<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1998
REGISTRATION NO. 333-45835
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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PRIMESTAR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 84-1441684
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
KENNETH G. CARROLL
PRIMESTAR, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPY TO:
MARC A. LEAF, ESQ.
BAKER & BOTTS, L.L.P.
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022-6030
(212) 705-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and certain other conditions under the TSAT Merger Agreement (as
defined herein) are satisfied or waived.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PRIMESTAR, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS IN FORM S-4 AND PROXY STATEMENT/PROSPECTUS
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM FORM S-4 CAPTION HEADING IN PROXY STATEMENT/PROSPECTUS
---- ---------------- -------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE
TRANSACTION
Item 1. Forepart of Registration
Statement and Outside Front Facing Page; Cross-Reference
Cover Page of Prospectus..... Sheet; Outside Front Cover Page
Item 2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back
Cover Pages; Available
Information; Table of Contents
Item 3. Risk Factors, Ratio of
Earnings to Fixed Charges and Summary; Risk Factors; Selected
Other Information............ Financial Data
Item 4. Terms of the Transaction...... Summary; Risk Factors; The Roll-
up Plan; The Restructuring
Agreement; Related Agreements;
The TSAT Merger Agreement;
Description of New PRIMESTAR
Capital Stock; Comparison of
Stockholders' Rights
Item 5. Pro Forma Financial Summary; Pro Forma Financial
Information.................. Statements
Item 6. Material Contacts with the Summary; Risk Factors; Business
Company Being Acquired....... of TSAT--Certain Arrangements
Between TSAT and TCI; Business of
the Partnership--Related Party
Transactions; Related Agreements
Item 7. Additional Information
Required for Reoffering by
Persons and Parties Deemed to
be Underwriters.............. *
Item 8. Interests of Named Experts and
Counsel...................... Legal Matters; Experts
Item 9. Disclosure of Commission
Position on Indemnification
of Securities Act
Liabilities.................. *
B. INFORMATION ABOUT THE
REGISTRANT
Item 10. Information with Respect to S-
3 Registrants................ *
Item 11. Incorporation of Certain
Information by Reference..... *
Item 12. Information with Respect to S-
2 or S-3 Registrants......... *
Item 13. Incorporation of Certain
Information by Reference..... *
Item 14. Information with Respect to
Registrants Other than S-3 or Outside Front Cover Page;
S-2 Registrants.............. Summary; Risk Factors; The
Digital Satellite Television
Industry; Business of New
PRIMESTAR; Index to Financial
Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM FORM S-4 CAPTION HEADING IN PROXY STATEMENT/PROSPECTUS
---- ---------------- -------------------------------------
<C> <S> <C>
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15. Information with Respect to
S-3 Companies............... *
Item 16. Information with Respect to
S-2 or S-3 Companies........ *
Item 17. Information with Respect to
Companies Other than S-3 or Available Information; Summary;
S-2 Companies. ............. Risk Factors; Selected Financial
Data; The Digital Satellite
Television Industry; Business of
TSAT; Business of the
Partnership; Business of Other
PRIMESTAR(R) Distributors;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations; Index
to Financial Information
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies,
Consents or Authorizations Available Information; Summary;
are to be Solicited......... The Special Meeting; Business of
TSAT --Certain Arrangements
Between TSAT and TCI; The Roll-up
Plan; Security Ownership of TSAT;
Security Ownership of New
PRIMESTAR; Management of New
PRIMESTAR
Item 19. Information if Proxies,
Consents or Authorizations
are not to be Solicited or
in an Exchange Offer........ *
</TABLE>
- --------
* Omitted because inapplicable or answer is in the negative.
<PAGE>
[LOGO]
TCI SATELLITE ENTERTAINMENT, INC.
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(303) 712-4600
February 9, 1998
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders (the
"Meeting") of TCI Satellite Entertainment, Inc. ("TSAT"), which will be held
at the offices of Tele-Communications, Inc., 5619 DTC Parkway, Englewood,
Colorado, on Friday, March 6, 1998, commencing at 10:00 a.m., local time. A
notice of the Meeting, a proxy card and a Proxy Statement/Prospectus
containing information about the matters to be acted upon at the Meeting are
enclosed.
At the Meeting, you will be asked to consider and vote upon a proposal to
approve and adopt (i) a Merger and Contribution Agreement dated as of February
6, 1998 (the "Restructuring Agreement"), (ii) an Asset Transfer Agreement
dated as of February 6, 1998 (the "TSAT Asset Transfer Agreement"), (iii) an
Agreement and Plan of Merger dated as of February 6, 1998 (the "TSAT Merger
Agreement"), (iv) each of the other agreements contemplated by the
Restructuring Agreement to which TSAT is a party and (v) the transactions
contemplated by the Restructuring Agreement, the TSAT Asset Transfer
Agreement, the TSAT Merger Agreement and such other agreements (collectively,
the "Roll-up Plan").
The Roll-up Plan is a two-part transaction, comprising (i) the contribution
of substantially all TSAT's assets and liabilities to a newly formed
corporation (referred to herein as "New PRIMESTAR"), and the concurrent
contribution to New PRIMESTAR by TSAT's existing partners of their respective
interests in the PRIMESTAR(R) digital satellite business (collectively, the
"Restructuring Transaction"), and (ii) subject to regulatory approval and
other conditions, the subsequent merger of TSAT with and into New PRIMESTAR,
in a transaction in which TSAT's outstanding common shares will be converted
into common shares of New PRIMESTAR (the "TSAT Merger").
As a result of the Restructuring Transaction, New PRIMESTAR will own the
entire PRIMESTAR(R) digital satellite business and TSAT and its former
partners in that business (or their respective affiliates) will, in the
aggregate, own all the outstanding capital stock of New PRIMESTAR. Following
the Restructuring Transaction and prior to the TSAT Merger, TSAT stockholders
will continue to own TSAT common stock, which will continue to trade on The
Nasdaq National Market under the symbols "TSATA" and "TSATB." During this
period, TSAT will be a holding company, and TSAT's principal asset will be its
36% ownership interest in New PRIMESTAR, including the right to initially
designate three out of eleven members of New PRIMESTAR's board of directors.
In addition, TSAT will own all the capital stock of Tempo Satellite, Inc.
("Tempo"), an existing TSAT subsidiary that holds certain authorizations
granted by the Federal Communications Commission ("FCC") and other assets and
liabilities relating to a proposed direct broadcast satellite system being
constructed by Tempo. In connection with the Roll-up Plan, TSAT will enter
into an agreement with New PRIMESTAR granting it an exclusive, transferable
option to acquire Tempo's stock or assets, subject to FCC approval.
<PAGE>
Assuming that necessary regulatory approvals are received and that the other
conditions provided for in the TSAT Merger Agreement are satisfied or waived,
the TSAT Merger will be consummated. In that event, TSAT will cease to exist,
and TSAT stockholders will receive, in a transaction designed to be tax-free
to such stockholders, (i) one share of New PRIMESTAR Class A Common Stock for
each share of TSAT Series A Common Stock outstanding immediately prior to the
closing of the TSAT Merger, and (ii) one share of New PRIMESTAR Class B Common
Stock for each share of TSAT Series B Common Stock so outstanding. Such shares
of New PRIMESTAR Common Stock will be freely tradeable by TSAT's former
stockholders (other than affiliates) and are expected to trade on The Nasdaq
National Market under the symbols "PSTRA" and "PSTRB." There can be no
assurance as to whether the market value of the shares of New PRIMESTAR common
stock to be received by TSAT stockholders in exchange for their shares of TSAT
common stock will be less than, equal to or greater than the market value of
shares of TSAT common stock prior to the consummation of the TSAT Merger.
Subject to adjustment based on closing subscriber counts and other factors,
immediately following the TSAT Merger, TSAT's former stockholders will own, in
the aggregate, common stock of New PRIMESTAR representing approximately 34% of
the common equity, and 36% of the voting power, of New PRIMESTAR then
outstanding.
The Board of Directors of TSAT (the "TSAT Board") has carefully reviewed and
considered the terms and conditions of the Roll-up Plan, including the
transactions contemplated by the Restructuring Agreement, the TSAT Asset
Transfer Agreement and the TSAT Merger Agreement. THE TSAT BOARD HAS
DETERMINED THAT THE TERMS OF THE ROLL-UP PLAN ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE STOCKHOLDERS OF TSAT, HAS UNANIMOUSLY APPROVED THE
RESTRUCTURING AGREEMENT, THE TSAT ASSET TRANSFER AGREEMENT AND THE TSAT MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT
THE ROLL-UP PLAN, INCLUDING THE RESTRUCTURING AGREEMENT, THE TSAT ASSET
TRANSFER AGREEMENT AND THE TSAT MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY. In addition, the TSAT Board retained Merrill Lynch &
Co., which delivered an oral opinion (which it subsequently confirmed in
writing) on February 6, 1998 (the "Merrill Lynch Opinion") to the TSAT Board
to the effect that, as of the date thereof, and based upon the assumptions
made, matters considered and limits of the review, as set forth in such
opinion, the consideration to be received by TSAT and its stockholders
pursuant to the Roll-up Plan is fair, from a financial point of view, to TSAT
and its stockholders (other than any stockholders that are affiliates of
TSAT). A copy of the Merrill Lynch Opinion, which sets forth the assumptions
made, matters considered and the scope of review undertaken in connection
therewith, is included as Appendix I to the accompanying Proxy
Statement/Prospectus and should be read in its entirety. For a discussion of
the TSAT Board's consideration and evaluation of the Roll-up Plan, as well as
a discussion of the interests of certain directors and executive officers of
TSAT in the Roll-up Plan, see "THE ROLL-UP PLAN--Reasons for the Roll-up Plan;
Recommendation of the TSAT Board" and "THE ROLL-UP PLAN--Interests of Certain
Persons in the Roll-up Plan" in the accompanying Proxy Statement/Prospectus.
The accompanying Proxy Statement/Prospectus contains detailed information
concerning the terms of the proposed Roll-up Plan, the proposed management of
New PRIMESTAR and certain additional information. Please give all of this
information your careful attention. Copies of the Restructuring Agreement and
the TSAT Asset Transfer Agreement, which together set forth the principal
terms and conditions of the Restructuring Transaction, and a copy of the TSAT
Merger Agreement, which sets forth the principal terms and conditions of the
TSAT Merger, are included as Appendices A-1, A-2 and B, respectively, to the
accompanying Proxy Statement/Prospectus and should be read in their entirety.
Consummation of the Restructuring Transaction and the TSAT Merger are
subject to certain conditions, including approval and adoption of the Roll-up
Plan by the holders of 66 2/3% of the combined voting power of the shares of
TSAT Series A Common Stock and TSAT Series B Common Stock, voting together as
a single class, and, in the case of the TSAT Merger, regulatory approval and
other conditions set forth in the TSAT Merger Agreement. Accordingly, the TSAT
Merger may not be consummated even if the Roll-up Plan is
<PAGE>
approved and the Restructuring Transaction is consummated. For a discussion of
the risks associated with the failure to consummate the TSAT Merger, see "RISK
FACTORS--Risks of Failure to Consummate the TSAT Merger" in the accompanying
Proxy Statement/Prospectus.
A vote in favor of the Roll-up Plan will constitute approval of the
Restructuring Transaction and the TSAT Merger, and will also constitute a vote
in favor of the adoption of the Restated Certificate of Incorporation of New
PRIMESTAR (the "New PRIMESTAR Charter") and the bylaws of New PRIMESTAR (the
"New PRIMESTAR Bylaws") and the election as directors of the members of the
Board of Directors of New PRIMESTAR, as in effect at the time of the closing
of the TSAT Merger. Stockholders are urged to review Appendices E and F to the
accompanying Proxy Statement/Prospectus, which contain the complete text of
the New PRIMESTAR Charter and the New PRIMESTAR Bylaws, respectively.
Stockholders are also urged to review "MANAGEMENT OF NEW PRIMESTAR" in the
accompanying Proxy Statement/Prospectus, which describes the qualifications of
the initial members of the Board of Directors of New PRIMESTAR, and
"COMPARISON OF STOCKHOLDERS' RIGHTS," which describes the material differences
between the rights of TSAT stockholders and the rights of New PRIMESTAR
stockholders, following the closing of the TSAT Merger.
Pursuant to Voting Agreements among certain parties to the Restructuring
Agreement and certain stockholders of TSAT (the "TSAT Voting Agreements"),
such stockholders have agreed to vote (or cause to be voted) all shares of
TSAT Common Stock which they respectively have the power to vote or direct the
vote of (representing approximately 47.6% of the combined voting power of the
outstanding shares of TSAT Common Stock as of January 6, 1998) in favor of the
approval of the Roll-up Plan. A copy of each of the TSAT Voting Agreements is
included in Appendix H to the accompanying Proxy Statement/Prospectus.
At the Meeting, you will also be asked to consider and vote upon a proposal
to approve and adopt the TCI Satellite Entertainment, Inc. 1997 Nonemployee
Director Stock Option Plan (the "TSAT Nonemployee Director Plan"), which
provides for the issuance of options to purchase up to 500,000 shares of TSAT
Series A Common Stock, and to approve all grants thereunder. The TSAT Board
believes that the TSAT Nonemployee Director Plan is in the best interests of
TSAT and its stockholders because it will, among other things, assist TSAT in
retaining its independent directors prior to the consummation of the TSAT
Merger. Approval of the TSAT Nonemployee Director Plan requires the
affirmative vote of a majority of the combined voting power of the outstanding
shares of TSAT Series A Common Stock and TSAT Series B Common Stock present
and entitled to vote thereon at the Meeting, voting together as a single
class. Approval of the TSAT Nonemployee Director Plan is not a condition to
consummation of the Roll-up Plan or any part thereof. A copy of the TSAT
Nonemployee Director Plan is included as Appendix J to the accompanying Proxy
Statement/Prospectus.
Whether or not you are personally able to attend the Meeting, please
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action will not limit your right to
vote in person if you wish to attend the Meeting and vote personally. Any
signed proxies received by TSAT that are not specifically marked with a
direction of how to vote in connection with a proposal will be counted as
affirmative votes in favor of adoption of such proposal.
Sincerely yours,
/s/ Gary S. Howard
Gary S. Howard
Chief Executive Officer
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES FOR YOUR
COMMON STOCK AT THIS TIME
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 6, 1998
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (together with
any adjournment or postponement thereof, the "Meeting") of TCI Satellite
Entertainment, Inc., a Delaware corporation ("TSAT"), will be held on March 6,
1998, at 10:00 a.m., local time, at the offices of Tele-Communications, Inc.,
5619 DTC Parkway, Englewood, Colorado, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt (i) the
Merger and Contribution Agreement dated as of February 6, 1998 (together
with the exhibits and schedules thereto, the "Restructuring Agreement"),
among TSAT, PRIMESTAR, Inc. ("New PRIMESTAR"), 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"), (ii) the Asset Transfer Agreement dated as of February 6, 1998
(together with the exhibits and schedules thereto, the "TSAT Asset Transfer
Agreement"), between TSAT and New PRIMESTAR, (iii) the Agreement and Plan
of Merger dated as of February 6, 1998 (together with the exhibits and
schedules thereto, the "TSAT Merger Agreement"), between TSAT and New
PRIMESTAR, (iv) each of the other agreements contemplated by the
Restructuring Agreement to which TSAT is a party and (v) the transactions
contemplated by the Restructuring Agreement, the TSAT Asset Transfer
Agreement, the TSAT Merger Agreement and such other agreements
(collectively, the "Roll-up Plan"). The Roll-up Plan comprises the
Restructuring Transaction (as defined below) and the TSAT Merger (as
defined below), with the TSAT Merger expected to occur after the
Restructuring Transaction, subject to regulatory approval and other
conditions set forth in the TSAT Merger Agreement.
Pursuant to the Restructuring Agreement, the businesses of TSAT and
PRIMESTAR Partners L.P. (the "Partnership"), and the PRIMESTAR(R)
distribution businesses of each of TWE, Newhouse, Comcast, Cox and
affiliates of MediaOne, will be consolidated into New PRIMESTAR (the
"Restructuring Transaction"). New PRIMESTAR is a newly formed wholly-owned
subsidiary of TSAT. The Restructuring Agreement provides for, among other
things, the contribution to New PRIMESTAR (by asset transfer or merger) of
the respective partnership interests in the Partnership of TSAT, TWE,
Newhouse, Cox, Comcast, MediaOne and GE Americom and the respective
PRIMESTAR(R) subscribers and certain other related assets of TSAT, TWE,
Newhouse, Cox, Comcast and MediaOne, in exchange for (i) in the case of Cox
and MediaOne, an amount of cash and, in the case of TSAT, TWE, Newhouse,
Comcast and GE Americom, an assumption of indebtedness by New PRIMESTAR,
(ii) shares of Class A Common Stock, $.01 par value per share, of New
PRIMESTAR ("New PRIMESTAR Class A Common Stock"), (iii) in the case of TSAT
only, shares of Class B Common Stock, $.01 par value per share, of New
PRIMESTAR ("New PRIMESTAR Class B Common Stock"), and (iv) except in the
case of TSAT and GE Americom, shares of Class C Common Stock, $.01 par
value per share, of New PRIMESTAR ("New PRIMESTAR Class C Common Stock"),
in each case in an amount determined pursuant to the Restructuring
Agreement.
As a result of the Restructuring Transaction, TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of
the outstanding capital stock of Tempo Satellite, Inc. ("Tempo"), a current
TSAT subsidiary that holds certain authorizations granted by the Federal
Communications Commission and other assets and liabilities relating to a
proposed direct broadcast satellite system being constructed by Tempo, (ii)
its ownership interest in New PRIMESTAR, and (iii) its rights and
obligations under the agreements with New PRIMESTAR described in the
accompanying Proxy Statement/Prospectus. As indicated above, approval of
the Roll-up Plan also constitutes approval of the execution and delivery by
TSAT of certain related agreements to which TSAT is a party, as
contemplated by the Restructuring Agreement, and the performance by TSAT of
its obligations thereunder. See "RELATED AGREEMENTS" in the accompanying
Proxy Statement/Prospectus. TSAT will own
<PAGE>
approximately 36% of the outstanding shares of common equity of New
PRIMESTAR at the closing of the Restructuring Transaction, representing
approximately 37% of the combined voting power of such common equity, and
TWE and Newhouse (collectively), Comcast, MediaOne, Cox and GE Americom
will own approximately 31%, 10%, 9%, 9% and 5%, respectively, of New
PRIMESTAR's outstanding common equity at closing, representing
approximately 32%, 10%, 10%, 9% and 2%, respectively, of such voting power,
subject in each case to adjustments based on closing subscriber counts and
other factors. Through its ownership of shares of New PRIMESTAR Class B
Common Stock, TSAT will be entitled to elect three out of the eleven
members of the board of directors of New PRIMESTAR at the closing of the
Restructuring Transaction.
The outstanding shares of Series A Common Stock, $1.00 par value per share,
of TSAT ("TSAT Series A Common Stock"), and Series B Common Stock, $1.00
par value per share, of TSAT ("TSAT Series B Common Stock" and, together
with the TSAT Series A Common Stock, "TSAT Common Stock") will remain
outstanding and will not be directly affected by the Restructuring
Transaction. The terms of the Restructuring Transaction and the common
stock of New PRIMESTAR are described in detail in the accompanying Proxy
Statement/Prospectus, and the full text of the Restructuring Agreement and
the TSAT Asset Transfer Agreement are included as Appendices A-1 and A-2,
respectively, to the Proxy Statement/Prospectus.
Pursuant to the TSAT Merger Agreement, TSAT will be subsequently merged
with and into New PRIMESTAR, with New PRIMESTAR as the surviving
corporation (the "TSAT Merger") and, in connection therewith (i) each
outstanding share of TSAT Series A Common Stock will be converted into the
right to receive one share of New PRIMESTAR Class A Common Stock and (ii)
each outstanding share of TSAT Series B Common Stock will be converted into
the right to receive one share of New PRIMESTAR Class B Common Stock. As a
result of the TSAT Merger, TSAT stockholders on the closing date of the
TSAT Merger will become stockholders of New PRIMESTAR. The terms of the
TSAT Merger are described in detail in the accompanying Proxy
Statement/Prospectus, and the full text of the TSAT Merger Agreement is
included as Appendix B to the Proxy Statement/Prospectus.
If the Roll-up Plan is approved, the Restructuring Transaction will be
consummated prior to the anticipated closing date of the TSAT Merger.
Consummation of the TSAT Merger is subject to regulatory approval and
certain other conditions to closing set forth in the TSAT Merger Agreement.
Accordingly, there can be no assurances that the TSAT Merger will be
consummated, even if the Roll-up Plan is approved and the Restructuring
Transaction is consummated. Holders of TSAT Common Stock who do not vote in
favor of the Roll-up Plan will not be entitled to any dissenters' appraisal
rights under Delaware law.
2. To consider and vote upon a proposal to approve and adopt the TCI
Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan,
which provides for the grant of options to purchase up to 500,000 shares of
TSAT Series A Common Stock, and to approve all grants thereunder.
3. To transact such other business as may properly come before the
Meeting.
The Board of Directors of TSAT (the "TSAT Board") has fixed the close of
business on January 6, 1998 as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Meeting. Only
stockholders of record of TSAT Common Stock as of the close of business on
such date are entitled to notice of, and to vote at, the Meeting. A list of
TSAT stockholders entitled to vote at the Meeting will be available for
examination by any TSAT stockholder at the Meeting and, for a period of ten
business days prior to the date of the Meeting, during ordinary business
hours, at the corporate offices at 8085 South Chester, Suite 300, Englewood,
Colorado 80112.
