciation,
amortization 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.
Furthermore, Operating Cash Flow may not be comparable to similarly titled
measures reported by other companies. Operating Cash Flow should be viewed
together with cash flows measured in accordance with generally accepted
accounting principles. For information concerning such cash flows, see the
consolidated statements of cash flows included in the accompanying
consolidated financial statements.
I-28
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Results of Operations, continued
- ----------------------------------------------------
Revenue increased $279,367,000 or 107% during the six months ended June 30,
1998, as compared to the corresponding prior year period. The Company's average
monthly programming and equipment rental revenue per customer increased from $55
during the 1997 period to $57 during the 1998 period. Such increase was
primarily the result of rate increases implemented in May 1997 in conjunction
with the launch of approximately 55 additional channels. The average
installation revenue from each customer installed decreased from $126 in 1997 to
$95 in 1998. Such decrease is primarily due to a $50 rebate offer that was
initiated by the Company subsequent to the Restructuring.
Through the Closing Date, the Partnership provided programming services to
the Company and other authorized PRIMESTAR(R) distributors in exchange for a fee
based upon the number of customers receiving programming services. The
Partnership 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 the Company, based on such distributor's total number of authorized
satellite receivers.
Subsequent to the Closing Date, operating expenses are primarily comprised
of programming, satellite capacity and uplink costs (costs, which prior to the
Restructuring were included in charges from the Partnership) and amounts related
to customer fulfillment activities. Such expenses represented 49% of revenue
for the three months ended June 30, 1998.
Selling and marketing expenses, which represented 23% of revenue during the
six months ended June 30, 1998, include sales salaries and commissions,
marketing and advertising expenses, and costs associated with the operation of
customer service call centers. General and administrative expenses represented
9% and 15% of revenue during the six months ended June 30, 1998 and 1997,
respectively. The decrease in such percentage is primarily attributable to the
relatively fixed nature of certain components of the Company's selling, general
and administrative expenses.
During the second half of 1997, the Company began offering 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. Losses
incurred by the Company on such sales of satellite reception equipment are
included in selling expense in the period such sales are consummated and
aggregated $12,077,000 during the six months ended June 30,1998.
Subsequent to the Restructuring, the Non-TSAT Parties continued to operate
the Transition Offices for approximately three months while the responsibilities
of such offices were transferred to other PRIMESTAR offices. By the end of the
Transition Period, the Transition Offices had been closed. Transition expenses
represent costs incurred through June 30, 1998 and charged to the Company by the
Non-TSAT Parties to operate the Transition Offices during the Transition Period.
The $64,229,000 or 57% increase in depreciation expense during the six
months ended June 30, 1998, as compared to the corresponding prior year period,
is the result of an increase in the Company's depreciable assets due primarily
to the Restructuring.
The Company recognized amortization expense of $32,368,000 during the three
months ended June 30, 1998. Such amortization expense relates to the intangible
assets recorded in connection with the Restructuring.
I-29
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Results of Operations, continued
- ----------------------------------------------------
The Company incurred interest expense of $63,624,000 and $21,408,000 during
the six months ended June 30, 1998 and 1997, respectively. The increase in
interest expense is due to interest incurred on the Interim Loan and the
Partnership Credit Facility as well as additional borrowings under the Senior
Credit Facility.
The Company's net loss of $156,908,000 for the six months ended June 30,
1998 represents an increase of $49,318,000 as compared to a net loss of
$107,590,000 for the six months ended June 30, 1997. Such increase is due
primarily to the increases in deprecation, amortization and interest expense
discussed above, partially offset by an increase in the Company's income tax
benefit.
Material Changes in Financial Position
- --------------------------------------
See notes 2 and 3 to the accompanying consolidated financial statements for
a description of the proposed TSAT Merger and ASkyB Transaction, respectively.
In connection with the consummation of the Restructuring, the Company paid
cash to, or assumed debt of, the Non-TSAT Parties in the aggregate amount of
approximately $479 million. The Company financed such cash payments and debt
assumption with the proceeds from the Interim Loan and through borrowings under
the Senior Credit Facility. In addition, the Company assumed indebtedness of
the Partnership aggregating approximately $575 million, including $571 million
outstanding under the Partnership Credit Facility and $4 million of capital
lease obligations.