The TSAT Board has carefully reviewed and considered the terms and
conditions of the Roll-up Plan, including the transactions contemplated by the
Restructuring Agreement, the TSAT Asset Transfer Agreement and the TSAT Merger
Agreement. THE TSAT BOARD HAS DETERMINED THAT THE TERMS OF THE ROLL-UP PLAN
ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF TSAT, HAS
UNANIMOUSLY APPROVED THE RESTRUCTURING AGREEMENT, THE TSAT
<PAGE>
ASSET TRANSFER AGREEMENT AND THE TSAT MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE ROLL-UP PLAN, INCLUDING THE
RESTRUCTURING AGREEMENT, THE TSAT ASSET TRANSFER AGREEMENT AND THE TSAT MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Consummation of the Restructuring Transaction and the TSAT Merger are
subject to certain conditions, including approval and adoption of the Roll-up
Plan by the holders of 66 2/3% of the combined voting power of the shares of
TSAT Series A Common Stock and TSAT Series B Common Stock, voting together as
a single class, and, in the case of the TSAT Merger, regulatory approval.
JOHN C. MALONE, TELE-COMMUNICATIONS, INC. AND THE ESTATE OF BOB MAGNESS HAVE
AGREED TO VOTE OR CAUSE TO BE VOTED ALL SHARES OF TSAT COMMON STOCK WHICH THEY
RESPECTIVELY HAVE THE POWER TO VOTE OR DIRECT THE VOTE OF (REPRESENTING, IN
THE AGGREGATE, APPROXIMATELY 47.6% OF THE COMBINED VOTING POWER OF THE
OUTSTANDING SHARES OF TSAT COMMON STOCK AS OF JANUARY 6, 1998) IN FAVOR OF
APPROVAL AND ADOPTION OF THE ROLL-UP PLAN.
To assure that your interests will be represented at the Meeting, regardless
of whether you plan to attend in person, please complete, sign and date the
enclosed proxy card and return it in the enclosed prepaid envelope as soon as
possible. This action will not limit your right to vote in person if you wish
to attend the Meeting and vote personally.
By Order of the Board of Directors
/s/ Stephen M. Brett
Stephen M. Brett
Secretary
Englewood, Colorado
February 9, 1998
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY, WHETHER OR NOT
YOU INTEND TO BE PRESENT AT THE MEETING. DO NOT SEND ANY STOCK CERTIFICATES
WITH THE ENCLOSED PROXY CARD. THE PROCEDURE FOR THE EXCHANGE OF YOUR SHARES
AFTER THE TSAT MERGER IS CONSUMMATED IS SET FORTH IN THE ATTACHED PROXY
STATEMENT/ PROSPECTUS.
<PAGE>
PROXY STATEMENT/PROSPECTUS
TCI SATELLITE ENTERTAINMENT, INC.
PROXY STATEMENT
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 6, 1998
----------------
PRIMESTAR, INC.
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of common
stock of TCI Satellite Entertainment, Inc., a Delaware corporation ("TSAT"),
in connection with the solicitation of proxies by the Board of Directors of
TSAT (the "TSAT Board") for use at a special meeting of stockholders of TSAT,
or any adjournment or postponement thereof (together, the "Meeting"), called
to consider and vote upon, among other things, a proposal to approve and adopt
(i) a Merger and Contribution Agreement dated as of February 6, 1998 (together
with the exhibits and schedules thereto, the "Restructuring Agreement"), among
TSAT, PRIMESTAR, Inc. ("New PRIMESTAR"), Time Warner Entertainment Company,
L.P. ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of Delaware, Inc.
("MediaOne" and together with TWE, Newhouse, Comcast and Cox, the "Class C
Stockholders") and GE American Communications, Inc. ("GE Americom") (ii) an
Asset Transfer Agreement dated as of February 6, 1998 (together with the
exhibits and schedules thereto, the "TSAT Asset Transfer Agreement"), between
TSAT and New PRIMESTAR, (iii) an Agreement and Plan of Merger dated as of
February 6, 1998 (together with the exhibits and schedules thereto, the "TSAT
Merger Agreement"), between TSAT and New PRIMESTAR and (iv) the transactions
contemplated by such agreements (collectively, the "Roll-up Plan"). The Roll-
up Plan comprises the Restructuring Transaction (as defined below) and the
TSAT Merger (as defined below), with the TSAT Merger expected to occur after
the Restructuring Transaction, subject to regulatory approval and other
conditions set forth in the TSAT Merger Agreement. Under the Restructuring
Agreement, the businesses of each of TSAT and PRIMESTAR Partners L.P. ("the
Partnership"), and the PRIMESTAR(R) distribution businesses of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne will be consolidated into New
PRIMESTAR (the "Restructuring Transaction"). New PRIMESTAR is currently a
newly formed wholly-owned subsidiary of TSAT. The TSAT Merger Agreement
provides for the merger, subject to regulatory approval and certain other
conditions, of TSAT with and into New PRIMESTAR, with New PRIMESTAR as the
surviving corporation (the "TSAT Merger").
SEE "RISK FACTORS" BEGINNING ON PAGE 29 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CAREFULLY CONSIDERED BY STOCKHOLDERS OF TSAT WITH RESPECT TO
THE ROLL-UP PLAN.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to the stockholders of TSAT on or about February 12, 1998.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is February 9, 1998.
<PAGE>
The Restructuring Transaction. The Restructuring Agreement provides for,
among other things, the following transactions to occur on the closing date of
the Restructuring Transaction:
(x) the contribution and transfer by TSAT to New PRIMESTAR pursuant to
the TSAT Asset Transfer Agreement (the "TSAT Asset Transfer") of all the
assets and liabilities of TSAT 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 to be received by TSAT in the Restructuring Transaction and
(iii) the rights and obligations of TSAT under agreements with New
PRIMESTAR described herein. See "RELATED AGREEMENTS." Such assets and
liabilities to be transferred by TSAT to New PRIMESTAR are sometimes
referred to herein as the "TSAT Business." Concurrently with the
consummation of the TSAT Asset Transfer, New PRIMESTAR will adopt the
Restated Certificate of Incorporation (the "New PRIMESTAR Charter") and
bylaws ("New PRIMESTAR Bylaws") in the forms attached hereto as Appendices
E and F, respectively;
(y) the merger (each a "Merger" and, collectively, the "Mergers") of each
of (I) Comcast DBS, Inc. ("Comcast DBS"), a subsidiary of Comcast whose
sole asset is Comcast's 10.43% interest in the Partnership, (II) Comcast
Satellite Communications, Inc. ("Comcast SCI" and, together with Comcast
DBS, "Comcast Satellite"), a subsidiary of Comcast that holds Comcast's
PRIMESTAR(R) distribution business, (III) Cox Satellite, Inc. ("Cox SI"), a
subsidiary of Cox that holds Cox's 10.43% interest in the Partnership and
Cox's PRIMESTAR(R) distribution business, and (IV) GE Americom Services,
Inc. ("GEAS"), a subsidiary of GE Americom that holds GE Americom's 16.56%
interest in the Partnership, with and into New PRIMESTAR, in each case in
accordance with the terms of a merger agreement with New PRIMESTAR, dated
as of February 6, 1998 (each, a "Merger Agreement" and, collectively, the
"Merger Agreements"); and
(z) the contribution and transfer to New PRIMESTAR by each of TWE,
Newhouse, and MediaOne (or, in the case of MediaOne, certain subsidiaries
of MediaOne) of its respective partnership interest in the Partnership
(collectively, and together with the partnership interests of the other
partners to the Partnership, the "Partnership Interests"), and its
PRIMESTAR(R) subscribers and certain other related assets (collectively,
and together with all such assets to be acquired by New PRIMESTAR in the
Restructuring Transaction, the "PRIMESTAR Assets") and related liabilities
(collectively the "PRIMESTAR Liabilities"), in each case in accordance with
the terms of an asset transfer agreement with New PRIMESTAR, dated as of
February 6, 1998. The TSAT Asset Transfer and the contribution and transfer
of assets by each of TWE, Newhouse and MediaOne are each sometimes referred
to herein as an "Asset Transfer" and collectively as the "Asset Transfers,"
and the TSAT Asset Transfer Agreement and the asset transfer agreements
between New PRIMESTAR and each of TWE, Newhouse and MediaOne (and certain
of its subsidiaries) are each sometimes referred to herein as an "Asset
Transfer Agreement" and collectively as the "Asset Transfer Agreements." In
addition, references herein to "MediaOne" include the subsidiaries of
MediaOne that are parties to MediaOne's Asset Transfer Agreement with New
PRIMESTAR, unless the context otherwise requires.
In connection with the Mergers and the Asset Transfers, each of TSAT,
Comcast, Cox, MediaOne, Newhouse, TWE and GE Americom will, directly or
indirectly, receive from New PRIMESTAR (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 New PRIMESTAR, (ii) shares of Class
A Common Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR
Class A Common Stock"), (iii) in the case of TSAT only, shares of Class B
Common Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class
B Common Stock"), and (iv) except in the case of TSAT and GE Americom, shares
of Class C Common Stock, $.01 par value per share, of New PRIMESTAR ("New
PRIMESTAR Class C Common Stock"), in each case in an amount determined
pursuant to the Restructuring Agreement. See "THE RESTRUCTURING AGREEMENT--
Consideration to be Received in the Restructuring Transaction."
Under the terms of the Restructuring Agreement, TSAT will own approximately
36% of the outstanding shares of common equity of New PRIMESTAR at the closing
of the Restructuring Transaction, and TWE and
ii
<PAGE>
Newhouse (collectively), Comcast, MediaOne, Cox and GE Americom will own
approximately 31%, 10%, 9%, 9% and 5%, respectively, of the outstanding shares
of common equity of New PRIMESTAR at closing, subject in each case to
adjustments based on closing subscriber counts and other factors. See "THE
RESTRUCTURING AGREEMENT--Consideration to be Received in the Restructuring
Transaction."
The TSAT Merger. In connection with the TSAT Merger (i) each outstanding
share of Series A Common Stock, $1.00 par value per share, of TSAT ("TSAT
Series A Common Stock") will be converted into the right to receive one share
of New PRIMESTAR Class A Common Stock and (ii) each outstanding share of
Series B Common Stock, $1.00 par value per share, of TSAT ("TSAT Series B
Common Stock" and together with the TSAT Series A Common Stock, "TSAT Common
Stock") will be converted into the right to receive one share of New PRIMESTAR
Class B Common Stock. Each share of New PRIMESTAR's common stock then held by
TSAT will be canceled.
If the Roll-up Plan is approved, the Restructuring Transaction will be
consummated prior to the anticipated closing date of the TSAT Merger.
Consummation of the TSAT Merger is subject to regulatory approval and other
conditions to closing set forth in the TSAT Merger Agreement. Accordingly,
there can be no assurances that the TSAT Merger will be consummated, even if
the Roll-up Plan is approved and the Restructuring Transaction is consummated.
See "RISK FACTORS--Risks of Failure to Consummate the TSAT Merger" and "THE
TSAT MERGER AGREEMENT--Conditions to the TSAT Merger."
New PRIMESTAR has filed a registration statement on Form S-4 (together with
all amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B
Common Stock that are proposed to be issued upon consummation of the TSAT
Merger to holders of outstanding shares of TSAT Common Stock. This Proxy
Statement/Prospectus also constitutes the Prospectus of New PRIMESTAR filed as
part of the Registration Statement. It is expected that, if the TSAT Merger is
consummated, shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR
Class B Common Stock will be authorized for listing, subject to official
notice of issuance, on the National Market tier of The Nasdaq Stock Market
("NASDAQ/NM"). All information contained in this Proxy Statement/Prospectus
relating to the Partnership or New PRIMESTAR has been supplied by the
Partnership, all information relating to TSAT has been supplied by TSAT and
all information relating to each of the other partners of the Partnership and
each of the other distributors of PRIMESTAR(R) has been supplied by each such
partner and each such distributor, respectively.
The New PRIMESTAR Board. The New PRIMESTAR Charter provides that the board
of directors of New PRIMESTAR (the "New PRIMESTAR Board") will initially
consist of eleven members, of which three (the "Class B Directors") will be
elected by holders of the New PRIMESTAR Class B Common Stock and six (the
"Class C Directors") will be elected by holders of the New PRIMESTAR Class C
Common Stock, in each case voting as a separate class. Pursuant to a
stockholders agreement, initially, of the six Class C Directors, three will be
nominated by TWE (and TWE has agreed with Newhouse that of such three, one
will be nominated by Newhouse) and one will be nominated by each of Cox,
Comcast and MediaOne. The New PRIMESTAR Charter provides that the remaining
two members of the New PRIMESTAR Board (the "Common Directors") will be
nominated by a supermajority vote of the Class B Directors and Class C
Directors, and elected by the holders of the New PRIMESTAR Class A Common
Stock, New PRIMESTAR Class B Common Stock and New PRIMESTAR Class C Common
Stock (collectively, the "New PRIMESTAR Voting Common Stock"), voting together
as a single class. The number of Class B Directors will decrease as the number
of shares of New PRIMESTAR Class B Common Stock outstanding decreases, and the
number of Class C Directors will decrease as the number of shares of New
PRIMESTAR Class C Common Stock outstanding decreases, in each case in
accordance with a schedule set forth in the New PRIMESTAR Charter. The special
class rights of the holders of New PRIMESTAR Class B Common Stock and the
holders of New PRIMESTAR Class C Common Stock, each voting as a separate
class, to elect the Class B Directors and Class C Directors, respectively,
will automatically terminate at the earlier to occur of (i) the tenth
anniversary of the date on which the New PRIMESTAR Charter is filed with the
Delaware Secretary of State (the "Effective Date") and (ii) the date on which
the New
iii
<PAGE>
PRIMESTAR Class C Common Stock, voting as a class, will no longer be entitled
to elect a specified number of directors to the New PRIMESTAR Board as
provided in the New PRIMESTAR Charter (such earlier date, the "Class C
Termination Date"). At any time prior to the Class C Termination Date that the
maximum number of Class B Directors or Class C Directors is decreased, the
number of Common Directors will be correspondingly increased, so that the
total number of directors constituting the entire New PRIMESTAR Board remains
at eleven. On and after the Class C Termination Date, all the members of the
New PRIMESTAR Board will be elected by the holders of New PRIMESTAR Voting
Common Stock, voting together as a single class. See "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors" and "RELATED
AGREEMENTS--Stockholders Agreement."
At the closing of the Restructuring Transaction, 100% of the issued and
outstanding shares of New PRIMESTAR Class B Common Stock, and approximately
36% of the issued and outstanding shares of New PRIMESTAR Class A Common
Stock, will be owned by TSAT. Accordingly, TSAT will be entitled to elect the
three initial Class B Directors. If the TSAT Merger is consummated, each
outstanding share of TSAT Series B Common Stock on the closing date of the
TSAT Merger will be converted into the right to receive one share of New
PRIMESTAR Class B Common Stock, each outstanding share of TSAT Series A Common
Stock on such date will be converted into the right to receive one share of
New PRIMESTAR Class A Common Stock and the shares of New PRIMESTAR Common
Stock then held by TSAT will be canceled.
The ASkyB Transaction. In a separate proposed transaction (the "ASkyB
Transaction"), pursuant to an asset acquisition agreement, dated as of June
11, 1997 (together with the exhibits and schedules thereto, and as amended
from time to time, the "ASkyB Agreement") 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 (collectively, the "Partners"), New PRIMESTAR will acquire from
MCI, News Corp. and ASkyB, as applicable, two high power communications
satellites currently under construction (the "MCI Satellites"), certain
authorizations granted to MCI by the FCC to operate a DBS business at the 110
West Longitude ("W.L.") orbital location using 28 transponder channels, and
certain related contracts. In consideration, ASkyB will receive non-voting
convertible securities of New PRIMESTAR, comprising, subject to closing
adjustments, approximately $600 million liquidation value of non-voting
convertible preferred stock, $.01 par value per share, of New PRIMESTAR (the
"New PRIMESTAR Convertible Preferred Stock") (convertible into approximately
52 million shares of non-voting Class D Common Stock, $.01 par value per
share, of New PRIMESTAR ("New PRIMESTAR Class D Common Stock"), subject to
adjustment) and approximately $516 million principal amount of convertible
subordinated notes of New PRIMESTAR ("New PRIMESTAR Convertible Subordinated
Notes") (convertible into approximately 45 million shares of New PRIMESTAR
Class D Common Stock). The New PRIMESTAR Convertible Subordinated Notes will
be due and payable, and the New PRIMESTAR Convertible Preferred Stock will be
mandatorily redeemable, on the tenth anniversary of the date of issuance. The
New PRIMESTAR Convertible Preferred Stock will accrue cumulative dividends at
the annual rate of 5% of the liquidation value of such shares and the New
PRIMESTAR Convertible Subordinated Notes will have an interest rate of 5%.
Dividends on the New PRIMESTAR Convertible Preferred Stock and interest on the
New PRIMESTAR Convertible Subordinated Notes will be payable in cash or, at
the option of New PRIMESTAR, in shares of the non-voting New PRIMESTAR Class D
Common Stock, for a period of four years. Thereafter, all dividend and
interest payments will be made solely in cash. Shares of New PRIMESTAR Class D
Common Stock issued to ASkyB or any of its affiliates upon conversion of such
New PRIMESTAR Convertible Preferred Stock and New PRIMESTAR Convertible
Subordinated Notes, or in payment of dividend or interest obligations
thereunder, will in turn automatically convert into shares of New 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. Assuming such a
transfer and conversion, and based on the number of shares of New PRIMESTAR
Common Stock (as defined below) expected to be issued in the Restructuring
Transaction (subject to adjustment as provided in the Restructuring
Agreement), the New PRIMESTAR Class D Common Stock into which the New
PRIMESTAR Convertible Subordinated Notes and the New PRIMESTAR Convertible
Preferred Stock are convertible, would
iv
<PAGE>
be converted into New PRIMESTAR Class A Common Stock representing
approximately 33% of the number of shares of New PRIMESTAR Common Stock and
approximately 20% of the combined voting power of the New PRIMESTAR Common
Stock outstanding after giving effect to such a transfer and conversion.
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. In
addition, it is a condition precedent to the closing of the ASkyB Transaction
by New PRIMESTAR that the ASkyB Transaction be approved by the holders of New
PRIMESTAR Voting Common Stock, including the former holders of TSAT Common
Stock if the TSAT Merger shall have been consummated, at an annual or special
meeting of New PRIMESTAR. However, no vote of the TSAT stockholders will be
taken at the Meeting regarding approval of the ASkyB Transaction and no
proxies are being solicited in connection therewith. The ASkyB Agreement
provides that if the Restructuring Transaction has not closed by March 8,
1998, and the closing conditions set forth in the ASkyB Agreement have all
been satisfied, then News Corp., MCI and ASkyB (collectively, the "ASkyB
Transferors") will have the right to transfer to the Partnership the assets
contemplated to be transferred to New PRIMESTAR under the ASkyB Transaction,
in exchange for such consideration, having an aggregate fair market value
equal to the aggregate consideration that would have been received by the
ASkyB Transferors pursuant to the ASkyB Transaction had the Restructuring
Transaction closed by such date, as the Partnership and the ASkyB Transferors
shall mutually agree. See "THE ASKYB TRANSACTION" and "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK."
The New PRIMESTAR Common Stock. New PRIMESTAR's common stock (the "New
PRIMESTAR Common Stock"), is comprised of the New PRIMESTAR Class A Common
Stock, the New PRIMESTAR Class B Common Stock, the New PRIMESTAR Class C
Common Stock and the New PRIMESTAR Class D Common Stock. The New PRIMESTAR
Class A Common Stock, the New PRIMESTAR Class B Common Stock, the New
PRIMESTAR Class C Common Stock and the New PRIMESTAR Class D Common Stock are
substantially identical, except in each case with respect to the election of
directors as provided above and except in each case as follows: (i) holders of
New PRIMESTAR Class B Common Stock and holders of New PRIMESTAR Class C Common
Stock are entitled to ten votes per share, while holders of New PRIMESTAR
Class A Common Stock are entitled to one vote per share, on all matters as to
which such holders are entitled to vote, and holders of New PRIMESTAR Class D
Common Stock are not entitled to any voting rights with respect to such
shares, except as may be required by law; (ii) each share of New PRIMESTAR
Class B Common Stock is convertible, at the option of its holder, into one
share of New PRIMESTAR Class A Common Stock, each share of New PRIMESTAR Class
C Common Stock is convertible, at the option of its holder, into one share of
New PRIMESTAR Class B Common Stock, New PRIMESTAR Class A Common Stock is not
convertible and each share of New PRIMESTAR Class D Common Stock automatically
converts into one share of New PRIMESTAR Class A Common Stock upon its
transfer to any person other than ASkyB, News Corp. or any of their respective
affiliates, but is not otherwise convertible; and (iii) the affirmative vote
of the holders of a majority of the outstanding shares of New PRIMESTAR Class
B Common Stock and 83% of the outstanding shares of New PRIMESTAR Class C
Common Stock, each voting as a separate class, is required to approve certain
actions by New PRIMESTAR, including all charter amendments (subject to certain
limited exceptions) and certain substantive bylaw amendments, mergers and
consolidations, the sale of all or substantially all of the assets of New
PRIMESTAR, dissolution, certain stock issuances and the voluntary bankruptcy
of New PRIMESTAR. On the tenth anniversary of the first issue of New PRIMESTAR
Class C Common Stock, all New PRIMESTAR Class C Common Stock will
automatically be converted into New PRIMESTAR Class B Common Stock on a one-
to-one basis. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock."
The TSAT Nonemployee Director Plan. At the Meeting, the stockholders of TSAT
will also be asked to consider and vote upon a proposal to approve and adopt
the TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option
Plan (the "TSAT Nonemployee Director Plan"), which provides for the issuance
of options to purchase up to 500,000 shares of TSAT Series A Common Stock, and
to approve all grants thereunder. Approval of the TSAT Nonemployee Director
Plan is not a condition to consummation of the Roll-up Plan or any part
thereof. See "PROPOSAL TO APPROVE THE TSAT 1997 NONEMPLOYEE DIRECTOR STOCK
OPTION PLAN."
v
<PAGE>
FORWARD LOOKING STATEMENTS
Certain statements in this Proxy Statement/Prospectus constitute forward-
looking statements. In particular, some of the statements contained under the
captions "SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS OF TSAT" and
"BUSINESS OF NEW PRIMESTAR" are forward-looking. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of
TSAT and/or New 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 TSAT's and/or New PRIMESTAR's proposed high power
strategy described in this Proxy Statement/Prospectus; future financial
performance, including availability, terms and deployment of capital; the
ability of vendors to deliver required equipment, software and services;
availability of qualified personnel; changes in, or the failure or inability
to comply with, government regulations, including, without limitation,
regulations of the FCC, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to New 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 the Partnership's existing medium power satellite television
business; and other factors referenced in this Proxy Statement/Prospectus. See
"RISK FACTORS." These forward-looking statements (and such risks,
uncertainties and other factors) speak only as of the date of this Proxy
Statement/Prospectus. TSAT and New PRIMESTAR expressly disclaim any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in TSAT's or New PRIMESTAR's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
INFORMATION PROVIDED IN THIS PROXY STATEMENT/PROSPECTUS
All information contained in this Proxy Statement/Prospectus relating to the
Partnership or New PRIMESTAR has been supplied by the Partnership, all
information relating to TSAT has been supplied by TSAT and all information
relating to each of the other Partners and each of the other distributors of
the PRIMESTAR(R) programming service has been supplied by each such Partner
and each such distributor, respectively.
AVAILABLE INFORMATION
TSAT is (and, following the TSAT Merger, New PRIMESTAR will be) subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and, in accordance therewith, TSAT files (and,
following the TSAT Merger, New PRIMESTAR will file) reports, proxy and
information statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy and information statements and
other information filed with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, NW, Washington, D.C. 20549, and at the regional offices of the
SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained by mail at prescribed rates by writing to the
Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549. The SEC maintains a Web site on the
Internet that contains reports, proxy and information statements and other
information regarding registrants (including TSAT and, following the TSAT
Merger, New PRIMESTAR) that file electronically with the SEC. The address of
the SEC's Web site is http://www.sec.gov. In addition, materials filed by TSAT
(and, following the TSAT Merger, New PRIMESTAR) should be available for
inspection at the offices of The Nasdaq Stock Market, Reports Section, 1735 K
Street, NW, Washington, D.C. 20006.
vi
<PAGE>
New PRIMESTAR has filed the Registration Statement with the SEC under the
Securities Act, with respect to the shares of New PRIMESTAR Class A Common
Stock and New PRIMESTAR Class B Common Stock that are proposed to be issued
upon consummation of the TSAT Merger to holders of outstanding shares of TSAT
Common Stock. This Proxy Statement/Prospectus does not include all of the
information set forth in the Registration Statement filed by New PRIMESTAR
with the SEC under the Securities Act, certain portions of which are omitted
in accordance with the rules and regulations of the SEC. The Registration
Statement, including any amendments, schedules and exhibits filed as a part
thereof, is available for inspection and copying as set forth above.
Statements contained in this Proxy Statement/Prospectus concerning the
contents of any contract or other document referred to herein are not
necessarily complete and, with respect to each such contract or other document
filed with the SEC as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A
PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF TSAT,
THE PARTNERSHIP, THE DISTRIBUTORS OF THE PRIMESTAR(R) PROGRAMMING SERVICE OR
NEW PRIMESTAR SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROXY STATEMENT/PROSPECTUS REFERS TO DOCUMENTS THAT ARE NOT PRESENTED
IN FULL HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE WITHOUT
CHARGE, UPON WRITTEN OR ORAL REQUEST BY ANY PERSON TO WHOM THIS PROXY
STATEMENT/PROSPECTUS HAS BEEN DELIVERED, FROM TCI SATELLITE ENTERTAINMENT,
INC., 8085 SOUTH CHESTER, SUITE 300, ENGLEWOOD, COLORADO 80112, ATTENTION:
INVESTOR RELATIONS; TELEPHONE NUMBER (303) 712-4600. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE RECEIVED BY FEBRUARY 27,
1998.
----------------
vii
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TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD LOOKING STATEMENTS.................................................. vi
INFORMATION PROVIDED IN THIS PROXY STATEMENT/PROSPECTUS..................... vi
AVAILABLE INFORMATION....................................................... vi
INDEX OF DEFINED TERMS...................................................... xii
SUMMARY..................................................................... 1
The Companies............................................................. 1
The Special Meeting....................................................... 4
The Roll-up Plan--The Restructuring Transaction........................... 5
The Roll-up Plan--The TSAT Merger......................................... 8
Fairness Opinion.......................................................... 10
Regulatory Matters........................................................ 10
Board of Directors of New PRIMESTAR....................................... 11
Management and Operations of New PRIMESTAR................................ 11
Comparison of Stockholders' Rights........................................ 12
Reasons for the Roll-up Plan; Recommendation of the TSAT Board............ 12
Absence of Appraisal Rights............................................... 13
Certain Federal Income Tax Consequences................................... 13
Related Agreements........................................................ 13
Financing in Connection with the Restructuring Transaction................ 17
The TSAT Nonemployee Director Plan........................................ 17
Risk Factors.............................................................. 18
Market Price Data......................................................... 18
Dividend Policy........................................................... 19
Certain Comparative Per Share Data........................................ 20
Summary Financial and Other Data--Historical.............................. 21
Summary Financial and Other Data--Pro Forma............................... 23
CORPORATE ORGANIZATION...................................................... 26
RISK FACTORS................................................................ 29
Potential Adverse Effect on New PRIMESTAR Common Stock Share Price........ 29
Uncertainty Regarding Trading Prices of New PRIMESTAR Common Stock........ 29
Dilution of Voting Rights................................................. 29
Lack of Operating History of New PRIMESTAR................................ 30
History of Losses of TSAT and Other Restructuring Parties................. 30
Potential Interference with Satellite Signal.............................. 31
Risks of Satellite Failure................................................ 31
Substantial Leverage; Additional Indebtedness Likely...................... 32
Ability to Manage Growth; Subscriber Churn................................ 34
Ability to Service Debt; Restrictive Covenants; Refinancing Risks......... 34
Risks Associated with Holding Company Structure........................... 35
Risks of Failure to Consummate the TSAT Merger............................ 36
Competitive Nature of Industry............................................ 36
Uncertainty Regarding High Power Strategies............................... 37
Risks of Adverse Government Regulations and Adjudications................. 37
Uncertainties of Operations Following the Restructuring Transaction....... 41
Control of New PRIMESTAR by Principal Stockholders........................ 41
Potential Conflicts of Interest........................................... 42
Investment Company Act Considerations..................................... 43
Risks Associated with the ASkyB Transaction............................... 43
Dependence on Third Party Programmers..................................... 45
Potential Adverse Effect of Shares Eligible for Future Sale............... 45
Potential Antitakeover Effects............................................ 47
Dividends and Dividend Policy............................................. 48
Risk of Signal Piracy..................................................... 48
Risk of Technological Changes............................................. 48
</TABLE>
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CAPITALIZATION............................................................. 50
THE SPECIAL MEETING........................................................ 52
Date, Time, Place and Purpose............................................ 52
Voting Rights; Vote Required for Approval................................ 52
Proxies.................................................................. 53
Expenses................................................................. 53
THE ROLL-UP PLAN .......................................................... 55
Background............................................................... 55
Reasons for the Roll-up Plan; Recommendation of the TSAT Board........... 57
TSAT Fairness Opinion.................................................... 58
Certain Federal Income Tax Consequences.................................. 65
Interests of Certain Persons in the Roll-up Plan ........................ 67
Certain Consequences of the Restructuring Transaction.................... 70
Certain Consequences of the TSAT Merger.................................. 70
Board of Directors of New PRIMESTAR...................................... 71
Management and Operations of New PRIMESTAR .............................. 71
Regulatory Approvals..................................................... 72
Accounting Treatment..................................................... 73
Absence of Appraisal Rights.............................................. 73
NASDAQ/NM Listings and Delistings........................................ 73
Financing in Connection with the Restructuring Transaction............... 74
Resale of New PRIMESTAR Common Stock Issued in the TSAT Merger;
Affiliates.............................................................. 75
THE RESTRUCTURING AGREEMENT................................................ 76
General; Effective Time.................................................. 76
Structure of the Restructuring Transaction............................... 76
Consideration to be Received in the Restructuring Transaction............ 78
Representations and Warranties........................................... 81
Conditions to the Restructuring Transaction.............................. 83
Covenants Relating to Business........................................... 85
Additional Covenants..................................................... 87
Closing Adjustments...................................................... 90
Termination, Amendment and Waiver........................................ 91
RELATED AGREEMENTS......................................................... 92
Stockholders Agreement................................................... 92
Registration Rights Agreement............................................ 101
Agency Agreements........................................................ 102
TWE/Newhouse Voting Agreement............................................ 103
Reimbursement Agreements................................................. 105
Guarantee Agreement...................................................... 105
Letter Agreement......................................................... 106
TSAT Voting Agreements................................................... 106
TSAT Tempo Agreement..................................................... 107
TSAT Stockholders Agreement.............................................. 110
THE TSAT MERGER AGREEMENT.................................................. 111
General; Effective Time.................................................. 111
Consideration to be Received in the TSAT Merger.......................... 111
Conditions to the TSAT Merger............................................ 112
Covenants Relating to Business........................................... 113
Additional Covenants..................................................... 115
Termination, Amendment and Waiver........................................ 116
THE ASKYB TRANSACTION...................................................... 118
The ASkyB Agreement...................................................... 118
Regulatory Approvals..................................................... 127
Registration Rights...................................................... 128
Carriage Agreement....................................................... 129
ASkyB Indemnification Agreement.......................................... 129
</TABLE>
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<TABLE>
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THE DIGITAL SATELLITE TELEVISION INDUSTRY................................... 131
Industry Overview......................................................... 131
Digital Satellite Services Business....................................... 132
Competition............................................................... 133
BUSINESS OF THE PARTNERSHIP................................................. 140
General................................................................... 140
PRIMESTAR(R) Programming.................................................. 141
PRIMESTAR(R) Satellite Signal............................................. 143
PRIMESTAR(R) Equipment.................................................... 144
Marketing of PRIMESTAR(R)................................................. 144
Management of the Partnership............................................. 145
Certain Agreements........................................................ 146
Related Party Transactions................................................ 147
BUSINESS OF TSAT............................................................ 148
General................................................................... 148
PRIMESTAR By TSAT......................................................... 149
Tempo..................................................................... 154
Certain Arrangements Between TSAT and TCI................................. 157
Employees................................................................. 162
Properties................................................................ 162
Legal Proceedings......................................................... 163
BUSINESS OF OTHER PRIMESTAR(R) DISTRIBUTORS................................. 164
General................................................................... 164
TWSSI..................................................................... 164
Cox SI.................................................................... 164
Comcast SCI............................................................... 165
Continental Satellite..................................................... 165
Employees and Properties.................................................. 165
Legal Proceedings......................................................... 166
BUSINESS OF NEW PRIMESTAR................................................... 167
General................................................................... 167
Business Strategy......................................................... 167
REGULATORY MATTERS.......................................................... 170
General................................................................... 170
The Telecommunications Act of 1996........................................ 172
Existing FCC Permits and Licenses......................................... 172
Required FCC Approvals.................................................... 173
Antitrust Decree.......................................................... 174
DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK.................................. 175
General................................................................... 175
Common Stock.............................................................. 175
Preferred Stock........................................................... 183
Limitation on Directors' Liability; Indemnification....................... 185
COMPARISON OF STOCKHOLDERS' RIGHTS.......................................... 187
Authorized Capital Stock.................................................. 187
Voting Rights............................................................. 187
Conversion Rights......................................................... 188
Board of Directors........................................................ 188
Election of Directors..................................................... 189
Nomination of Directors................................................... 189
Removal of Directors...................................................... 190
Vacancies on the Board of Directors....................................... 190
Action by Written Consent................................................. 191
Certain Supermajority Voting Rights....................................... 191
</TABLE>
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<TABLE>
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Charter or Bylaw Amendments.............................................. 193
Special Meetings ........................................................ 193
Stockholder Approval of Certain Business Combinations.................... 194
Redemption............................................................... 194
MANAGEMENT OF TSAT......................................................... 195
Directors and Executive Officers......................................... 195
Board Composition........................................................ 196
Committees of TSAT's Board of Directors.................................. 197
Compensation of Directors................................................ 197
Executive Compensation................................................... 197
MANAGEMENT OF NEW PRIMESTAR................................................ 203
Directors and Executive Officers......................................... 203
Board Composition........................................................ 205
Committees of New PRIMESTAR's Board...................................... 206
Compensation of Directors................................................ 207
Compensation of Executive Officers....................................... 207
SECURITY OWNERSHIP OF TSAT................................................. 208
Security Ownership of Certain Beneficial Owners.......................... 208
Security Ownership of Management......................................... 210
SECURITY OWNERSHIP OF NEW PRIMESTAR........................................ 212
Security Ownership of Certain Beneficial Owners.......................... 212
Security Ownership of Management......................................... 214
DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT................................ 216
Bank Credit Facility..................................................... 216
Notes.................................................................... 217
PROPOSAL TO APPROVE THE TSAT 1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN... 220
General.................................................................. 220
Description of the TSAT Nonemployee Director Plan........................ 220
Certain Federal Income Tax Consequences.................................. 222
Vote Required for Approval; Recommendation of the TSAT Board............. 223
LEGAL MATTERS.............................................................. 223
EXPERTS.................................................................... 223
STOCKHOLDER PROPOSALS...................................................... 224
INDEX TO FINANCIAL INFORMATION............................................. F-1
</TABLE>
Appendix A-1:Restructuring Agreement
Appendix A-2:TSAT Asset Transfer Agreement
Appendix B:TSAT Merger Agreement
Appendix C:TSAT Tempo Agreement
Appendix D:TSAT Stockholders Agreement
Appendix E:Form of New PRIMESTAR Charter
Appendix F:Form of New PRIMESTAR Bylaws
Appendix G:Form of Stockholders Agreement
Appendix H: TSAT Voting Agreements
Appendix I:Merrill Lynch Opinion
Appendix J:TSAT Nonemployee Director Plan
xi
<PAGE>
INDEX OF DEFINED TERMS
Set forth below is a list of certain defined terms used in this Proxy
Statement/Prospectus and the page on which each such term is defined.
<TABLE>
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110 Slot.................................................................... 39
1940 Act.................................................................... 8
1996 Act.................................................................... 172
1997 Grant.................................................................. 200
Acceptable Alternative Arrangement.......................................... 124
Add-on TSAT Option.......................................................... 161
Adjusted Aggregate Value.................................................... 80
Adjusted Cash............................................................... 61
Adjusted Equity............................................................. 61
Adjusted PRIMESTAR Valuation................................................ 121
Adjusted TCI Option......................................................... 161
Adjusted Total Cash......................................................... 79
Adjusted Total Equity....................................................... 80
AlphaStar................................................................... 135
Ancillary Investment........................................................ 101
Antitrust Division.......................................................... 10
Applicable Subscriber Multiple.............................................. 61
ASkyB....................................................................... iv
ASkyB Agreement............................................................. iv
ASkyB Assumed Liabilities................................................... 119
ASkyB Closing............................................................... 118
ASkyB Closing Date.......................................................... 118
ASkyB Contracts............................................................. 118
ASkyB Demand Registration................................................... 128
ASkyB Indemnification Agreement............................................. 126
ASkyB Losses................................................................ 130
ASkyB Recent PRIMESTAR Subscribers.......................................... 121
ASkyB Registrable Shares.................................................... 128
ASkyB Registration Rights Agreement......................................... 128
ASkyB Retained Liabilities.................................................. 119
ASkyB Stockholders.......................................................... 129
ASkyB Transaction........................................................... iv
ASkyB Transferor Indemnified Parties........................................ 126
ASkyB Transferors........................................................... v
ASkyB Transferred Assets.................................................... 118
ASkyB Valuation............................................................. 119
Asset Transfer.............................................................. ii
Asset Transfer Agreement.................................................... ii
Asset Transfer Agreements................................................... ii
Asset Transfers............................................................. ii
Assignment Application...................................................... 38
Authorized Units............................................................ 1
Awards...................................................................... 200
Bank Credit Facility........................................................ 17
Boise Call Center........................................................... 151
BSS......................................................................... 131
Cable Sale.................................................................. 96
</TABLE>
<TABLE>
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Cable Sale Call Right....................................................... 97
Cable Sale Interest......................................................... 97
Cable Seller................................................................ 97
CARP........................................................................ 40
Carriage Agreement.......................................................... 129
Champion.................................................................... 135
churn....................................................................... 30
Class B Directors........................................................... iii
Class C Directors........................................................... iii
Class C Stockholders........................................................ i
Class C Termination Date.................................................... iv
Closing..................................................................... 5
Closing Date................................................................ 6
Code........................................................................ 66
Comcast..................................................................... i
Comcast DBS................................................................. ii
Comcast Satellite........................................................... ii
Comcast SCI................................................................. ii
Common Director Voting Power................................................ 100
Common Directors............................................................ iii
Communications Act.......................................................... 39
Comparable Company.......................................................... 61
consideration ratio......................................................... 62
Consideration Shares........................................................ 119
Continental................................................................. 2
Continental Satellite....................................................... 165
Contributed Corporation..................................................... 88
Contribution Indemnitor..................................................... 88
Conversion Price............................................................ 120
Conversion Shares........................................................... 119
Convertible Securities...................................................... 178
Covered Class B Securities.................................................. 95
Covered Class C Securities.................................................. 96
Covered Taxes............................................................... 78
Cox......................................................................... i
Cox Enterprises............................................................. 10
Cox Satellite............................................................... 21
Cox SI...................................................................... ii
Croce....................................................................... 163
Current Market Price........................................................ 97
Customer Payment............................................................ 91
Customer Premises Equipment................................................. 77
Cut-Off Amount.............................................................. 94
Cut-Off Holder.............................................................. 94
DBS......................................................................... ii
DCF......................................................................... 60
Delivery.................................................................... 155
</TABLE>
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<TABLE>
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Demand Registration......................................................... 101
DGCL........................................................................ 4
digital satellite business.................................................. 1
DirectSat................................................................... 40
DirecTv..................................................................... 36
dishes...................................................................... 1
Distributors................................................................ 3
Divestiture Requirement..................................................... 39
DMX......................................................................... 152
Dominion.................................................................... 135
EchoStar.................................................................... 31
Effective Date.............................................................. iii
Effective Time.............................................................. 5
End-of-Life Option.......................................................... 143
ERISA....................................................................... 217
Exchange Act................................................................ vi
Exchange Agent.............................................................. 112
Exchange Notes.............................................................. 219
Exchange Offer.............................................................. 218
Excluded Accounts Receivable................................................ 77
Excluded Liabilities........................................................ 78
Exercise Fee................................................................ 156
Expected Cost Savings....................................................... 58
Expiration Date............................................................. 219
Extension................................................................... 114
Family Channel.............................................................. 129
FCC......................................................................... ii
FCC Approval................................................................ 123
FCC Event................................................................... 9
FCC Permit.................................................................. 1
Federal Decree.............................................................. 174
Field Assets................................................................ 77
FNC......................................................................... 129
Fox Sports.................................................................. 129
FSS......................................................................... 131
FTC......................................................................... 10
Fulfillment Agreement....................................................... 150
full CONUS.................................................................. 1
FX.......................................................................... 129
GE.......................................................................... 2
GE Americom................................................................. i
GE Shares................................................................... 94
GE-2........................................................................ 14
GE-2 Agreement.............................................................. 14
GE-3........................................................................ 143
GE-4........................................................................ 143
GEAS........................................................................ ii
GI.......................................................................... 48
Guarantee Agreement......................................................... 15
HP Agency Agreements........................................................ 15
HSDs........................................................................ 1
HSR Act..................................................................... 7
ICA Acquisition............................................................. 115
</TABLE>
<TABLE>
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Included Options............................................................ 80