On the Closing Date, the Company entered into the Interim Loan Agreement
with certain financial institutions. The Interim Loan Agreement provided for
commitments of $350 million which were used to fund the cash payments and debt
assumption under the Restructuring. The commitments were fully funded to the
Company on the Closing Date.
The obligations under the Interim Loan Agreement are due in full one year
from the Closing Date. However, the Company has the option to convert any
outstanding principal amount of the Interim Loan to a term loan on such date.
If converted to a term loan, the term loan would mature on April 1, 2008.
Interest is payable at variable rates monthly in arrears on the last day of
each month until the Conversion Date. Thereafter, interest is payable quarterly
in arrears, except for any term loan converted to a fixed rate loan, in which
event interest is payable on March 31 and September 30 of each year. If
interest payable by the Company exceeds 15%, the Company may elect to pay all or
a portion of the interest in excess of 15% by issuance of notes in an aggregate
principal amount equal to the amount of the interest being so paid.
Prior to the Conversion Date, the Company may prepay the Interim Loan
without penalty. After the Conversion Date, certain limited prepayments are
permitted until April 1, 2001 out of the proceeds of certain equity offerings or
upon consummation of the ASkyB Transaction. Otherwise, prepayment is not
permitted until on or after April 1, 2003. Prepayment penalties apply to any
prepayment prior to April 1, 2006, which penalties are calculated with reference
to the interest rate in effect at the time of prepayment. The Interim Loan
Agreement provides for mandatory prepayments of the Interim Loan upon the
occurrence of certain asset sales, dispositions of Tempo Satellites, capital
contributions, securities issuances and a change of control (as defined in the
Interim Loan Agreement) of the Company.
I-30
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Financial Position, continued
- -------------------------------------------------
The Company currently intends to refinance the Interim Loan. There can be
no assurance that the Company will be able to secure such refinancing on terms
that are acceptable to the Company or at all, and if secured, as to the timing
of such refinancing.
In connection with the Restructuring, the Company amended and restated its
bank credit facility. As amended, the Senior Credit Facility provides for
maximum commitments of up to $700 million, comprising $550 million of revolving
loan commitments and $150 million of term commitments, subject to the Company's
compliance with operating and financial covenants and other customary
conditions. As of the June 30, 1998, $252.7 million in loans were outstanding
under the Senior Credit Facility. Two letters of credit with an aggregate
drawable amount of $30 million have been issued for the account of the Company
pursuant to the Senior Credit Facility, consisting of a $5 million letter of
credit issued in connection with the Partnership Credit Facility and a $25
million letter of credit issued in connection with the GE-2 Agreement.
Commencing March 31, 2001, the revolving loan commitments will be reduced
quarterly, and outstanding borrowing under the term loan commitments will be
payable in quarterly installments, in each case in accordance with a schedule,
until final maturity at June 30, 2005.
The Senior Credit Facility contains covenants regarding debt service
coverage and leverage, as well as negative covenants restricting, among other
things indebtedness, liens and other encumbrances, mergers or consolidation
transactions, transactions with affiliates, investments, capital expenditures,
and payment of dividends and other distributions.
The Partnership obtained the Partnership Credit Facility, which currently
allows for borrowings up to $585 million, to finance advances to Tempo for
payments due in respect of the construction and launch of two high power
communications satellites, and borrowings thereunder are collateralized by the
Partnership Letters of Credit. In connection with the Restructuring, the
Partnership became an indirect, wholly-owned subsidiary of the Company. In
addition, the Partners and TCI agreed to maintain their respective Partnership
Letters of Credit through June 1999, and the Company entered into Reimbursement
Agreements with respect to such letters of credit, whereby the Company agreed to
indemnify the parties arranging for such letters of credit from and against all
obligations thereunder and under the existing reimbursement agreements and/or
other existing documentation relating thereto, including all existing and future
payment obligations. The obligations of the Company under such Reimbursement
Agreements are subordinated in right of payment to all other indebtedness of the
Company for borrowed money. At June 30, 1998, the balance due under the
Partnership Credit Facility was $575 million, including amounts borrowed to pay
interest charges.
The maturity date of the Partnership Credit Facility is September 30, 1998,
and the Company is currently negotiating the terms and conditions of an
extension or an amendment to the Partnership Credit Facility. No assurance can
be given that any such extension or amendment will be available on acceptable
terms.