Indemnification Agreements.................................................. 159
Indentures.................................................................. 19
Individual Class C Stockholder Caps......................................... 179
Interim Credit Facility..................................................... 17
International Bureau........................................................ 31
Inventory Payment........................................................... 90
IRDs........................................................................ 1
IRS......................................................................... 66
Kearns-Tribune.............................................................. 209
Letter Agreement............................................................ 15
Liberty Media Group......................................................... 198
License Agreement........................................................... 160
Liquidation Preference...................................................... 184
LMDS........................................................................ 138
LMG Common Stock............................................................ 198
LMG Series A Common Stock................................................... 198
LMG Series B Common Stock................................................... 198
LNBs........................................................................ 77
LodgeNet.................................................................... 152
Loral....................................................................... 1
Losses...................................................................... 126
Majority Specified Class B Stockholders..................................... 93
Master Agents............................................................... 150
Material Adverse Effect..................................................... 82
MCI......................................................................... iv
MCI FCC Licenses............................................................ 118
MCI Satellites.............................................................. iv
MDUs........................................................................ 2
MediaOne.................................................................... i
MediaOne Satellite.......................................................... 21
MediaOne Transaction Documents.............................................. 15
Meeting..................................................................... i
Merger...................................................................... ii
Merger Agreement............................................................ ii
Merger Agreements........................................................... ii
Merger Indemnitor........................................................... 88
Mergers..................................................................... ii
Merrill Lynch............................................................... 10
Merrill Lynch Opinion....................................................... 10
Methodology................................................................. 79
NASDAQ/NM................................................................... iii
National Call Center........................................................ 141
NDTC........................................................................ 140
NDTC Transmission Agreement................................................. 147
Networks.................................................................... 129
New Notes................................................................... 17
New Notes Offering.......................................................... 17
New PRIMESTAR............................................................... i
New PRIMESTAR Assumption Agreement.......................................... 123
New PRIMESTAR Board......................................................... iii
New PRIMESTAR Bylaws........................................................ ii
</TABLE>
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<TABLE>
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New PRIMESTAR Charter....................................................... ii
New PRIMESTAR Class A Common Stock.......................................... ii
New PRIMESTAR Class B Common Stock.......................................... ii
New PRIMESTAR Class C Common Stock.......................................... ii
New PRIMESTAR Class D Common Stock.......................................... iv
New PRIMESTAR Common Stock.................................................. v
New PRIMESTAR Convertible Preferred Stock................................... iv
New PRIMESTAR Convertible Subordinated Notes................................ iv
New PRIMESTAR Indemnified Parties........................................... 126
New PRIMESTAR Preferred Stock............................................... 46
New PRIMESTAR Voting Common Stock........................................... iii
Newhouse.................................................................... i
Newhouse Broadcasting....................................................... 3
News Corp................................................................... iv
Nonemployee Director........................................................ 220
Notes....................................................................... 19
Notes Registration Rights Agreements........................................ 218
Notifying Partner........................................................... 146
Option Holder............................................................... 16
Original Fulfillment Agreement.............................................. 160
Original Restructuring Transaction.......................................... 56
Partners.................................................................... iv
Partners Committee.......................................................... 3
Partnership................................................................. i
Partnership Agreement....................................................... 3
Partnership FCC Licenses.................................................... 121
Partnership Fee............................................................. 64
Partnership Interests....................................................... ii
Pegasus..................................................................... 61
Percentage.................................................................. 80
Permitted Class B Transferee................................................ 95
Permitted Class C Transferee................................................ 96
Plan Effective Date......................................................... 220
Post-Closing Tax Period..................................................... 89
Post-Restructuring.......................................................... 64
Pre-Closing Tax Period...................................................... 78
Pre-Restructuring........................................................... 64
PRIMESTAR Assets............................................................ ii
PRIMESTAR Credit Facility................................................... 15
PRIMESTAR Customer.......................................................... 79
PRIMESTAR Debt.............................................................. 78
PRIMESTAR Indemnitee........................................................ 130
PRIMESTAR Inventory......................................................... 77
PRIMESTAR Inventory Valuation............................................... 90
PRIMESTAR Letters of Credit................................................. 14
PRIMESTAR Liabilities....................................................... ii
PRIMESTAR Satellite Signal.................................................. 153
PRIMESTAR Sub............................................................... 82
PRIMESTAR Subscriber........................................................ 120
PRIMESTAR Valuation......................................................... 120
</TABLE>
<TABLE>
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PRIMESTAR-DBS Service....................................................... 120
PRIMESTAR(R)................................................................ 1
private cable system........................................................ 153
Proceeding.................................................................. 185
Public Sale................................................................. 98
qualified stock options..................................................... 67
Recent PRIMESTAR Subscriber................................................. 91
Record Date................................................................. 4
Registrable Shares.......................................................... 102
Registration Rights Agreement............................................... 14
Registration Rights Holders................................................. 101
Registration Statement...................................................... iii
Reimbursement Agreements.................................................... 15
Relevant Agreements......................................................... 82
Relevant Documents.......................................................... 59
Reorganization Agreement.................................................... 157
Reset Date.................................................................. 183
ResNet Business............................................................. 152
ResNet Corp................................................................. 152
ResNet LLC.................................................................. 152
Restructuring Agreement..................................................... i
Restructuring Parties....................................................... 7
Restructuring Transaction................................................... i
Rights...................................................................... 120
Roll-up Plan................................................................ i
Roll-up Proposal............................................................ 4
Sales Agency Agreements..................................................... 16
SARs........................................................................ 198
Satellite Construction Agreement............................................ 1
satellite receiver.......................................................... 131
Satellite Television Business............................................... 101
SBCA........................................................................ 40
SEC......................................................................... vi
Securities Act.............................................................. iii
Senior Subordinated Discount Notes.......................................... 19
Senior Subordinated Notes................................................... 19
set-top box................................................................. 131
share distribution.......................................................... 176
Share Purchase Agreement.................................................... 161
SHVA........................................................................ 39
simultaneous use rights..................................................... 153
Smallest C.................................................................. 179
Specified Class B Stockholders.............................................. 14
Spin-Off.................................................................... 96
Spin-Off Entity............................................................. 96
STA Application............................................................. 40
Stockholders Agreement...................................................... 13
Subscriber Multiple......................................................... 61
Subscriber Multiple Range................................................... 62
Subsidiary.................................................................. 182
Tag-Along Agreement......................................................... 146
Tax Sharing Agreement....................................................... 159
</TABLE>
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<TABLE>
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TCI......................................................................... 1
TCI Board................................................................... 161
TCI ESPP.................................................................... 199
TCI Group................................................................... 198
TCI Group Common Stock...................................................... 149
TCI Group Series A Common Stock............................................. 149
TCI Group Series B Common Stock............................................. 149
TCI Option.................................................................. 161
TCI Plan Committee.......................................................... 197
TCI Plans................................................................... 197
TCI SARs.................................................................... 197
TCI UA 1.................................................................... 159
TCI UA 1 Letter of Credit................................................... 159
TCIC........................................................................ 1
TCIC Credit Facility........................................................ 160
TCIC Revolving Loans........................................................ 160
Televisa.................................................................... 135
Tempo....................................................................... ii
Tempo Assets................................................................ 16
Tempo DBS-1................................................................. 1
Tempo DBS-2................................................................. 1
Tempo FCC Event............................................................. 107
Tempo Letter Agreements..................................................... 156
Tempo Option................................................................ 156
Tempo Option Agreement...................................................... 2
Tempo Sale.................................................................. 16
Tempo Sale Option........................................................... 16
Tempo Satellites............................................................ 1
Tender Offer................................................................ 98
Time Warner................................................................. 3
Total Consideration......................................................... 119
Transfer Application........................................................ 38
Transfer Notice............................................................. 98
Transferor.................................................................. 98
Transferred Interest........................................................ 98
Transition Period Agency Agreements......................................... 15
Transition Services Agreement............................................... 158
TSAT........................................................................ i
TSAT 1996 Plan.............................................................. 67
TSAT Asset Transfer......................................................... ii
TSAT Asset Transfer Agreement............................................... i
TSAT Board.................................................................. i
TSAT Business............................................................... ii
TSAT Bylaws................................................................. 12
</TABLE>
<TABLE>
<S> <C>
TSAT Charter................................................................ 4
TSAT Closing................................................................ 8
TSAT Closing Date........................................................... 8
TSAT Common Stock........................................................... iii
TSAT Debt Per Sub........................................................... 79
TSAT Effective Time......................................................... 8
TSAT Employees.............................................................. 198
TSAT ESPP................................................................... 210
TSAT Expiration Date........................................................ 115
TSAT Inventory Ratio........................................................ 90
TSAT Merger................................................................. i
TSAT Merger Agreement....................................................... i
TSAT Nonemployee Director Plan.............................................. v
TSAT Nonemployee Director Plan Proposal..................................... 4
TSAT Note................................................................... 157
TSAT Options................................................................ 67
TSAT Plans.................................................................. 67
TSAT Preferred Stock........................................................ 187
TSAT Restricted Stock Awards................................................ 68
TSAT SARs................................................................... 67
TSAT Series A Common Stock.................................................. iii
TSAT Series B Common Stock.................................................. iii
TSAT Spin-off .............................................................. 2
TSAT Spin-off Date.......................................................... 1
TSAT Spin-off Date Options.................................................. 162
TSAT Spin-off Record Date................................................... 149
TSAT Stockholder............................................................ 16
TSAT Stockholders Agreement................................................. 16
TSAT Tempo Agreement........................................................ 16
TSAT Voting Agreements...................................................... 5
TSAT Voting Securities...................................................... 191
TSAT Voting Stockholders.................................................... 106
TSAT-MDU.................................................................... 152
TSAT/New PRIMESTAR.......................................................... 29
TWE......................................................................... i
TWE/Newhouse Voting Agreement............................................... 14
TWE/Newhouse Voting Period.................................................. 14
TWEAN....................................................................... 21
TWSSI....................................................................... 21
Unrecovered Inventory....................................................... 77
US West..................................................................... 15
USSB........................................................................ 36
UVSG........................................................................ 169
W.L......................................................................... iv
</TABLE>
xv
<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information, including the financial statements and the notes thereto,
contained elsewhere in this Proxy Statement/Prospectus, the Appendices hereto
and the documents otherwise referred to herein. Prior to December 4, 1996 (the
"TSAT Spin-off Date"), TSAT was wholly-owned by TCI Communications, Inc.
("TCIC"), a subsidiary of Tele-Communications, Inc. ("TCI"). Unless the context
otherwise requires, references in this Proxy Statement/Prospectus to "TSAT"
refer to (i) certain businesses of TCIC, constituting TCI's collective
interests in the digital satellite business before the TSAT Spin-off Date and
(ii) TSAT and its consolidated subsidiaries on and after the TSAT Spin-off
Date. Additionally, references in this Proxy Statement/Prospectus to "TCI" and
"TCIC" are to TCI and TCIC, respectively, and each of their respective
consolidated subsidiaries unless the context indicates otherwise. References to
TCI prior to August 4, 1994 are to TCI's predecessor. As used herein, "digital
satellite business" means the business of distributing multichannel programming
services directly to consumers in the United States via digital medium power or
high power satellite, including the rental and sale of customer premises
equipment relating thereto. Capitalized terms used in this summary and not
otherwise defined have the meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus. See "INDEX TO DEFINED TERMS." Stockholders are urged to
review carefully the entire Proxy Statement/Prospectus, including the
Appendices hereto.
THE COMPANIES
TSAT. TSAT is a leading distributor of digital satellite-based television
services in the United States. TSAT markets and distributes the PRIMESTAR(R)
programming service ("PRIMESTAR(R)"), a medium power digital satellite service,
under the brand names "PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owns an
aggregate 20.86% interest in the Partnership, which owns and operates the
PRIMESTAR(R) service. As of September 30, 1997, TSAT was the largest
distributor of PRIMESTAR(R), with an installed base of approximately 769,000
subscribers, which represented approximately 42.7% of the Partnership's
estimated 1.8 million subscribers as of such date. As of September 30, 1997,
TSAT's subscribers were authorized to receive service on approximately 888,000
Authorized Units. As used herein, the term "Authorized Units" refers to the
number of active authorized satellite receivers or integrated receiver/decoders
("IRDs"), more than one of which may be installed in a subscribing household.
PRIMESTAR(R) offers over 160 channels of digital video and audio programming
throughout the continental U.S., via medium power satellite, to home satellite
dishes ("dishes" or "HSDs") approximately 27 to 36 inches in diameter for most
subscribers.
Tempo, a wholly-owned subsidiary of TSAT, holds a construction permit issued
by the FCC, authorizing construction of a high power DBS system consisting of
two or more satellites delivering DBS service in 11 frequencies at the
119(degrees) W.L. orbital position and 11 frequencies at the 166(degrees) W.L.
orbital position (together with related FCC authorizations, including earth
station permits held by Tempo, the "FCC Permit"). The 119(degrees) W.L. orbital
position is one of three such orbital positions allocated to the U.S. for DBS
service that provide "full CONUS" visibility, meaning that they have a view of
the entire continental U.S.
Tempo is also a party to a satellite construction agreement with Space
Systems/Loral, Inc. ("Loral"), dated as of February 22, 1990 (the "Satellite
Construction Agreement"), pursuant to which Tempo has arranged for the
construction of two high power direct broadcast satellites (together, the
"Tempo Satellites") and has an option to purchase up to three additional
satellites. Construction of the Tempo Satellites has been completed. One of the
Tempo Satellites ("Tempo DBS-1") was launched into Tempo's high power slot at
119(degrees) W.L. on March 8, 1997. The other Tempo Satellite ("Tempo DBS-2")
presently serves as a ground spare for Tempo DBS-1.
Tempo DBS-1 is currently undergoing extended in-orbit testing under the
Satellite Construction Agreement. Assuming that such in-orbit testing results
in acceptance of the satellite by Tempo under the Satellite
1
<PAGE>
Construction Agreement, Tempo DBS-1 would be available for commercial
operations in the first quarter of 1998. At current levels of digital
compression, Tempo believes that Tempo DBS-1 would be able to deliver
approximately 100 channels of digital video and 20 channels of digital audio
programming, as operated under the FCC Permit. Tempo expects to use 18 inch
dishes for the proposed high power service, the same diameter currently used by
other high power DBS providers, in most areas. Tempo currently intends to
operate Tempo DBS-1 as a platform to provide high power digital video and audio
programming services to residential customers, as well as multiple dwelling
units ("MDUs"), commercial customers and resellers.
The availability and utility of Tempo DBS-1, including the power levels
provided by Tempo DBS-1, are subject to risks of satellite defect, loss or
reduced performance. Since the launch of Tempo DBS-1, Loral has notified Tempo
of at least five separate occurrences of power reductions on Tempo DBS-1. No
assurance can be given that further power reductions will not occur in the
future. TSAT does not currently know the extent of such power reductions, and
cannot confirm the precise causes thereof; however, such reductions could
eventually affect the proposed operation of Tempo DBS-1, either alone or
together with other events that may arise during the expected life of the
satellite. See "RISK FACTORS--Risks of Satellite Failure."
Pursuant to an option agreement dated February 8, 1990 between Tempo and the
Partnership (the "Tempo Option Agreement"), Tempo has agreed to sell or lease
to the Partnership 100% of the capacity of any DBS system constructed by Tempo
under the FCC Permit. See "BUSINESS OF TSAT--Tempo." If the TSAT Merger or the
Tempo Sale (as hereinafter defined) is consummated, New PRIMESTAR will operate
Tempo's high power DBS system. Otherwise, TSAT expects that such system will be
utilized by the Partnership pursuant to the Tempo Option Agreement. See "RISK
FACTORS--Uncertainty Regarding High Power Strategies."
TSAT was incorporated in Delaware in November 1996. Prior to the TSAT Spin-
off Date, TSAT was a wholly-owned subsidiary of TCI, which, through various
subsidiaries, was engaged in the business of distributing PRIMESTAR(R) since
December 1990. TSAT was formed to own and operate TCI's interests in the
digital satellite business, in connection with the distribution (the "TSAT
Spin-off") by TCI to certain of its stockholders on the TSAT Spin-off Date of
all the issued and outstanding shares of TSAT Common Stock. TSAT's predecessor
was incorporated in February 1995 to consolidate TCI's PRIMESTAR(R)
distribution business into one subsidiary, and was merged into TSAT in
connection with the TSAT Spin-off. TCI is one of the two largest operators of
cable systems in the U.S.
TSAT Series A Common Stock and TSAT Series B Common Stock trade on the
NASDAQ/NM under the symbols "TSATA" and "TSATB," respectively. The mailing
address and telephone number of TSAT's principal executive offices are 8085
South Chester, Suite 300, Englewood, Colorado 80112, (303) 712-4600. See
"BUSINESS OF TSAT."
The Partnership. The Partnership owns and operates the PRIMESTAR(R) service,
which is the oldest Ku-band satellite television service in the U.S. and has
the second largest subscriber base of any U.S. digital satellite television
service. In 1990, direct or indirect subsidiaries of TCI and several other
large cable operators and GEAS, an indirect subsidiary of General Electric
Company ("GE"), formed the Partnership to acquire, originate and/or provide
television programming services for delivery by satellite to subscribers in the
continental U.S. Initially, PRIMESTAR(R) was an analog service limited to seven
broadcast television superstations, TV Japan and three pay-per-view stations.
In 1994, PRIMESTAR(R) was among the first satellite television services to use
digital transmission and compression technology to offer laser-disc-quality
image and compact-disc-quality sound. The Partnership has consistently taken
advantage of technological improvements and additional available transponder
capacity to improve the PRIMESTAR(R) service, which today offers over 160
channels of digital video and audio programming.
In addition to TSAT, the Partners include (i) Cox SI, a subsidiary of Cox,
(ii) Comcast DBS, a subsidiary of Comcast, (iii) Continental Satellite Company,
Inc. ("Continental"), a subsidiary of US WEST, Inc., the parent
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of MediaOne, (iv) New Vision Satellite, a partnership controlled by Newhouse,
which is a subsidiary of Newhouse Broadcasting Corporation ("Newhouse
Broadcasting"), (v) TW Programming Co., a partnership controlled by TWE, which
is a subsidiary of Time Warner Inc. ("Time Warner"), and (vi) GEAS, a
subsidiary of GE, the parent of GE Americom. Each of TSAT (through its
subsidiaries) and TW Programming Co. holds a 20.86% Partnership Interest, each
of Cox SI, Comcast DBS, Continental and New Vision Satellite holds a 10.43%
Partnership Interest, and GEAS holds a 16.56% Partnership Interest. Time Warner
has substantial interests, through its subsidiaries and controlled
partnerships, in video programming and distribution, and is one of the two
largest operators of cable systems in the U.S. Cox, Comcast and MediaOne are
also among the five largest cable system operators in the U.S.
Pursuant to the Limited Partnership Agreement of the Partnership dated as of
February 8, 1990, as amended (the "Partnership Agreement"), the business and
affairs of the Partnership are managed and controlled by the Partners Committee
(the "Partners Committee"), which is composed of representatives of each of the
Partners and two independent members. TSAT has two voting representatives on
the Partners Committee, Time Warner has two voting representatives, and Cox,
Comcast, MediaOne, Newhouse and GE each have one voting representative.
The PRIMESTAR(R) programming service includes a variety of advertiser-
supported networks (sometimes referred to as "basic cable" channels), a broad
selection of movie services, national and regional sports packages and other
premium services, and multiplexed pay-per-view programming. See "BUSINESS OF
THE PARTNERSHIP--PRIMESTAR(R) Programming." The Partnership secures its rights
to transmit such programming via satellite by entering into non-exclusive
affiliation agreements with programming vendors. In addition to video services,
PRIMESTAR(R) includes digital audio and data services, including Ingenius,
which provides access to news, business news, stock quotes, sports, weather and
entertainment information to subscribers through their personal computers.
The Partnership currently plans to participate in the high power segment of
the digital satellite industry. In that connection, the Partnership has agreed
to purchase or lease from Tempo 100% of the capacity of any DBS system
constructed by Tempo under the FCC Permit. In addition, the Partnership has
entered into the ASkyB Agreement, which provides for the sale and transfer to
New PRIMESTAR of the two MCI Satellites currently under construction by Loral,
certain authorizations granted to MCI by the FCC to operate a DBS business at
the 110(degrees) W.L. orbital location using 28 transponder channels, and
certain related contracts. The ASkyB Agreement requires New PRIMESTAR to bear
certain risks in connection with the process of obtaining the regulatory
approval related to such transfers, including the divestiture of all rights of
the Partnership and any of the Partners under Tempo's FCC authorizations with
respect to the 11 transponder channels at 119(degrees) W.L., if required as a
condition to such approval. 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. See "THE ASKYB TRANSACTION."
The mailing address and telephone number of the Partnership's principal
executive offices are 3 Bala Plaza West, Suite 700, Bala Cynwyd, Pennsylvania
19004, (610) 617-5300. See "BUSINESS OF THE PARTNERSHIP."
Other PRIMESTAR(R) Distributors. PRIMESTAR(R) is distributed through TSAT and
other distributors (collectively, the "Distributors"), each of which is
currently affiliated with one or more of the Partners. The Distributors market
the PRIMESTAR(R) service and contract with subscribers, in non-exclusive
territories assigned by the Partnership. The Distributors set their own retail
pricing and are responsible in their respective territories for authorization
of subscribers, installation, maintenance and retrieval of customer premises
equipment, and billing and collection of monthly and other fees, and the
Distributors bear all risks of loss relating thereto. The Partnership performs
certain administrative functions for the Distributors, including program
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acquisition, national marketing, transponder leasing and certain technical
functions, and passes along the costs relating thereto to the Distributors. See
"BUSINESS OF OTHER PRIMESTAR(R) DISTRIBUTORS."
New PRIMESTAR. New PRIMESTAR, a newly formed Delaware corporation, is a
wholly-owned subsidiary of TSAT that has not conducted any significant
activities other than those incident to its formation, the preparation of this
Proxy Statement/Prospectus, the execution of the Restructuring Agreement, the
TSAT Merger Agreement and related agreements, and financing activities relating
to the Restructuring Transaction. As a result of the Restructuring Transaction
and pursuant to the Restructuring Agreement, the Merger Agreements and the
Asset Transfer Agreements, New PRIMESTAR will acquire the TSAT Business, the
Partnership Interests of the other Partners and the PRIMESTAR Assets of the
other Distributors. Accordingly, after consummation of the Restructuring
Transaction, the business of New PRIMESTAR will be the businesses currently
conducted by the Partnership and TSAT, and the PRIMESTAR(R) distribution
businesses of the other Distributors. It is expected that, measured by the
number of subscribers, New PRIMESTAR will be the second largest provider of
satellite television services in the United States. The mailing address and
telephone number of New PRIMESTAR's principal executive offices are 8085 South
Chester, Suite 300, Englewood, Colorado 80112, (303) 712-4600. See "BUSINESS OF
NEW PRIMESTAR."
THE SPECIAL MEETING
A special meeting of the stockholders of TSAT will be held at the offices of
Tele-Communications, Inc., 5619 DTC Parkway, Englewood, Colorado, on March, 6,
1998, at 10:00 a.m., local time. At the Meeting, TSAT stockholders will be
asked to consider and vote upon (i) the proposal to approve and adopt the
Restructuring Agreement, the TSAT Asset Transfer Agreement and the TSAT Merger
Agreement and the transactions contemplated by such agreements, including,
without limitation, the execution and delivery of the Stockholders Agreement,
the TSAT Stockholders Agreement and the TSAT Tempo Agreement (each as
hereinafter defined) and the performance by TSAT of its obligations thereunder
(the "Roll-up Proposal"), (ii) the proposal to approve and adopt the TSAT
Nonemployee Director Plan and to approve all grants thereunder (the "TSAT
Nonemployee Director Plan Proposal") and (iii) such other matters as may
properly be brought before the Meeting. The Roll-up Plan consists of the
Restructuring Transaction and the TSAT Merger, with the TSAT Merger expected to
occur after the Restructuring Transaction, subject to regulatory approval and
other conditions set forth in the TSAT Merger Agreement. Copies of the
Restructuring Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger
Agreement and the TSAT Nonemployee Director Plan are included as Appendices A-
1, A-2, B and J, respectively, to this Proxy Statement/Prospectus. See "THE
SPECIAL MEETING."
Holders of record of TSAT Common Stock as of the close of business on January
6, 1998 (the "Record Date") are entitled to notice of, and to vote at, the
Meeting. Each share of TSAT Series A Common Stock is entitled to one vote and
each share of TSAT Series B Common Stock is entitled to ten votes on each
matter that is properly presented to stockholders for a vote at the Meeting.
Pursuant to the Restated Certificate of Incorporation of TSAT (the "TSAT
Charter") and the Delaware General Corporation Law ("DGCL") (i) the affirmative
vote of the holders of 66 2/3% of the combined voting power of the shares of
TSAT Series A Common Stock and TSAT Series B Common Stock issued and
outstanding on the Record Date, voting together as a single class, is required
to approve the Roll-up Proposal, and (ii) the affirmative vote of a majority of
the combined voting power of the outstanding shares of TSAT Series A Common
Stock and TSAT Series B Common Stock present and entitled to vote thereon at
the Meeting, voting together as a single class, is required to approve the TSAT
Nonemployee Director Plan Proposal. If the Roll-up Proposal is approved, the
Restructuring Transaction will be consummated prior to the anticipated closing
date of the TSAT Merger. Consummation of the TSAT Merger is subject to
regulatory approval and other conditions to closing set forth in the TSAT
Merger Agreement. See "THE TSAT MERGER AGREEMENT--Conditions to the TSAT
Merger." Accordingly, there can be no assurances that the TSAT Merger will be
consummated, even if the Roll-up Proposal is approved and the Restructuring
Transaction is consummated. See "RISK FACTORS--Risks of Failure to Consummate
the TSAT Merger." In addition, approval of the TSAT Nonemployee Director Plan
Proposal is not a condition to the consummation of the Roll-up Plan or any part
thereof.
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A vote in favor of the Roll-up Proposal will also constitute a vote in favor
of the election as directors of the members of the New PRIMESTAR Board and the
adoption of the New PRIMESTAR Bylaws and the New PRIMESTAR Charter, as in
effect at the time of the closing of the TSAT Merger. See "MANAGEMENT OF NEW
PRIMESTAR--Directors and Executive Officers" for a description of the
qualifications of the initial members of the New PRIMESTAR Board. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK-- Common Stock" for a description
of the terms of the New PRIMESTAR Common Stock and "COMPARISON OF STOCKHOLDERS'
RIGHTS" for a description of the material differences between the rights of
holders of TSAT Common Stock and the rights of holders of New PRIMESTAR Common
Stock. See also Appendices E and F to this Proxy Statement/Prospectus, which
contain the complete text of the New PRIMESTAR Charter and the New PRIMESTAR
Bylaws, respectively.
As of the Record Date, TSAT's directors and executive officers beneficially
owned 581,852 outstanding shares of TSAT Series A Common Stock and 3,441,393
outstanding shares of TSAT Series B Common Stock, representing approximately
24.5% of the combined voting power of the shares of TSAT Common Stock
outstanding on such date. See "SECURITY OWNERSHIP OF TSAT--Security Ownership
of Management." TSAT's directors and executive officers have informed TSAT that
they intend to vote all of their shares of TSAT Common Stock in favor of the
Roll-up Proposal. Of such shares, John C. Malone, the Chairman of the Board,
beneficially owned 556,061 shares of TSAT Series A Common Stock and 3,439,958
shares of TSAT Series B Common Stock, representing 24.5% of the combined voting
power of the shares of TSAT Common Stock outstanding on the Record Date.
Pursuant to separate Voting Agreements, each dated as of June 12, 1997, among
certain parties to the Restructuring Agreement and each of John C. Malone and
certain other TSAT stockholders, respectively (collectively, the "TSAT Voting
Agreements"), such TSAT stockholders have agreed to vote (or cause to be voted)
all shares of TSAT Common Stock which they respectively have the power to vote
or direct the vote of (representing approximately 47.6% of the combined voting
power of the shares of TSAT Common Stock outstanding on the Record Date) in
favor of the approval of the Roll-up Proposal. See "THE SPECIAL MEETING," "THE
ROLL-UP PLAN--Interests of Certain Persons in the Roll-up Plan," "RELATED
AGREEMENTS--TSAT Voting Agreements" and Appendix H to this Proxy
Statement/Prospectus, which contains the complete text of each of the TSAT
Voting Agreements.
THE ROLL-UP PLAN--THE RESTRUCTURING TRANSACTION
Effect of the Restructuring Transaction. Pursuant to the Restructuring
Agreement and the TSAT Asset Transfer Agreement, upon the terms and subject to
the conditions set forth therein, TSAT will contribute and transfer to New
PRIMESTAR the TSAT Business, comprising all of TSAT's assets and liabilities,
except (i) the capital stock of Tempo, (ii) the consideration to be received by
TSAT in the Restructuring Transaction and (iii) the rights and obligations of
TSAT under agreements with New PRIMESTAR described herein. See "RELATED
AGREEMENTS." In addition, upon the terms and subject to the conditions set
forth in the Restructuring Agreement, each of Comcast DBS, Comcast SCI, Cox SI
and GEAS, respectively, will merge with and into New PRIMESTAR, in accordance
with the terms and subject to the conditions of its respective Merger
Agreement, and New PRIMESTAR will be the surviving corporation of each such
Merger. Pursuant to its respective Asset Transfer Agreement, each of TWE,
Newhouse and MediaOne (and its subsidiaries), respectively, will assign and
transfer to New PRIMESTAR all of such party's rights, title and interests in,
to and under such party's Partnership Interest and PRIMESTAR Assets, and New
PRIMESTAR will assume all of such party's PRIMESTAR Liabilities. See "THE
RESTRUCTURING AGREEMENT--Structure of the Restructuring Transaction."
The Restructuring Transaction will become effective on the Closing Date
(defined below) upon the filing of the certificates of merger relating to the
Mergers with the Delaware Secretary of State in accordance with the applicable
provisions of the DGCL (the "Effective Time"). The date on which the closing of
the Restructuring Transaction (the "Closing") takes place, which, unless
otherwise agreed among the parties, shall be on the later of (x) March 31, 1998
and (y) the first business day following the date on which the last of the
conditions
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precedent to the Restructuring Transaction set forth in the Restructuring
Agreement is fulfilled or, to the extent permissible, waived, is herein called
the "Closing Date." See "THE RESTRUCTURING AGREEMENT--General; Effective Time."
Consideration to be Received in the Restructuring Transaction. Pursuant to
the Restructuring Agreement, at the Closing, each of TSAT, Comcast, Cox,
MediaOne, Newhouse, TWE and GE Americom will, directly or indirectly, receive
from New PRIMESTAR (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 New PRIMESTAR, (ii) shares of New PRIMESTAR Class A Common
Stock, (iii) in the case of TSAT only, shares of New PRIMESTAR Class B Common
Stock and (iv) except in the case of TSAT and GE Americom, shares of New
PRIMESTAR Class C Common Stock, in each case in an amount determined pursuant
to the Restructuring Agreement. The Restructuring Agreement provides that the
amount of cash to be received by, or debt to be assumed in respect of, each of
TSAT, Comcast, Cox, MediaOne, Newhouse and TWE at the Closing will be based on,
among other things, subscriber counts and TSAT's debt balance at such date. If
the Restructuring Transaction had occurred on September 30, 1997, the total
amount of funds required to be paid by New PRIMESTAR to the Restructuring
Parties other than TSAT as cash consideration (or assumption of debt in lieu of
cash consideration) in the Restructuring Transaction would have been
approximately $464 million, comprising (i) approximately $66 million and $70
million, in cash to be paid to Cox and MediaOne, respectively and (ii)
approximately $242 million, $72 million and $14 million, of debt to be assumed
by New PRIMESTAR in respect of TWE and Newhouse (collectively), Comcast and GE
Americom, respectively. In addition, New PRIMESTAR would have assumed
indebtedness of TSAT and the Partnership aggregating approximately $921 million
if the Restructuring Transaction had occurred on September 30, 1997. See "RISK
FACTORS--Substantial Leverage; Additional Indebtedness Likely," "THE ROLL-UP
PLAN--Financing in Connection with the Restructuring Transaction," "THE
RESTRUCTURING AGREEMENT--Consideration to be Received in the Restructuring
Transaction" and "DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT." For a
description of the New PRIMESTAR Common Stock to be issued in the Restructuring
Transaction, see "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock."
Ownership of New PRIMESTAR After the Restructuring Transaction. As a result
of the Restructuring Transaction, TSAT will own approximately 36% of the
outstanding shares of New PRIMESTAR Common Stock at the Closing, and TWE and
Newhouse (collectively), Comcast, MediaOne, Cox and GE Americom will own
approximately 31%, 10%, 9%, 9% and 5%, respectively, of the outstanding shares
of New PRIMESTAR Common Stock at Closing, subject in each case to adjustments
based on closing subscriber counts and other factors. See "THE RESTRUCTURING
AGREEMENT--Consideration to be Received in the Restructuring Transaction."
Accordingly, the Class C Stockholders will hold an aggregate of approximately
59% of the shares of New PRIMESTAR Class A Common Stock outstanding on the
Closing Date and all of the shares of New PRIMESTAR Class C Common Stock,
representing in the aggregate approximately 61% of the total voting power of
the New PRIMESTAR Common Stock outstanding on the Closing Date. Therefore, the
Class C Stockholders collectively will have the power to control all matters
requiring the approval of the holders of New PRIMESTAR Common Stock voting
together as a single class, including the election of the Common Directors. In
addition, in accordance with the New PRIMESTAR Charter, so long as the Class C
Stockholders own in the aggregate at least 80% of the number of shares of New
PRIMESTAR Class C Common Stock issued in the Restructuring Transaction, the
Class C Stockholders will have the right to elect six of the eleven members of
the New PRIMESTAR Board. Pursuant to a stockholders agreement, initially, three
of the six Class C Directors will be nominated by TWE (and TWE has agreed with
Newhouse that of such three, one will be nominated by Newhouse), and one will
be nominated by each of Cox, Comcast and MediaOne. The New PRIMESTAR Bylaws
provide that actions of the New PRIMESTAR Board, with certain exceptions, may
be approved by a simple majority vote. See "RISK FACTORS--Control of New
PRIMESTAR by Principal Stockholders."
Conditions to the Restructuring Transaction. The respective obligations of
the parties to the Restructuring Agreement to consummate the Restructuring
Transaction are subject to the satisfaction or waiver of a number of
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conditions, including, among others, (a) approval of a five year strategic plan
of New PRIMESTAR by a Super-majority Vote (as defined in the Partnership
Agreement) of the Partnership's Partners Committee; (b) approval of the Roll-up
Proposal by the requisite vote of TSAT stockholders; (c) the absence of any
legal restraint or prohibition preventing consummation of the Restructuring
Transaction; (d) receipt of approval for listing on the NASDAQ/NM of the shares
of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock
issuable to the stockholders of TSAT pursuant to the TSAT Merger Agreement,
subject to official notice of issuance; and (e) the sufficiency of the credit
lines and borrowing capacity of New PRIMESTAR to pay the cash and assume the
indebtedness as part of the consideration for the Restructuring Transaction. In
July 1997, TSAT and the other parties to the Roll-up Plan filed Notification
and Report Forms under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the waiting periods under the HSR Act
with respect to the transactions described therein, which effectively included
both the Restructuring Transaction and the TSAT Merger, have since expired. See
"THE RESTRUCTURING AGREEMENT--Conditions to the Restructuring Transaction."
Covenants. Under the Restructuring Agreement, TSAT has agreed, until the
Closing Date, among other things, to conduct its business and operations in the
ordinary course, consistent with past practice, to use its commercially
reasonable efforts to preserve intact its business organization and, with
certain exceptions, to refrain from issuing additional shares of its capital
stock, amending its charter or bylaws or taking certain other actions. In
addition, under the Restructuring Agreement, each Class C Stockholder has
agreed, until the Closing Date, among other things, to conduct its PRIMESTAR(R)
distribution business in the ordinary course, consistent with past practice,
and to use its commercially reasonable efforts to preserve intact the
organization of its PRIMESTAR(R) distribution business. See "THE RESTRUCTURING
AGREEMENT--Covenants Relating to Business" and "THE RESTRUCTURING AGREEMENT--
Additional Covenants."
The Restructuring Agreement provides that, prior to the Closing Date, TSAT
will not initiate, solicit or encourage, directly or indirectly, any inquiries
or the making or implementation of any proposal or offer (including without
limitation any proposal or offer to its stockholders) with respect to a merger,
acquisition, consolidation or similar transaction that would impede, interfere
with, delay, postpone, discourage or adversely affect the transactions
contemplated by the Restructuring Agreement, or that could reasonably be
expected to have such effect. TSAT has also agreed that, prior to the Closing
Date, neither the TSAT Board nor any committee thereof will approve or
recommend, or propose to approve or recommend, any alternative transaction of
the type described in the preceding sentence. See "THE RESTRUCTURING
AGREEMENT--Covenants Relating to Business."
Termination of the Restructuring Agreement. The Restructuring Agreement may
be terminated and the Restructuring Transaction abandoned at any time prior to
the Effective Time, whether before or after the vote of the TSAT stockholders
at the Meeting, by (a) the mutual written consent of the parties to the
Restructuring Agreement; or (b) any of Comcast, Cox, GE Americom, MediaOne,
TSAT, TWE and Newhouse (collectively, the "Restructuring Parties") if (i) the
requisite approval of the TSAT stockholders is not obtained at the Meeting; or
(ii) any judgment, decree, injunction, rule or order of any governmental entity
which prohibits, restricts or delays consummation of the Restructuring
Transaction has become final and nonappealable; provided, however, that the
Restructuring Party seeking termination is not in breach in any material
respect of any of its representations, warranties, covenants or agreements
contained in the Restructuring Agreement. See "THE RESTRUCTURING AGREEMENT--
Termination, Amendment and Waiver."
Accounting Treatment. The TSAT Asset Transfer will be recorded at TSAT's
historical cost due to the fact that New PRIMESTAR is a wholly-owned subsidiary
of TSAT. The remaining elements of the Restructuring Transaction, as set forth
above, will be treated as the acquisition by New PRIMESTAR of the Partnership
Interests and the PRIMESTAR Assets, and the assumption by New PRIMESTAR of the
PRIMESTAR
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Liabilities, of the Restructuring Parties other than TSAT, and such acquisition
will be accounted for using the purchase method of accounting. TSAT has been
identified as the acquiror for accounting purposes and the predecessor for
reporting purposes due to the fact that TSAT will own the largest interest in
New PRIMESTAR immediately following consummation of the Restructuring
Transaction. Accordingly, the fair value of the consideration paid to the
Restructuring Parties other than TSAT will be allocated to the identifiable
assets acquired and liabilities assumed based upon their respective estimated
fair values. See the Primary and Supplemental Condensed Pro Forma Combined
Financial Statements of New PRIMESTAR, included elsewhere in this Proxy
Statement/Prospectus.
THE ROLL-UP PLAN--THE TSAT MERGER
Effect of the TSAT Merger. Pursuant to the TSAT Merger Agreement, upon the
terms and subject to the conditions set forth therein, TSAT will merge with and
into New PRIMESTAR, with New PRIMESTAR as the surviving corporation. The TSAT
Merger will become effective on the TSAT Closing Date (defined below) upon the
filing of the certificate of merger relating to the TSAT Merger with the
Delaware Secretary of State in accordance with the applicable provisions of the
DGCL or at such subsequent time as is stated in the certificate of merger (the
"TSAT Effective Time"). The date on which the closing of the TSAT Merger (the
"TSAT Closing") takes place, which, unless otherwise agreed among the parties,
shall be on the first business day following the date on which the last of the
conditions precedent to the TSAT Merger set forth in the TSAT Merger Agreement
is fulfilled or, to the extent permissible, waived, is herein called the "TSAT
Closing Date." See "THE TSAT MERGER AGREEMENT--General; Effective Time."
Consideration to be Received in the TSAT Merger. Pursuant to the TSAT Merger
Agreement, at the TSAT Effective Time, (i) each share of TSAT Series A Common
Stock outstanding immediately prior to the TSAT Effective Time (other than
shares held by TSAT in its treasury, all of which will be canceled) will be
converted into the right to receive one share of New PRIMESTAR Class A Common
Stock and (ii) each share of TSAT Series B Common Stock outstanding immediately
prior to the TSAT Effective Time (other than shares held by TSAT in its
treasury, all of which will be canceled) will be converted into the right to
receive one share of New PRIMESTAR Class B Common Stock. Each share of New
PRIMESTAR Common Stock then held by TSAT will be canceled. See "THE TSAT MERGER
AGREEMENT--Consideration to be Received in the TSAT Merger." For a summary of
the material differences between the rights of holders of TSAT Series A Common
Stock and TSAT Series B Common Stock and the rights of holders of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B Common Stock, see "COMPARISON OF
STOCKHOLDERS' RIGHTS." For a description of the New PRIMESTAR Common Stock to
be issued in the TSAT Merger, see "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--
Common Stock."
Investment Company Considerations. Because TSAT's approximate 36% ownership
interest in New PRIMESTAR following consummation of the Restructuring
Transaction will constitute the majority of TSAT's net worth, consummation of
the Restructuring Transaction may cause TSAT to be deemed an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the "1940 Act"). The TSAT Merger Agreement provides that if the TSAT Merger is
not consummated prior to the expiration of the one year exemption period
provided for "transient investment companies" under Rule 3a-2 promulgated under
the 1940 Act, or the expiration of any extension of such period that TSAT is
able to obtain, then TSAT may, in consultation with New PRIMESTAR, acquire an
operating business or take such other commercially reasonably actions within
such one year period in order to prevent TSAT from being deemed an investment
company within the meaning of the 1940 Act. If TSAT does acquire an operating
business or takes such other material commercially reasonable actions under
such circumstances, the TSAT Merger Agreement requires TSAT and New PRIMESTAR
to negotiate in good faith to amend the TSAT Merger Agreement to change the
exchange ratio between TSAT capital stock and New PRIMESTAR capital stock to
reflect the financial effects of such acquisition or actions (and if such an
agreement is reached, TSAT will, as soon as practicable, resubmit the TSAT
Merger Agreement, as amended, to its stockholders for approval and adoption).
See "RISK FACTORS--
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Investment Company Act Considerations," "THE TSAT MERGER AGREEMENT--
Consideration to be Received in the TSAT Merger" and "THE TSAT MERGER
AGREEMENT--Covenants Relating to Business--Investment Company Act Exception."
By voting in favor of the Roll-up Proposal, TSAT stockholders are voting in
favor of any revision of the TSAT Merger Agreement that would not otherwise
require stockholder approval under applicable law, and TSAT will not seek any
further approval from TSAT stockholders in connection with any such revision of
the TSAT Merger Agreement unless applicable law requires TSAT to seek such
approval.
Ownership of New PRIMESTAR After the TSAT Merger. As a result of the TSAT
Merger, stockholders of TSAT at the TSAT Closing will own approximately 34% of
the outstanding shares of New PRIMESTAR Common Stock, and the shares of New
PRIMESTAR Common Stock then held by TSAT will be cancelled. The ownership of
the New PRIMESTAR Common Stock not then held by TSAT at the TSAT Closing will
not be affected by the TSAT Merger. See "THE ROLL-UP PLAN--Certain Consequences
of the Restructuring Transaction," "THE RESTRUCTURING AGREEMENT--Consideration
to be Received in the TSAT Merger" and "THE TSAT MERGER AGREEMENT--
Consideration to be Received in the TSAT Merger."