I-31
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Financial Position, continued
- -------------------------------------------------
On February 20, 1997, TSAT completed the offering related to the Notes,
consisting of $200 million aggregate principal amount of 10 7/8% Senior
Subordinated Notes and $275 million aggregate principal amount at maturity of 12
1/4% Senior Subordinated Discount Notes.
Cash interest on the Senior Subordinated Notes accrues at a rate of 10 7/8%
per annum and is payable semi-annually in arrears each February 15 and August
15. Cash interest will not accrue or be payable on the Senior Subordinated
Discount Notes prior to February 15, 2002. Thereafter, cash interest on the
Senior Subordinated Discount 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 in
the applicable Indenture) on any interest payment date to commence the accrual
of cash interest from and after the Cash Interest Date (as defined in the
applicable Indenture), in which case the outstanding principal amount at
maturity of each Senior Subordinated Discount Note will on such interest payment
date be reduced to the Accreted Value (as defined in the applicable Indenture)
of such Senior Subordinated Discount 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. The Notes mature on
February 15, 2007.
At June 30, 1998, PRIMESTAR's future minimum commitments to purchase
satellite reception equipment aggregated approximately $160 million.
As part of the compensation paid to the Company's various sales agents, the
Company has agreed to pay certain residual sales commissions during specified
periods following the initiation of service (generally five years). During the
six months ended June 30, 1998 and 1997, residual sales commissions to such
sales agents aggregated $11,344,000 and $8,204,000, respectively.
In April 1998, the Company announced the terms of a proposed business
combination (the "Superstar Acquisition") with Superstar/Netlink Group LLC
("Superstar"). Superstar is the nation's largest provider of satellite
entertainment programming to C-band direct-to-home satellite customers, serving
approximately 1.2 million subscribers. Superstar is currently owned
approximately 40% by United Video Satellite Group, Inc. ("UVSG"), the majority
of the voting power and common stock of which is owned by TCI; 40% by Liberty
Media Corporation, a subsidiary of TCI ("Liberty"); and 20% by Turner-Vision,
Inc. ("Turner-Vision"). Under the terms of the Superstar Acquisition, as
currently proposed, UVSG, Liberty and Turner-Vision (collectively, the
"Superstar Transferors") will receive convertible preferred stock of the
Company, in an amount determined by formula, based in part on the number of C-
band subscribers acquired by the Company. The Company will also assume certain
liabilities of Superstar. The Superstar Acquisition is subject to the execution
and delivery of definitive documentation, applicable regulatory approval and
other conditions to closing.
The Company believes that the parties to the Superstar Acquisition remain
committed in principle to the consummation of the Superstar Acquisition.
However, in light of the DOJ Action, no assurance can be given that the
Superstar Acquisition will be consummated or that the terms of the Superstar
Acquisition will not be renegotiated prior to execution of definitive binding
documentation relating thereto.
I-32
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Financial Position, continued
- -------------------------------------------------
The International Bureau of the FCC has granted a subsidiary of 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 medium power satellite now used to
provide the PRIMESTAR(R) service. Contrary to previous FCC policy, which would
have permitted operation of a satellite at the 83 degrees W.L. orbital position
at a power level of only 60 to 90 watts (subject to coordination requirements)
EchoStar has been 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
from GE-2 by subscribers to the PRIMESTAR(R) medium power service.
GE Americom and the Partnership have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83 degrees W.L.
These requests, which were opposed by EchoStar and others, currently are pending
at the International Bureau. 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. Accordingly, the ultimate
outcome of this matter cannot presently be predicted.
GE Americom and the Partnership have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
agreement in respect of such coordination between the Partnership and EchoStar
will be reached, or that if such agreement is reached that coordination will
resolve such interference.
ResNet LLC has agreed to purchase from the Company, at a price that
approximates the Company's cost, up to $40,000,000 in satellite reception
equipment over a five-year period (subject to a one-year extension at the option
of ResNet LLC if ResNet LLC 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 LLC, 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
LLC 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
ownership interests in ResNet LLC, representing 32% of the total ownership
interests in ResNet LLC. The Company's only recourse with respect to repayment
of the loan is conversion into ownership interests in ResNet LLC stock or
warrants. Under current interpretations of the FCC rules and regulations
related to restrictions on the provision of cable and satellite master antenna
television services (ResNet LLC's business) in certain areas, the Company could
be prohibited from holding 5% or more of the ownership interests in ResNet LLC
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. As of June 30, 1998, ResNet had purchased $5,319,000 in equipment
under this arrangement.