Conditions to the TSAT Merger. 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)
approval of the Roll-up Plan by the requisite vote of TSAT stockholders; (b)
occurrence of one of the following (each an "FCC Event"): (i) FCC approval of
TSAT's pending application to transfer control of Tempo to New PRIMESTAR, (ii)
divestiture of the FCC Permit by TSAT in accordance with TSAT's obligations
under the TSAT Tempo Agreement, or (iii) FCC permission to consummate the TSAT
Merger without divestiture of the FCC Permit (including pursuant to an
agreement to divest the FCC Permit within a specific time period following the
TSAT Effective Time); (c) the absence of any legal restraint or prohibition
preventing consummation of the TSAT Merger; and (d) receipt of approval for
listing on the NASDAQ/NM of the shares of New PRIMESTAR Class A Common Stock
and New 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, New PRIMESTAR has the right to terminate the TSAT Merger
Agreement, and abandon the TSAT Merger, under certain circumstances. In July
1997, TSAT and the other parties to the Roll-up Plan filed Notification and
Report Forms under the HSR Act, and the waiting periods under the HSR Act with
respect to the transactions described therein, which effectively included both
the Restructuring Transaction and the TSAT Merger, have since expired. See "THE
TSAT MERGER AGREEMENT--Conditions to the TSAT Merger."
Covenants. Under the TSAT Merger Agreement, TSAT has agreed, until the TSAT
Closing Date, among other things, to conduct its business and operations in the
ordinary course, consistent with past practice, to use its commercially
reasonable efforts to preserve intact its business organization and, with
certain exceptions, to refrain from acquiring any assets or incurring any
liabilities, issuing additional shares of its capital stock, amending its
charter or bylaws or taking certain other actions. See "THE TSAT MERGER
AGREEMENT--Covenants Relating to Business" and "THE TSAT MERGER AGREEMENT--
Additional Covenants."
The TSAT Merger Agreement provides that, prior to the TSAT Closing Date, TSAT
will not initiate, solicit or encourage, directly or indirectly, any inquiries
or the making or implementation of any proposal or offer (including without
limitation any proposal or offer to its stockholders) with respect to a merger,
acquisition, consolidation or similar transaction that would impede, interfere
with, delay, postpone, discourage or adversely affect the transactions
contemplated by the TSAT Merger Agreement, or that could reasonably be expected
to have such effect. TSAT has also agreed that neither the TSAT Board nor any
committee thereof will approve or recommend, or propose to approve or
recommend, any alternative transaction of the type described in the preceding
sentence. See "THE TSAT MERGER AGREEMENT--Covenants Relating to Business."
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Termination of the TSAT Merger Agreement. The TSAT Merger Agreement may be
terminated at any time prior to the TSAT Effective Time, whether before or
after adoption thereof by the stockholders of TSAT and/or New PRIMESTAR by (a)
the mutual written consent of TSAT and New PRIMESTAR; (b) by New PRIMESTAR at
any time after June 30, 1998, on ten days prior written notice to TSAT, if the
TSAT Merger has not been consummated on or before June 30, 1998 and no FCC
Event has occurred on or before the date of such notice, unless the failure to
consummate the TSAT Merger is the result of a wilful and material breach of the
TSAT Merger Agreement by New PRIMESTAR; or (c) by either TSAT or New PRIMESTAR
on or after the earlier of (x) the 180th day following the first to occur of
the FCC Events if the TSAT Merger has not been consummated on or before the end
of such 180-day period, and (y) on the 18 month anniversary of the Closing Date
(unless the failure to consummate the TSAT Merger is the result of a wilful and
material breach of the TSAT Merger Agreement or the TSAT Stockholders Agreement
by the party seeking to terminate the TSAT Merger Agreement); provided,
however, that the passage of either such period shall be tolled for any part
thereof during which either party is subject to a nonfinal order, decree,
ruling or action restraining, enjoining or otherwise prohibiting consummation
of the TSAT Merger.
Accounting Treatment. The TSAT Merger will be treated as the acquisition of
TSAT by New PRIMESTAR. Such acquisition will be accounted for at TSAT's
historical cost since (i) the percentage of New PRIMESTAR owned by TSAT prior
to consummation of the TSAT Merger will be approximately equal to the
percentage of New PRIMESTAR to be owned by TSAT stockholders following
consummation of the TSAT Merger and (ii) the TSAT Merger and the Restructuring
Transaction are both part of the Roll-up Plan. See the Primary and Supplemental
Condensed Pro Forma Combined Financial Statements of New PRIMESTAR, included
elsewhere herein.
FAIRNESS OPINION
The TSAT Board retained Merrill Lynch & Co. ("Merrill Lynch") to review the
fairness, from a financial point of view, to TSAT and its stockholders (other
than any stockholders that are affiliates of TSAT) of the consideration to be
received by TSAT and its stockholders pursuant to the Roll-up Plan. On February
6, 1998, Merrill Lynch delivered an oral opinion (which it subsequently
confirmed in writing) (the "Merrill Lynch Opinion") to the TSAT Board to the
effect that, as of the date thereof, and based upon the assumptions made,
matters considered and limits of the review, as set forth in such opinion, the
consideration to be received by TSAT and its stockholders pursuant to the Roll-
up Plan, including the consideration to be received by TSAT pursuant to the
Restructuring Agreement, the TSAT Tempo Agreement and the TSAT Asset Transfer
Agreement and the consideration to be received by TSAT's stockholders pursuant
to the TSAT Merger Agreement, taken as a whole, is fair to TSAT and its
stockholders (other than any stockholders that are affiliates of TSAT), from a
financial point of view. A copy of the Merrill Lynch Opinion, which sets forth
the assumptions made, matters considered and the scope of review undertaken in
connection therewith, is included as Appendix I to the accompanying Proxy
Statement/Prospectus and should be read in its entirety.
REGULATORY MATTERS
The Restructuring Transaction and the TSAT Merger are subject to the
applicable provisions of the HSR Act. In July 1997, TSAT, on behalf of itself
and New PRIMESTAR, and the Partnership, Time Warner, Cox Enterprises, Inc.
("Cox Enterprises"), Comcast, Newhouse Broadcasting, US WEST, Inc. and GE each
filed the information and material required under the HSR Act with the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the Federal Trade Commission (the "FTC"). In August 1997, the waiting periods
applicable to the transactions described in such filings, which effectively
incorporated both the Restructuring Transaction and the TSAT Merger, expired in
accordance with the HSR Act. See "THE ROLL-UP PLAN--Regulatory Approvals."
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TSAT believes that consummation of the Restructuring Transaction does not
require any FCC approval. However, consummation of the TSAT Merger is
conditioned upon, among other things, approval by the FCC of the transfer of
control of Tempo and its DBS assets to New PRIMESTAR. On July 18, 1997, TSAT
filed an application with the FCC in connection with such transfer to New
PRIMESTAR, and pursuant to the Restructuring Agreement, each Restructuring
Party has agreed to use its commercially reasonable efforts to respond to
requests for information from all governmental entities relating to the
Restructuring Transaction and the TSAT Merger, including the FCC. However, no
assurance can be given that FCC approval of the transfer of control of Tempo
and its DBS assets to New PRIMESTAR will be obtained. See "RISK FACTORS--Risks
of Adverse Government Regulations and Adjudications," "REGULATORY MATTERS--
Required FCC Approvals," "THE ROLL-UP PLAN--Background" and "THE ROLL-UP PLAN--
Regulatory Approvals."
BOARD OF DIRECTORS OF NEW PRIMESTAR
Upon consummation of the Restructuring Transaction, the New PRIMESTAR Board
will consist of eleven members, of which the three Class B Directors will be
elected by holders of the New PRIMESTAR Class B Common Stock and the six Class
C Directors will be elected by holders of the New PRIMESTAR Class C Common
Stock, in each case voting as a separate class. Pursuant to a stockholders
agreement, initially, of the six Class C Directors, three will be nominated by
TWE (and TWE has agreed with Newhouse that of such three, one will be nominated
by Newhouse), and one will be nominated by each of Cox, Comcast and MediaOne.
The remaining two Common Directors will be nominated by a supermajority vote of
the Class B Directors and Class C Directors, and elected by the holders of the
New PRIMESTAR Voting Common Stock, voting together as a single class. The
number of Class B Directors will decrease as the number of shares of New
PRIMESTAR Class B Common Stock outstanding decreases, and the number of Class C
Directors will decrease as the number of shares of New PRIMESTAR Class C Common
Stock outstanding decreases, in each case in accordance with a schedule set
forth in the New PRIMESTAR Charter. The special class rights of the holders of
New PRIMESTAR Class B Common Stock and the holders of New PRIMESTAR Class C
Common Stock, each voting as a separate class, to elect the Class B Directors
and the Class C Directors, respectively, will automatically terminate on the
Class C Termination Date. At any time prior to the Class C Termination Date
that the maximum number of Class B Directors or Class C Directors is decreased,
the number of Common Directors will be correspondingly increased, so that the
total number of directors constituting the entire New PRIMESTAR Board remains
at eleven. On and after the Class C Termination Date, all members of the New
PRIMESTAR Board will be elected by the holders of New PRIMESTAR Voting Common
Stock, voting together as a single class. See "RISK FACTORS--Dilution of Voting
Rights," "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of
Directors," "RELATED AGREEMENTS--Stockholders Agreement" and "RELATED
AGREEMENTS--TWE/Newhouse Voting Agreement."
At the closing of the Restructuring Transaction, 100% of the issued and
outstanding shares of New PRIMESTAR Class B Common Stock, and approximately 36%
of the issued and outstanding shares of New PRIMESTAR Class A Common Stock,
will be owned by TSAT. Accordingly, TSAT will be entitled to elect the three
initial Class B Directors. If the TSAT Merger is consummated, each outstanding
share of TSAT Series B Common Stock on the TSAT Closing Date will be converted
into the right to receive one share of New PRIMESTAR Class B Common Stock, each
outstanding share of TSAT Series A Common Stock on such date will be converted
into the right to receive one share of New PRIMESTAR Class A Common Stock and
the shares of New PRIMESTAR Common Stock then held by TSAT will be canceled.
MANAGEMENT AND OPERATIONS OF NEW PRIMESTAR
The corporate headquarters of New PRIMESTAR will be in Englewood, Colorado. A
determination with respect to the position of Chief Executive Officer of New
PRIMESTAR has not yet been made. It is expected that the New PRIMESTAR Board
will name a Chief Executive Officer shortly after the Closing. Jim Gray, the
current Chairman and Chief Executive Officer of the Partnership, has indicated
a desire to retire from that position during 1998. Mr. Gray will participate in
the search for the Chief Executive Officer of New
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PRIMESTAR and is expected to assist the New PRIMESTAR Board in transitional
matters following the Closing Date. Daniel J. O'Brien, the current President of
the Partnership, will be the President and Chief Operating Officer of New
PRIMESTAR. Other members of the executive management team will include: Kenneth
G. Carroll, the current Senior Vice President and Chief Financial Officer of
TSAT, who will be the Chief Financial Officer of New PRIMESTAR; Marcus O.
Evans, the current Senior Vice President and General Counsel of the
Partnership, who will be the General Counsel of New PRIMESTAR; Joel Ginsparg,
the current Senior Vice President, Technology and Operations of the
Partnership, who will be the Senior Vice President, Technology and Operations
of New PRIMESTAR; Christopher Sophinos, the current President of TSAT, who will
be the Senior Vice President, Sales and Distribution of New PRIMESTAR; and
Denny Wilkinson, the current Senior Vice President, Marketing and Programming
of the Partnership, who will be the Senior Vice President, Marketing and
Programming of New PRIMESTAR. See "THE ROLL-UP PLAN--Management and Operations
of New PRIMESTAR" and "MANAGEMENT OF NEW PRIMESTAR."
COMPARISON OF STOCKHOLDERS' RIGHTS
TSAT and New PRIMESTAR are each incorporated in Delaware. Stockholders of
TSAT, whose rights as stockholders are currently governed by the TSAT Charter
and TSAT's Bylaws (the "TSAT Bylaws") and by Delaware law, will, upon
consummation of the TSAT Merger, become stockholders of New PRIMESTAR, and
their rights as such will be governed by the New PRIMESTAR Charter and the New
PRIMESTAR Bylaws and will continue to be governed by Delaware law. The New
PRIMESTAR Charter and the New PRIMESTAR Bylaws contain significant differences
from the TSAT Charter and the TSAT Bylaws, including, without limitation, (i)
provisions in the New PRIMESTAR Charter that authorize the issuance of the New
PRIMESTAR Class C Common Stock and set forth the voting rights, conversion
rights and other terms thereof, (ii) provisions in the New PRIMESTAR Charter
that provide for the New PRIMESTAR Board to consist of Class B Directors
elected by the holders of the New PRIMESTAR Class B Common Stock, Class C
Directors elected by the holders of the New PRIMESTAR Class C Common Stock and
Common Directors elected by the holders of the New PRIMESTAR Voting Common
Stock, voting together as a single class, and (iii) provisions in the New
PRIMESTAR Charter that provide that the affirmative vote of the holders of a
majority of the outstanding shares of New PRIMESTAR Class B Common Stock and
83% of the outstanding shares of New PRIMESTAR Class C Common Stock, each
voting as a separate class, will be required to approve certain actions by New
PRIMESTAR, including all charter amendments (subject to certain limited
exceptions) and certain substantive bylaw amendments, mergers and
consolidations, the sale of all or substantially all of the assets of New
PRIMESTAR, dissolution, certain stock issuances and the voluntary bankruptcy of
New PRIMESTAR. See "RISK FACTORS--Dilution of Voting Rights" and "COMPARISON OF
STOCKHOLDERS' RIGHTS."
REASONS FOR THE ROLL-UP PLAN; RECOMMENDATION OF THE TSAT BOARD
THE TSAT BOARD HAS UNANIMOUSLY APPROVED THE ROLL-UP PLAN, INCLUDING THE TERMS
OF THE RESTRUCTURING AGREEMENT, THE TSAT ASSET TRANSFER AGREEMENT AND THE TSAT
MERGER AGREEMENT, HAS DETERMINED THAT THE ROLL-UP PLAN IS ADVISABLE AND FAIR
AND IN THE BEST INTERESTS OF TSAT AND ITS STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT TSAT STOCKHOLDERS VOTE FOR APPROVAL OF THE ROLL-UP PROPOSAL. In
reaching its decision to approve the Roll-up Plan and to recommend that TSAT's
stockholders vote to approve the Roll-up Proposal, the TSAT Board considered
the following factors: (i) industry and market conditions, including the
increasing competition in the multichannel television services business,
including competition from other satellite services providers and cable
operators; (ii) the terms of the Restructuring Agreement, the TSAT Asset
Transfer Agreement and the TSAT Merger Agreement, including the consideration
to be received by TSAT in the Restructuring Transaction and by TSAT
stockholders in the TSAT Merger; (iii) the opportunity for TSAT (and, following
the TSAT Merger, TSAT stockholders) to participate, as holders of New PRIMESTAR
Common Stock, in a national provider of satellite
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television services with a cohesive, national focus, and to do so by means of a
transaction that is designed to be tax-free to TSAT (and, following the TSAT
Merger, TSAT stockholders); and (iv) the opinion of Merrill Lynch as to the
fairness, from a financial point of view, of the consideration to be received
by TSAT and its stockholders pursuant to the Roll-up Plan. See "THE ROLL-UP
PLAN--TSAT Fairness Opinion." For a discussion of the interests of certain
members of the TSAT Board in the Roll-up Plan, see "THE ROLL-UP PLAN--Interests
of Certain Persons in the Roll-up Plan."
In addition, TSAT and each of the other parties to the Restructuring
Agreement believes that the Restructuring Transaction will benefit the
PRIMESTAR(R) digital satellite business currently owned and operated on a
decentralized basis by the Partnership, and by TSAT and the other Distributors
by (i) providing increased access to capital markets to finance growth
prospects, (ii) facilitating the implementation of a national sales strategy
for the PRIMESTAR(R) service with consistent programming, packages and pricing,
(iii) enhancing PRIMESTAR(R)'s expansion into more retail distribution
channels, and (iv) providing increased agility to compete in a rapidly changing
marketplace by nationalizing the local business units of the PRIMESTAR(R)
Distributors. Consummating the Restructuring Transaction without waiting for
the FCC to render its decision on the transfer of control of Tempo from TSAT to
New PRIMESTAR allows TSAT and the other Restructuring Parties to realize these
benefits even if such approval is not obtained. However, TSAT and New PRIMESTAR
will both be able to operate more efficiently as a combined company, and by
proceeding with the TSAT Merger after the regulatory issues have been resolved
(subject to the conditions set forth in the TSAT Merger Agreement), TSAT
stockholders will be able to realize these benefits directly rather than
through a holding company. See "THE ROLL-UP PLAN--Reasons for the Roll-up Plan;
Recommendation of the TSAT Board," "RISK FACTORS-- Risks Associated with
Holding Company Structure," "RISK FACTORS--Investment Company Act
Considerations" and "RISK FACTORS--Risks of Failure to Consummate the TSAT
Merger."
ABSENCE OF APPRAISAL RIGHTS
Holders of TSAT Common Stock are not entitled to appraisal rights under
Delaware law in connection with the transactions contemplated by the Roll-up
Plan, with respect to any of their shares of TSAT Common Stock. See "THE ROLL-
UP PLAN--Absence of Appraisal Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Baker & Botts, L.L.P., has rendered its opinion to TSAT to the effect that,
based upon representation certificates, which will be reconfirmed prior to the
closing of the Restructuring Transaction and/or the TSAT Merger, as applicable,
and subject to the qualifications set forth under "THE ROLL-UP PLAN--Certain
Federal Income Tax Consequences," (i) the contribution by TSAT of the TSAT
Business to New PRIMESTAR in the Restructuring Transaction in exchange for New
PRIMESTAR Common Stock will be treated for federal income tax purposes as a
tax-free exchange, and no gain or loss will be recognized by TSAT except for
the possibility that gain or income may be recognized by TSAT in connection
with the assumption of certain indebtedness of TSAT, and (ii) the TSAT Merger,
if consummated pursuant to the TSAT Merger Agreement, will qualify as a tax-
free reorganization pursuant to Section 368(a) of the Code, and no gain or loss
will be recognized by TSAT or TSAT stockholders as a result of the TSAT Merger.
RELATED AGREEMENTS
Stockholders Agreement. Pursuant to the Restructuring Agreement, each of the
Class C Stockholders, the Specified Class B Stockholders (as defined below), GE
Americom and New PRIMESTAR will enter into a Stockholders Agreement (the
"Stockholders Agreement") on the Closing Date, which will provide for, among
other things, certain provisions relating to the nomination of directors to the
New PRIMESTAR Board and certain voting agreements, transfer restrictions,
conversion restrictions, rights of first refusal and other rights and
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obligations of the Class C Stockholders, the Specified Class B Stockholders and
GE Americom in connection with their respective shares of New PRIMESTAR Common
Stock. The term of the Stockholders Agreement will be ten years. As used
herein, the term "Specified Class B Stockholders" means (i) prior to the TSAT
Merger, TSAT (and for certain purposes, John C. Malone), and (ii) after the
TSAT Merger, John C. Malone (and, under certain circumstances, certain other
holders of New PRIMESTAR Class B Common Stock). Although immediately following
the Closing of the Restructuring Transaction, Dr. Malone will not own directly
any shares of New PRIMESTAR Class B Common Stock (all of which will be owned by
TSAT), he will nevertheless execute the Stockholders Agreement on the Closing
Date as a Specified Class B Stockholder and be entitled to exercise certain
rights thereunder, including the rights of first refusal. See "RISK FACTORS--
Control of New PRIMESTAR by Principal Stockholders," "RELATED AGREEMENTS--
Stockholders Agreement" and Appendix G to this Proxy Statement/Prospectus,
which contains the complete text of the form of Stockholders Agreement.
Registration Rights Agreement. Pursuant to the Restructuring Agreement, at
the Closing, a registration rights agreement (the "Registration Rights
Agreement") will be entered into among New PRIMESTAR, TSAT, the Class C
Stockholders, GE Americom and John C. Malone. The Registration Rights Agreement
will provide that each of the Class C Stockholders, the Specified Class B
Stockholders, GE Americom, respectively, and their respective affiliates, will
have certain rights, under specific circumstances and subject to certain
conditions and exceptions, to require New PRIMESTAR to register under the
Securities Act all or any portion of their respective shares of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B Common Stock. See "RELATED
AGREEMENTS--Registration Rights Agreement."
TWE/Newhouse Voting Agreement. Pursuant to the Restructuring Agreement, at
the Closing, a voting agreement will be entered into between TWE and Newhouse
(the "TWE/Newhouse Voting Agreement") with respect to all shares of New
PRIMESTAR Class C Common Stock issued to Newhouse pursuant to the Restructuring
Transaction, any shares of New PRIMESTAR Class C Common Stock or New PRIMESTAR
Class B Common Stock acquired in accordance with specified provisions of the
Stockholders Agreement and any securities of New PRIMESTAR or any other entity
that may be issued to Newhouse in respect of such shares. The term of the
TWE/Newhouse Voting Agreement will be ten years. The TWE/Newhouse Voting
Agreement will provide, among other things, that, during the period commencing
on the Effective Date and ending on the date that TWE and its affiliates
collectively hold of record less than 10% of the shares of New PRIMESTAR Class
C Common Stock held by TWE on the Effective Date (the "TWE/Newhouse Voting
Period"), (i) Newhouse will vote or act by written consent with respect to (or
cause to be voted or acted upon by written consent) all such shares and
securities as directed by TWE in its sole and absolute discretion, and (ii) TWE
will nominate one person chosen by Newhouse to serve on the New PRIMESTAR Board
as a Class C Director, subject to certain conditions, and TWE will vote (or
cause to be voted) all of its shares of New PRIMESTAR Class C Common Stock and
all of Newhouse's shares subject to the TWE/Newhouse Voting Agreement as to
which TWE has voting control in favor of the election of such nominee to the
New PRIMESTAR Board. In addition, the TWE/Newhouse Voting Agreement will
provide for certain transfer restrictions with respect to the New PRIMESTAR
Class C Common Stock held by Newhouse and will give Newhouse certain rights of
first refusal, prior to any other Class C Stockholder, any Specified Class B
Stockholder or GE Americom, with respect to shares of New PRIMESTAR Class C
Common Stock held by TWE, subject to certain conditions. See "RELATED
AGREEMENTS--TWE/Newhouse Voting Agreement."
Reimbursement Agreements. Prior to entering into the Restructuring Agreement,
affiliates of each of the Partners (or, in the case of TSAT, affiliates of TCI)
other than GEAS provided letters of credit (collectively, the "PRIMESTAR
Letters of Credit") to secure certain obligations of the Partnership under (i)
the Amended and Restated Memorandum of Agreement, effective as of October 18,
1996, between the Partnership and GE Americom (the "GE-2 Agreement"), which
provides for the Partnership's use of transponders on GE-2, the medium power
satellite currently used to provide the PRIMESTAR(R) service ("GE-2"), and (ii)
the bank credit
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facility (the "PRIMESTAR Credit Facility") that was obtained by the Partnership
to finance advances to Tempo for payments due in respect of the construction of
the Tempo Satellites. In connection with the Restructuring Transaction, New
PRIMESTAR will enter into a reimbursement agreement with each of TWE, Comcast,
Cox and MediaOne (collectively, the "Reimbursement Agreements"), which will
provide for, among other things, the assumption by New PRIMESTAR of all the
obligations of such party under its respective PRIMESTAR Letters of Credit and
the existing reimbursement agreements and/or other existing documentation
between such party and the issuing bank relating to such PRIMESTAR Letters of
Credit, including all existing and future payment obligations of such party
thereunder, and the indemnification by New PRIMESTAR of such party for any and
all losses, claims, damages, liabilities, deficiencies, obligations, costs and
expenses of such party relating thereto. In addition, pursuant to the TSAT
Asset Transfer Agreement, New PRIMESTAR will assume the rights and obligations
of TSAT under the Indemnification Agreements between TSAT and the affiliates of
TCI that issued PRIMESTAR Letters of Credit, which include reimbursement
obligations in favor of such TCI affiliates with respect to such PRIMESTAR
Letters of Credit on substantially the same terms as the Reimbursement
Agreements. Each of TWE, Comcast, Cox, MediaOne and TCI (or their respective
affiliates) will be paid a fee to be negotiated in consideration of their
agreement to maintain such PRIMESTAR Letters of Credit outstanding for a period
of time following the Closing Date. SEE "RELATED AGREEMENTS--Reimbursement
Agreements," and "BUSINESS OF TSAT--Certain Arrangements Between TSAT and TCI--
Indemnification Agreements."
Guarantee Agreement. In connection with the execution and delivery of the
Restructuring Agreement by the parties thereto, US WEST Media Group, Inc. ("US
West"), the parent of MediaOne, entered into a guarantee agreement, dated as of
February 6, 1998, for the benefit of such parties (the "Guarantee Agreement").
The Guarantee Agreement provides for, among other things, the absolute,
irrevocable and unconditional guarantee of US West, as principal and not as
surety, in respect of (i) the due and punctual payment of all monetary
obligations payable by MediaOne pursuant to the Restructuring Agreement, the
Asset Transfer Agreement to which MediaOne is a party, the Stockholders
Agreement and the Registration Rights Agreement (collectively, the "MediaOne
Transaction Documents"), (ii) the full and complete performance of all
covenants, agreements, duties and obligations of MediaOne pursuant to each
MediaOne Transaction Document, as if US West were party thereto (in place of
MediaOne), and (iii) the accuracy of the representations and warranties made by
MediaOne in each MediaOne Transaction Document. See "RELATED AGREEMENTS--
Guarantee Agreement."
Letter Agreement. In connection with the execution and delivery of the
Restructuring Agreement by the parties thereto, John C. Malone entered into a
letter of agreement, dated February 6, 1998, for the benefit of such parties
(the "Letter Agreement"). The Letter Agreement provides for, among other
things, the agreement of Dr. Malone to enter into the Stockholders Agreement
and the Registration Rights Agreement at the Closing of the Restructuring
Transaction, to cooperate in good faith in the preparation of the Registration
Statement and this Proxy Statement/Prospectus, including the provision to TSAT
and New PRIMESTAR of information regarding Dr. Malone required to be included
therein, and to use reasonable efforts to respond to any request for
information relating to the Restructuring Transaction by a governmental entity.
See "RELATED AGREEMENTS--Letter Agreement."
Agency Agreements. Pursuant to the Restructuring Agreement, at the Closing,
New PRIMESTAR will enter into a transition period agency agreement with each
Class C Stockholder (or their respective affiliates), pursuant to which each
such party will be designated as a servicing agent in assigned non-exclusive
territories with respect to New PRIMESTAR's medium power PRIMESTAR(R)
subscribers, for a period of up to six months following the Closing
(collectively, the "Transition Period Agency Agreements"). In addition, each
Class C Stockholder and TCI (or their respective affiliates) will have the
right to enter into an agency agreement with New PRIMESTAR pursuant to which
such party will act as a non-exclusive retail sales and servicing agent of any
stand-alone retail high power PRIMESTAR(R) programming service (collectively,
the "HP Agency Agreements"). Pursuant to the Restructuring Agreement, each
Class C Stockholder and TCI (or their respective
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affiliates) will also have a right to enter into non-exclusive sales agency
agreements pursuant to which such party will act as a non-exclusive retail
sales agent of (i) the PRIMESTAR(R) medium power programming service, or (ii)
at any time that such party is not a party to an HP Agency Agreement, any
stand-alone retail high power PRIMESTAR(R) programming service (collectively,
the "Sales Agency Agreements"). Both the HP Agency Agreements and any Sales
Agency Agreements will have an initial term of ten years. See "RELATED
AGREEMENTS--Agency Agreements."
TSAT Tempo Agreement. In connection with the execution and delivery of the
Restructuring Agreement, TSAT and New PRIMESTAR entered into the TSAT Tempo
Agreement dated as of February 6, 1998 (the "TSAT Tempo Agreement"), pursuant
to which, among other things, TSAT granted to New PRIMESTAR (together with its
successors and assigns, the "Option Holder") the exclusive and irrevocable
option (the "Tempo Sale Option"), exercisable at any time during the term of
the TSAT Tempo Agreement, on the terms and subject to the conditions set forth
in the TSAT Tempo Agreement, upon receipt of FCC approval of the transfer of
control of Tempo to New PRIMESTAR (including approval of a transfer in
anticipation of a subsequent sale), to purchase from TSAT (at the Option
Holder's election) either (x) all the issued and outstanding shares of capital
stock of Tempo or (y) all the rights, title and interests of TSAT in, to and
under the Tempo Assets (as defined below), in either case for an aggregate
purchase price equal to $2.5 million plus, in the case of (y), the assumption
by the Option Holder of all obligations and liabilities of Tempo in respect of
the Tempo Assets, other than those incurred in violation of the TSAT Tempo
Agreement (either such transaction being referred to herein as the "Tempo
Sale"). If the Option Holder exercises the Tempo Sale Option and elects to
consummate the Tempo Sale via clause (y) above, then TSAT will liquidate Tempo
immediately prior to the closing of the Tempo Sale. The Option Holder, in its
sole discretion, is entitled to assign the TSAT Tempo Agreement and New
PRIMESTAR's rights, interests and obligations thereunder at any time. "Tempo
Assets" means (i) the FCC Permit, (ii) the Tempo Satellites, (iii) the
Satellite Construction Agreement, and (iv) all rights, claims and causes of
action under the Satellite Construction Agreement, all insurance claims in
respect of the Tempo Satellites, and Tempo's rights under the Tempo Option
Agreement. See "RELATED AGREEMENTS--TSAT Tempo Agreement" and Appendix C to
this Proxy Statement/Prospectus, which contains the complete text of the TSAT
Tempo Agreement.
TSAT Stockholders Agreement. In connection with the execution and delivery of
the Restructuring Agreement, TSAT, John C. Malone and New PRIMESTAR entered
into a stockholders agreement dated as of February 6, 1998 (the "TSAT
Stockholders Agreement"), which provides, among other things, that until the
termination of the TSAT Merger Agreement, each TSAT Stockholder (as defined
below) will vote or act by written consent with respect to (or cause to be
voted or acted upon by written consent) all shares of TSAT Common Stock held of
record or beneficially owned by such TSAT Stockholder and all shares of TSAT
Common Stock as to which such TSAT Stockholder has voting control (1) in favor
of the TSAT Merger Agreement and the transactions contemplated thereby and (2)
except for the transactions contemplated by the TSAT Merger Agreement, against
any merger, acquisition, consolidation or similar transaction that would
adversely affect the transactions contemplated by the TSAT Merger Agreement, or
any amendment of the TSAT Charter or the TSAT Bylaws, without the prior written
consent of New PRIMESTAR. In addition, until the termination of the TSAT Merger
Agreement, each TSAT Stockholder has agreed not to convert any of its shares of
TSAT Series B Common Stock into shares of TSAT Series A Common Stock or to
transfer any of its shares of TSAT Common Stock, except to a permitted
transferee (as specified in the TSAT Stockholders Agreement) of such TSAT
Stockholder that becomes a party to the TSAT Stockholders Agreement as a TSAT
Stockholder and to the Stockholders Agreement as a potential Specified Class B
Stockholder. Each TSAT Stockholder has also agreed, until the earliest to occur
of (i) consummation of the TSAT Merger, (ii) consummation of the transactions
contemplated by the TSAT Tempo Agreement and (iii) termination of the TSAT
Tempo Agreement, to vote or act by written consent with respect to (or cause to
be voted or acted upon by written consent) all shares of TSAT Common Stock held
of record or beneficially owned by such TSAT Stockholder and all shares of TSAT
Common Stock as to which such TSAT Stockholder has voting control, in favor of
the TSAT Tempo Agreement and the transactions contemplated thereby. "TSAT
Stockholder" means (i) Dr. Malone for so long as he holds of record or
beneficially owns or has voting control of any TSAT Common Stock (or has an
affiliate
16
<PAGE>
holding TSAT Common Stock pursuant to specified provisions of the TSAT
Stockholders Agreement) and (ii) each permitted transferee (as specified in the
TSAT Stockholders Agreement) that acquires record or beneficial ownership or
voting control of any TSAT Common Stock from a TSAT Stockholder, as long as
such permitted transferee holds of record, beneficially owns or has voting
control of any TSAT Common Stock; provided that such permitted transferee
becomes a party to the TSAT Stockholders Agreement in accordance therewith. See
"RELATED AGREEMENTS--TSAT Stockholders Agreement" and Appendix D to this Proxy
Statement/ Prospectus, which contains the complete text of the TSAT
Stockholders Agreement.
FINANCING IN CONNECTION WITH THE RESTRUCTURING TRANSACTION
If the Restructuring Transaction had occurred on September 30, 1997, the
total amount of funds required to be paid by New PRIMESTAR to the Restructuring
Parties other than TSAT as cash consideration (or assumption of debt in lieu of
cash consideration) in the Restructuring Transaction would have been
approximately $464 million, comprising (i) approximately $136 million in cash
to be paid in the aggregate to Cox and MediaOne and (ii) approximately $328
million of debt to be assumed by New PRIMESTAR in the aggregate in respect of
TWE and Newhouse (collectively), Comcast and GE Americom. In addition, New
PRIMESTAR would have assumed indebtedness of TSAT and the Partnership
aggregating approximately $921 million if the Restructuring Transaction had
occurred on September 30, 1997. See "RISK FACTORS--Substantial Leverage;
Additional Indebtedness Likely" and "DESCRIPTION OF CERTAIN INDEBTEDNESS OF
TSAT." The actual cash consideration to be paid to, or debt to be assumed in
respect of, such parties will be based on, among other things, subscriber
counts and TSAT's debt balance at the Closing Date. See "THE RESTRUCTURING
AGREEMENT--Consideration to be Received in the Restructuring Transaction."
In order to fund such cash consideration and repay the debt to be assumed by
New PRIMESTAR from the Restructuring Parties other than TSAT, New PRIMESTAR
intends (i) to assume the amended and/or refinanced senior secured reducing
revolving credit facility of TSAT that, subject to TSAT's compliance with
certain covenants and conditions, currently provides for aggregate commitments
of up to $750 million (the "Bank Credit Facility"), (ii) to enter into a credit
facility with one or more investment banks or other financial institutions (the
"Interim Credit Facility"), and (iii) to seek additional long-term debt
financing through an offering (the "New Notes Offering") of senior subordinated
promissory notes (the "New Notes"), as soon as practicable after the Closing,
subject to market conditions and other factors. No assurances can be given that
the Interim Credit Facility, or the amendment and/or refinancing of the Bank
Credit Facility, will be completed successfully, or that the proceeds from such
facilities will be sufficient for New PRIMESTAR to fund such cash
consideration, and to repay the debt to be assumed by New PRIMESTAR from the
Restructuring Parties other than TSAT in full in accordance with the
Restructuring Agreement. No assurance can be given that the New Notes Offering
will be completed successfully, or that the proceeds from the New Notes
Offering will be sufficient to repay all amounts borrowed or assumed by New
PRIMESTAR under the Interim Credit Facility and the amended and/or refinanced
Bank Credit Facility. If New PRIMESTAR is unable to repay such amounts with the
proceeds of the New Notes Offering, New PRIMESTAR could be adversely affected.
See "RISK FACTORS--Substantial Leverage; Additional Indebtedness Likely" and
"THE ROLL-UP PLAN--Financing in Connection with the Restructuring Transaction."
THE TSAT NONEMPLOYEE DIRECTOR PLAN
At the Meeting, the holders of TSAT Common Stock will also be asked to
approve and adopt the TSAT Nonemployee Director Plan, which allows for the
issuance of up to 500,000 shares of TSAT Common Stock to nonemployee directors
of TSAT, and to approve all grants thereunder. The TSAT Board believes that the
TSAT Nonemployee Director Plan is in the best interests of TSAT and its
stockholders because it will, among other things, assist TSAT in retaining its
independent directors prior to the consummation of the TSAT Merger. Approval of
the TSAT Nonemployee Director Plan Proposal is not a condition to consummation
of the Roll-up Plan or any part thereof. See "PROPOSAL TO APPROVE THE TSAT 1997
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN" and Appendix J to this Proxy
Statement/Prospectus, which contains the complete text of the TSAT Nonemployee
Director Plan.
17
<PAGE>
RISK FACTORS
In reviewing this Proxy Statement/Prospectus, TSAT stockholders should
carefully consider the matters described under the heading "RISK FACTORS"
beginning on page 29.
MARKET PRICE DATA
TSAT. The TSAT Series A Common Stock and the TSAT Series B Common Stock trade
on the National Market tier of The Nasdaq Stock Market under the symbols
"TSATA" and "TSATB," respectively. The following table sets forth the range of
high and low sale prices reported on the NASDAQ/NM for the periods indicated
for the TSAT Series A Common Stock and the TSAT Series B Common Stock. The
prices have been rounded up to the nearest eighth and do not include retail
markups, markdowns or commissions.
TSAT SERIES A COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year ended December 31, 1996:
Fourth Quarter (beginning December 5, 1996*).................... 13 1/8 9 7/8
Year ended December 31, 1997:
First Quarter................................................... 10 1/2 6 7/8
Second Quarter.................................................. 10 3/4 5 3/4
Third Quarter................................................... 9 1/4 6 3/8
Fourth Quarter.................................................. 8 3/4 5 3/4
TSAT SERIES B COMMON STOCK
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year ended December 31, 1996:
Fourth Quarter (beginning December 5, 1996*).................... 13 10
Year ended December 31, 1997:
First Quarter................................................... 11 7 1/2
Second Quarter.................................................. 11 3/8 6 5/8
Third Quarter................................................... 9 1/2 6 1/2
Fourth Quarter.................................................. 8 5 3/4
</TABLE>
- --------
* The first day of trading following the TSAT Spin-off.
On June 10, 1997, the last full trading day prior to the public announcement
of the Roll-up Plan, the last reported sale prices on the NASDAQ/NM for shares
of TSAT Series A Common Stock and TSAT Series B Common Stock were $9 and $9 1/8
per share, respectively. On February 6, 1998, the last full trading day before
the date of this Proxy Statement/Prospectus, the last reported sale prices on
the NASDAQ/NM for shares of TSAT Series A Common Stock and TSAT Series B Common
Stock were $6 and $5 1/4 per share, respectively. The foregoing prices have
been rounded up to the nearest eighth.
New PRIMESTAR. There is currently no public market for any class or series of
New PRIMESTAR capital stock. It is anticipated that, if the TSAT Merger is
consummated, the New PRIMESTAR Class A Common Stock and the New PRIMESTAR Class
B Common Stock will trade on the NASDAQ/NM under the symbols "PSTRA" and
"PSTRB," respectively.
18
<PAGE>
DIVIDEND POLICY
TSAT has never declared or paid cash dividends on TSAT Common Stock. TSAT
anticipates that no cash dividends will be paid on the TSAT Common Stock in the
foreseeable future. Payment of cash dividends on the TSAT Common Stock, if any,
in the future will be determined by the TSAT Board in light of TSAT's earnings,
financial condition and other relevant considerations. Following the
Restructuring Transaction and prior to the TSAT Merger, TSAT will be a holding
company and, as such, TSAT's ability to pay cash dividends will be dependent on
its ability to receive cash dividends and advances from its subsidiaries and
New PRIMESTAR. Moreover, during the term of the TSAT Merger Agreement, TSAT
will be subject to the covenants provided for therein, including TSAT's
agreement not to, and to cause each of its subsidiaries not to, declare, set
aside or pay any dividend with respect to any shares of its capital stock.
Any future payments of dividends by New PRIMESTAR will depend on decisions
that will be made by the New PRIMESTAR Board from time to time in the exercise
of its business judgment, taking into account, among other things, New
PRIMESTAR's results of operations and financial condition, any then existing or
proposed commitments by New PRIMESTAR for the use of available funds, and New
PRIMESTAR's obligations with respect to the holders of any then outstanding
indebtedness or preferred stock. TSAT anticipates that New PRIMESTAR will
retain future earnings for use in its business and will not pay any dividends
on New PRIMESTAR Common Stock in the foreseeable future.
On December 31, 1996, TSAT entered into the Bank Credit Facility, which
provides for aggregate commitments of up to $750 million, subject to TSAT's
compliance with certain covenants and conditions. TSAT expects that the Bank
Credit Facility will be amended and/or refinanced in connection with the
Closing of the Restructuring Transaction. In February 1997, TSAT issued $200
million aggregate principal amount of 10 7/8% Senior Subordinated Notes (the
"Senior Subordinated Notes") and $275 million aggregate principal amount at
maturity of 12 1/4% Senior Subordinated Discount Notes (the "Senior
Subordinated Discount Notes" and, together with the Senior Subordinated Notes,
the "Notes"), under indentures dated as of February 20, 1997 (the
"Indentures"), between TSAT and The Bank of New York, as trustee. The Bank
Credit Facility and the Indentures, both of which will be assumed by New
PRIMESTAR in connection with the Restructuring Transaction, contain, and the
New Notes and the Interim Credit Facility are expected to contain, restrictions
with respect to the payment of dividends. See "DESCRIPTION OF CERTAIN
INDEBTEDNESS OF TSAT." In addition, if the ASkyB Transaction is consummated,
the holders of the New PRIMESTAR Convertible Preferred Stock and the New
PRIMESTAR Convertible Subordinated Notes will be entitled to receive all
cumulative dividend payments and interest payments payable under such
securities before any dividends can be paid on the New PRIMESTAR Common Stock.
See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Preferred Stock--Convertible
Preferred Stock." In addition, New PRIMESTAR may in the future issue additional
debt securities or preferred stock or enter into loan agreements or other
agreements that restrict the payment of dividends on the New PRIMESTAR Common
Stock. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" of TSAT included elsewhere herein, "THE ASKYB
TRANSACTION" and "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK."
19
<PAGE>
CERTAIN COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative data related to book value
and loss per common share (i) on a historical basis for TSAT, (ii) on a pro
forma basis for TSAT after giving effect to the Restructuring Transaction,
(iii) on a pro forma basis for New PRIMESTAR after giving effect to the
indicated transactions and (iv) on a pro forma equivalent basis for TSAT after
giving effect to the indicated transactions. The pro forma information shown is
derived from the Primary and Supplemental Condensed Pro Forma Combined
Financial Statements of New PRIMESTAR included elsewhere herein, which give
effect to the Restructuring Transaction, the TSAT Merger and the ASkyB
Transaction as if such events had occurred as of September 30, 1997 with
respect to the pro forma balance sheet data. The pro forma operating data give
effect to the Restructuring Transaction, the TSAT Merger and the ASkyB
Transaction as if such events had occurred as of January 1, 1996. The
information shown below should be read in conjunction with the Primary and
Supplemental Condensed Pro Forma Combined Financial Statements and notes
thereto of New PRIMESTAR, and the historical financial statements and notes
thereto of TSAT, included elsewhere herein. The following information also
should be read in conjunction with the description of the New PRIMESTAR Common
Stock set forth under "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common
Stock." TSAT did not pay any cash dividends on the TSAT Common Stock during the
nine months ended September 30, 1997 or during the year ended December 31,
1996.