I-33
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
Material Changes in Financial Position, continued
- -------------------------------------------------
The Company believes that borrowing availability pursuant to the Senior
Credit Facility and any funds generated by the Company's operating activities
will be sufficient through December 31, 1998, to fund the Company's working
capital, debt service and currently projected capital expenditure requirements
associated with its medium power satellite distribution business. However, to
the extent that the Company (i) pursues a strategy with respect to the high
power segment of the digital satellite industry, (ii) completes any significant
acquisitions, (iii) enters into any other business activities, other than its
existing medium power satellite distribution business, (iv) 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.
The Company is in the process of identifying and addressing issues
surrounding the Year 2000 and its impact on the Company's operations. The issue
surrounding the Year 2000 is whether the Company's operating and financial
systems or the systems used by companies with whom the Company conducts business
will properly recognize date sensitive information when the year changes to
2000, or "00." Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. As the Company has not
completed its assessment of the impact the Year 2000 may have on its computer
operations, management cannot estimate the costs associated with ensuring the
Company's systems are Year 2000 compliant. The Company is in the process of
determining the impact of the Year 2000, and management anticipates completion
of the project by January 1999, allowing adequate time for testing. However,
there can be no assurance that the Company's systems nor the computer systems of
other companies with whom the Company conducts business will be Year 2000
compliant prior to December 31, 1999. If such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.
I-34
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibit
27 - Financial Data Schedule
(b) Report on Form 8-K filed during quarter ended June 30, 1998 -
<TABLE>
<CAPTION>
Financial
Date of Items Statements
Report Reported Filed
------ -------- ----------
<S> <C> <C>
April 15, 1998, Item 2 and Item 7 Time Warner Satellite Service Group -
as amended Combined financial statements as of December 31,
1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997.
Cox Communications, Inc. - Direct Broadcast
Satellite Business-
Financial statements as of December 31, 1997 and
1996 and for each of the years in the three-year
period ended December 31, 1997.
Comcast Satellite Communication, Inc.
and Comcast DBS, Inc. -
Combined financial statements as of December 31,
1997 and 1996 for each of the years in the
three-year period ended December 31, 1997.
MediaOne of Delaware, Inc. - Direct Broadcast
Satellite Business (Successor) and Direct
Broadcast Satellite Business of Continental
Cablevision, Inc. (Predecessor) -
Combined financial statements as of December 31,
1997 and 1996 and for the year ended December 31,
1997, the period November 15, 1996 through December
31, 1996, the period from January 1, 1996 through
November 14, 1996, and the year ended December 31,
1995.
PRIMESTAR Partners L.P. -
Financial statements as of December 31, 1997 and 1996
and for each of the years in the three-year period
ended December 31, 1997.
</TABLE>
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESTAR, INC.
Date: August 13, 1998 By: /s/ Kenneth G. Carroll
------------------------------------
Kenneth G. Carroll
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998 By: /s/ Marcus O. Evans
------------------------------------
Marcus O. Evans
Senior Vice President, General
Counsel and Secretary
Date: August 13, 1998 By: /s/ Scott D. Macdonald
------------------------------------
Scott D. Macdonald
Vice President and Controller
(Chief Accounting Officer)
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from PRIMESTAR,
Inc.'s quarterly report on Form 10-Q for the quarter ended June 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 104,995
<ALLOWANCES> 11,160
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,794,655
<DEPRECIATION> 364,214
<TOTAL-ASSETS> 3,019,396
<CURRENT-LIABILITIES> 0
<BONDS> 1,562,259
0
0
<COMMON> 2,009
<OTHER-SE> 899,107
<TOTAL-LIABILITY-AND-EQUITY> 3,019,396
<SALES> 0
<TOTAL-REVENUES> 540,012
<CGS> 0
<TOTAL-COSTS> 274,835
<OTHER-EXPENSES> 209,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,624
<INCOME-PRETAX> (219,280)
<INCOME-TAX> (62,372)
<INCOME-CONTINUING> (156,908)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156,908)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