<TABLE>
<CAPTION>
ROLL-UP PLAN
----------------------------------------------------
PRO FORMA FOR
RESTRUCTURING TRANSACTION
AND TSAT MERGER
----------------------------------
TSAT
TSAT PRO FORMA
---------------------- FOR RESTRUCTURING NEW TSAT
HISTORICAL PRO FORMA TRANSACTION PRIMESTAR EQUIVALENT(1)
---------- --------- ----------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Book value per
common share as
of September
30, 1997....... $ 3.11 $ -- $ 6.48 $ 6.08(2) $2.07
Net loss
attributable to
common
stockholders
per common and
common
equivalent
share:
Nine months
ended
September 30,
1997........... $(2.50)(3) $ -- $(1.95)(3) $(1.83)(4) $ (.62)
Year ended
December 31,
1996........... $ -- $(2.11)(5) $(2.02)(5) $(1.89)(4) $ (.64)
<CAPTION>
PRO FORMA FOR
RESTRUCTURING TRANSACTION,
TSAT MERGER AND
ASKYB TRANSACTION
-------------------------------------
NEW TSAT
PRIMESTAR EQUIVALENT(1)
------------------- -----------------
<S> <C> <C>
Book value per
common share as
of September
30, 1997....... $ 6.08 (2) $ 2.07
Net loss
attributable to
common
stockholders
per common and
common
equivalent
share:
Nine months
ended
September 30,
1997........... $(2.00)(4) $ (.68)
Year ended
December 31,
1996........... $(2.12)(4) $ (.72)
</TABLE>
- --------
(1) TSAT pro forma equivalents are determined by multiplying the New PRIMESTAR
pro forma amounts by the approximate 34% interest that holders of TSAT
Common Stock would have had in New PRIMESTAR Common Stock if the indicated
transactions had been consummated on September 30, 1997.
(2) The New PRIMESTAR pro forma book value per share data is based upon 197.5
million shares of New PRIMESTAR Common Stock. Such amount represents the
number of shares that would have been outstanding if the indicated
transactions had occurred on September 30, 1997.
(3) The historical net loss per share and the pro forma net loss per share for
the Restructuring Transaction is based on 66,642,359 weighted average
shares of TSAT Common Stock outstanding during the nine months ended
September 30, 1997.
(4) The New PRIMESTAR pro forma net loss per share data is based upon 197.5
million weighted average shares of New PRIMESTAR Common Stock. Such
weighted average share amount assumes that the estimated number of shares
of New PRIMESTAR Common Stock that would have been issued if the indicated
transactions had occurred on September 30, 1997, had been outstanding since
January 1, 1996.
(5) On the TSAT Spin-off Date, TSAT issued 66,407,608 shares of TSAT Common
Stock. The pro forma net loss per share assumes 66,408,025 weighted average
shares of TSAT Common Stock were issued and outstanding during the year
ended December 31, 1996.
20
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA--HISTORICAL
The following table presents summary financial data relating to (a) the
historical financial position as of September 30, 1997 of (i) TSAT, (ii) the
PRIMESTAR(R) distribution businesses of the other Distributors (Time Warner
Satellite Services Group, a combination of the DBS operations conducted by TWE
and the Time Warner Entertainment--Advance/Newhouse Partnership ("TWEAN"), a
joint venture between TWE and Newhouse (collectively, "TWSSI"), Cox
Communications, Inc.--Direct Broadcast Satellite Business ("Cox Satellite"),
Comcast Satellite and MediaOne, Inc.--Direct Broadcast Satellite Business
("MediaOne Satellite")) and (iii) the Partnership, and (b) the historical
results of operations of TSAT, TWSSI, Cox Satellite, Comcast Satellite,
MediaOne Satellite and the Partnership for the nine months ended September 30,
1997 and the year ended December 31, 1996. The historical financial data for
the year ended December 31, 1996 has been derived from the respective audited
financial statements of TSAT, TWSSI, Cox Satellite, Comcast Satellite, MediaOne
Satellite and the Partnership. The historical data as of, and for the nine
months ended, September 30, 1997 has been derived from unaudited information.
The following information should be read in conjunction with the "SELECTED
FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" of TSAT, TWSSI, Cox Satellite, Comcast
Satellite, MediaOne Satellite and the Partnership and is qualified in its
entirety by reference to the Primary and Supplemental Condensed Pro Forma
Combined Financial Statements and notes thereto of New PRIMESTAR, and the
historical financial statements and notes thereto of TSAT, TWSSI, Cox
Satellite, Comcast Satellite, MediaOne Satellite and the Partnership, included
elsewhere herein. Such historical financial statements present historical
financial information with respect to TSAT, the Partnership and the PRIMESTAR
Assets and Partnership Interests of each of TWE, Newhouse, Comcast, Cox and
MediaOne, which assets, together with the Partnership Interest indirectly held
by GE, will be consolidated into New PRIMESTAR pursuant to the Restructuring
Transaction.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------
COX COMCAST MEDIAONE
TSAT TWSSI SATELLITE SATELLITE SATELLITE PARTNERSHIP
--------- -------- --------- --------- --------- -----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OPERATING DATA
Revenue(1).............. $ 406,072 276,158 78,773 81,057 77,955 450,973
Operating, selling,
general
and administrative..... (351,405) (226,894) (70,732) (71,826) (65,591) (480,302)
Depreciation and
amortization........... (177,415) (48,724) (31,041) (21,248) (18,875) (2,856)
--------- -------- ------- ------- ------- --------
Operating income
(loss)................. (122,748) 540 (23,000) (12,017) (6,511) (32,185)
Interest expense........ (33,965) (20,637) (8,034) (11,481) (4,591) (13,130)
Share of losses of the
Partnership............ (11,610) (11,424) (4,259) (4,352) (4,886) --
Other, net.............. 1,779 (1,097) (388) 232 (123) 1,453
--------- -------- ------- ------- ------- --------
Loss before income
taxes.................. (166,544) (32,618) (35,681) (27,618) (16,111) (43,862)
Income tax benefit...... -- -- 12,621 -- 6,047 --
--------- -------- ------- ------- ------- --------
Net loss................ $(166,544) (32,618) (23,060) (27,618) (10,064) (43,862)
========= ======== ======= ======= ======= ========
OTHER DATA
Operating Cash Flow
(deficit)(2)........... $ 59,274 49,264 8,041 9,231 12,364 (29,329)
Capital expenditures.... $ 156,510 100,348 47,042 57,916 39,467 19,309
</TABLE>
(continued)
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
COX COMCAST MEDIAONE
TSAT TWSSI SATELLITE SATELLITE SATELLITE PARTNERSHIP
---------- -------- --------- --------- --------- -----------
AMOUNTS IN THOUSANDS
SUMMARY OPERATING DATA
<S> <C> <C> <C> <C> <C> <C>
Revenue(1)...................................... $ 417,461 277,083 68,291 65,574 68,879 412,999
Operating, selling, general and administrative.. (410,390) (241,566) (66,146) (62,021) (60,107) (426,561)
Depreciation and amortization................... (191,355) (45,449) (21,704) (17,956) (14,740) (3,261)
---------- -------- ------- ------- ------- --------
Operating loss................................. (184,284) (9,932) (19,559) (14,403) (5,968) (16,823)
Interest expense................................ (2,023) (20,921) (6,898) (8,442) (11,914) (737)
Share of losses of the Partnership.............. (3,275) (5,314) (1,397) (1,647) (1,830) --
Other, net...................................... 3,641 (1,054) (151) 126 (87) 1,858
---------- -------- ------- ------- ------- --------
Loss before income taxes....................... (185,941) (37,221) (28,005) (24,366) (19,799) (15,702)
Income tax benefit.............................. 45,937 -- 9,791 -- 7,842 --
---------- -------- ------- ------- ------- --------
Net loss....................................... $ (140,004) (37,221) (18,214) (24,366) (11,957) (15,702)
========== ======== ======= ======= ======= ========
<CAPTION>
OTHER DATA
<S> <C> <C> <C> <C> <C> <C>
Operating Cash Flow (deficit)(2)................ $ 6,625 35,517 2,145 3,553 8,772 (13,562)
Capital expenditures............................ $ 401,406 169,793 70,522 68,008 73,602 116,345
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------
COX COMCAST MEDIAONE
TSAT TWSSI SATELLITE SATELLITE SATELLITE PARTNERSHIP
---------- -------- --------- --------- --------- -----------
AMOUNTS IN THOUSANDS
SUMMARY BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C> <C>
Cash, receivables and prepaids.................. $ 41,257 17,715 9,078 6,824 38,574 160,013
Investment in, and related advances to the Part-
nership........................................ 19,952 28,494 10,214 9,122 31,984 --
Property and equipment, net of accumulated de-
preciation:
Satellites.................................... 463,133 -- -- -- -- 543,070
Other......................................... 636,225 447,898 114,823 107,929 154,398 17,073
---------- -------- ------- ------- ------- --------
1,099,358 447,898 114,823 107,929 154,398 560,143
Intangible assets............................... -- -- -- -- 31,932 --
Other assets.................................... 28,479 93 8,572 25,145 349 96
---------- -------- ------- ------- ------- --------
Total assets.................................. $1,189,046 494,200 142,687 149,020 257,237 720,252
========== ======== ======= ======= ======= ========
Payables, accruals and other operating liabili-
ties........................................... $ 152,479 74,313 17,554 41,891 46,202 81,540
Due to Partnership.............................. 463,133 -- -- -- -- --
Debt............................................ 365,760 513,104 199,348 174,436 209,882 555,000
Deferred income taxes........................... -- -- (1,956) -- 13,417 --
---------- -------- ------- ------- ------- --------
Total liabilities............................. 981,372 587,417 214,946 216,327 269,501 636,540
Equity (deficit)................................ 207,674 (93,217) (72,259) (67,307) (12,264) 83,712
---------- -------- ------- ------- ------- --------
Total liabilities and equity.................. $1,189,046 494,200 142,687 149,020 257,237 720,252
========== ======== ======= ======= ======= ========
</TABLE>
- --------
(1) Revenue of TSAT, TWSSI, Cox Satellite, Comcast Satellite and MediaOne
Satellite is primarily comprised of installation and monthly service
revenue received from subscribers to the PRIMESTAR(R) service. The
Partnership derives its revenue by providing satellite capacity and
programming, national marketing and distribution services to the
Distributors.
(2) Operating Cash Flow (deficit), which represents operating income (loss)
before depreciation, amortization and stock compensation, is a commonly
used measure of value and borrowing capacity within the direct broadcast
satellite industry, and is not intended to be a measure of performance in
accordance with generally accepted accounting principles and should not be
relied on as such. Furthermore, Operating Cash Flow (deficit) may not be
comparable to similarly titled measures reported by other companies.
Operating Cash Flow (deficit) should be viewed in conjunction with cash
flows measured in accordance with generally accepted accounting principles.
For information concerning such cash flows, see "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity
and Capital Resources" of TSAT, TWSSI, Cox Satellite, Comcast Satellite,
MediaOne Satellite and the Partnership, and the statements of cash flows
included in the historical financial statements of TSAT, TWSSI, Cox
Satellite, Comcast Satellite, MediaOne Satellite and the Partnership.
22
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA--PRO FORMA
The following table presents summary financial data relating to TSAT's and
New PRIMESTAR's unaudited pro forma combined financial position as of September
30, 1997 and TSAT's and New PRIMESTAR's unaudited pro forma combined results of
operations for the nine months ended September 30, 1997 and the year ended
December 31, 1996. The unaudited pro forma summary operating data gives effect
to the indicated transactions as of January 1, 1996. The unaudited pro forma
balance sheet data gives effect to the indicated transactions as of September
30, 1997. The unaudited pro forma combined data does not purport to be
indicative of the results of operations or financial position that may be
obtained in the future or that actually would have been obtained had such
transactions occurred on such dates. The following information should be read
in conjunction with the "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of TSAT, TWSSI,
Cox Satellite, Comcast Satellite, MediaOne Satellite and the Partnership and is
qualified in its entirety by reference to the Primary and Supplemental
Condensed Pro Forma Combined Financial Statements and notes thereto of New
PRIMESTAR, and the historical financial statements and notes thereto of TSAT,
TWSSI, Cox Satellite, Comcast Satellite, MediaOne Satellite and the
Partnership, included elsewhere herein. Such historical financial statements
present historical financial information with respect to TSAT, the Partnership
and the PRIMESTAR Assets and Partnership Interests of each of TWE, Newhouse,
Comcast, Cox and MediaOne, which assets, together with the Partnership Interest
indirectly held by GE, will be consolidated into New PRIMESTAR pursuant to the
Restructuring Transaction.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------
ROLL-UP PLAN
-------------------------------------------------- NEW PRIMESTAR
NEW PRIMESTAR PRO FORMA FOR
TSAT NEW PRIMESTAR PRO FORMA RESTRUCTURING
PRO FORMA PRO FORMA FOR FOR RESTRUCTURING TRANSACTION
FOR RESTRUCTURING RESTRUCTURING TRANSACTION AND TSAT MERGER AND
TRANSACTION(1) TRANSACTION(2) TSAT MERGER(3) ASKYB TRANSACTION(3)
----------------- -------------- ----------------- --------------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA
Revenue................. $ -- 920,015 920,015 920,015
Operating, selling,
general
and administrative..... -- (809,289) (809,289) (809,289)
Depreciation and
amortization........... -- (442,179) (442,179) (442,179)
--------- -------- -------- --------
Operating loss.......... -- (331,453) (331,453) (331,453)
Interest expense........ -- (83,375) (83,375) (102,736)
Shares of losses of New
PRIMESTAR.............. (129,958) -- -- --
Other, net.............. -- 1,856 1,856 1,856
--------- -------- -------- --------
Loss before income
taxes.................. (129,958) (412,972) (412,972) (432,333)
Income tax benefit...... -- 51,977 51,977 59,721
--------- -------- -------- --------
Net loss................ (129,958) (360,995) (360,995) (372,612)
Dividend requirement on
preferred stock........ -- -- -- (22,500)
--------- -------- -------- --------
Net loss attributable to
common stockholders.... $(129,958) (360,995) (360,995) (395,112)
========= ======== ======== ========
Pro forma net loss per
share.................. $ (1.95) (1.83) (2.00)
========= ======== ========
</TABLE>
(continued)
23
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
ROLL-UP PLAN
-------------------------------------------
NEW NEW
PRIMESTAR PRIMESTAR
NEW PRO FORMA FOR PRO FORMA FOR
TSAT PRIMESTAR RESTRUCTURING RESTRUCTURING
PRO FORMA FOR PRO FORMA FOR TRANSACTION TRANSACTION, TSAT
RESTRUCTURING RESTRUCTURING AND TSAT MERGER AND ASKYB
TRANSACTION(1) TRANSACTION(2) MERGER(3) TRANSACTION(3)
-------------- -------------- ------------- -----------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
SUMMARY OPERATING DATA
Revenue................. $ -- 897,288 897,288 897,288
Operating, selling,
general
and administrative..... -- (847,885) (847,885) (847,885)
Depreciation and
amortization........... -- (520,212) (520,212) (520,212)
--------- -------- -------- --------
Operating loss......... -- (470,809) (470,809) (470,809)
Interest expense........ -- (51,134) (51,134) (76,949)
Share of losses of New
PRIMESTAR.............. (134,170) -- -- --
Other, net.............. -- 4,333 4,333 4,333
--------- -------- -------- --------
Loss before income
taxes.................. (134,170) (517,610) (517,610) (543,425)
Income tax benefit...... -- 144,915 144,915 155,241
--------- -------- -------- --------
Net loss................ (134,170) (372,695) (372,695) (388,184)
Dividend requirement on
preferred stock........ -- -- -- (30,000)
--------- -------- -------- --------
Net loss attributable to
common stockholders.... $(134,170) (372,695) (372,695) (418,184)
========= ======== ======== ========
Pro forma net loss per
share.................. $ (2.02) (1.89) (2.12)
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------------------
ROLL-UP PLAN
-------------------------------------------
NEW NEW
PRIMESTAR PRIMESTAR
NEW PRO FORMA FOR PRO FORMA FOR
TSAT PRIMESTAR RESTRUCTURING RESTRUCTURING
PRO FORMA FOR PRO FORMA FOR TRANSACTION TRANSACTION, TSAT
RESTRUCTURING RESTRUCTURING AND TSAT MERGER AND ASKYB
TRANSACTION(1) TRANSACTION(2) MERGER(3) TRANSACTION(3)
-------------- -------------- ------------- -----------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA
Cash, receivables and
prepaids............... $ -- 133,062 133,062 133,062
Investment in, and
related advances to the
Partnership............ -- -- -- --
Investment in New
PRIMESTAR.............. 432,086 -- -- --
Property and equipment,
net of accumulated
depreciation:
Satellites............ 463,133 543,070 543,070 975,770
Other................. -- 1,220,061 1,220,061 1,220,061
-------- --------- --------- ---------
463,133 1,763,131 1,763,131 2,195,831
Intangible assets....... -- 1,196,338 1,196,338 1,879,938
Other assets............ -- 29,760 29,760 29,760
-------- --------- --------- ---------
Total assets........... $895,219 3,122,291 3,122,291 4,238,591
======== ========= ========= =========
Payables, accruals and
other
operating liabilities.. $ -- 287,198 287,198 287,198
Due to the Partnership.. 463,133 -- -- --
Debt.................... -- 1,404,496 1,404,496 1,920,796
Deferred income taxes... -- 230,360 230,360 230,360
-------- --------- --------- ---------
Total liabilities...... 463,133 1,922,054 1,922,054 2,438,354
Mandatorily redeemable
preferred stock........ -- -- -- 600,000
Equity.................. 432,086 1,200,237 1,200,237 1,200,237
-------- --------- --------- ---------
Total liabilities and
equity................ $895,219 3,122,291 3,122,291 4,238,591
======== ========= ========= =========
</TABLE>
24
<PAGE>
- --------
(1) Represents the pro forma financial condition and results of operations of
TSAT after giving effect to the TSAT Asset Transfer and other elements of
the Restructuring Transaction on the dates indicated in the headnote to
this table. For additional information concerning the pro forma
adjustments, see the Primary Condensed Pro Forma Combined Financial
Statements of New PRIMESTAR, included elsewhere herein.
(2) Represents a combination of the financial information of TSAT, TWSSI, Cox
Satellite, Comcast Satellite, MediaOne, the Partnership, and the
Partnership Interest held by GE (after eliminating all significant inter-
entity transactions) as affected by the assumed consummation of the
Restructuring Transaction on the dates indicated in the headnote to this
table. For additional information concerning the pro forma adjustments, see
the Supplemental Condensed Pro Forma Combined Financial Statements of New
PRIMESTAR, included elsewhere herein.
(3) Represents the pro forma financial condition and results of operations of
New PRIMESTAR after giving effect to the indicated transactions on the
dates indicated in the headnote to this table. For additional information
concerning the pro forma adjustments, see the Primary Condensed Pro Forma
Combined Financial Statements of New PRIMESTAR, included elsewhere herein.
25
<PAGE>
CORPORATE ORGANIZATION
The diagrams set forth below illustrate the ownership and organization of New
PRIMESTAR and TSAT both prior to the Roll-up Plan and following consummation of
the Restructuring Transaction, and the ownership and organization of New
PRIMESTAR following consummation of the TSAT Merger.
[GRAPHIC]
26
<PAGE>
OWNERSHIP AND ORGANIZATION AFTER THE RESTRUCTURING TRANSACTION
[GRAPHIC]
27
<PAGE>
OWNERSHIP AND ORGANIZATION AFTER THE TSAT MERGER
[GRAPHIC APPEARS HERE]
28
<PAGE>
RISK FACTORS
The following factors relating to TSAT and/or New PRIMESTAR, among others,
should be considered carefully by TSAT stockholders in considering whether to
vote in favor of the Roll-up Proposal. Because certain of these factors
represent risks associated with an investment in TSAT, and may continue to
apply whether or not the Restructuring Transaction and the TSAT Merger are
consummated, the term "TSAT/New PRIMESTAR" shall be used in this section, as
applicable, to indicate the entities subject to such risks.
POTENTIAL ADVERSE EFFECT ON NEW PRIMESTAR COMMON STOCK SHARE PRICE
Upon consummation of the Restructuring Transaction, TSAT will become a
stockholder of New PRIMESTAR as a result of the TSAT Asset Transfer, and each
of the Class C Stockholders and GE Americom will also become stockholders of
New PRIMESTAR as a result of the Mergers and the other Asset Transfers. Upon
consummation of the TSAT Merger, TSAT stockholders will become stockholders of
New PRIMESTAR, and the shares of New PRIMESTAR Common Stock held by TSAT will
be canceled.
As a result of the Restructuring Transaction, the manner in which TSAT, the
Class C Stockholders and GE Americom hold their respective investment in the
Partnership and, in the case of TSAT and the Class C Stockholders, their
respective investment in the PRIMESTAR(R) distribution business will be
changed. Currently such investments take the form of (i) in the case of TSAT,
the TSAT Business, and (ii) in the case of the Class C Stockholders,
Partnership Interests and PRIMESTAR Assets. Such assets have limited liquidity
and any proposed transfers of such assets may be subject to restriction under
the Partnership Agreement. However, pursuant to the Restructuring Transaction,
these investments will be converted into (i) cash (or, in the case of TSAT,
Newhouse, TWE, Comcast and GE Americom, an assumption of indebtedness by New
PRIMESTAR), (ii) shares of New PRIMESTAR Class A Common Stock, (iii) in the
case of TSAT only, shares of New PRIMESTAR Class B Common Stock and (iv)
except in the case of TSAT and GE Americom, shares of New PRIMESTAR Class C
Common Stock. If the TSAT Merger is consummated, shares of New PRIMESTAR Class
A Common Stock will be freely transferable, subject to the requirements of the
securities laws, and the Class C Stockholders will obtain registration rights
in connection with the Restructuring Transaction. Accordingly, the Class C
Stockholders will have a much greater ability to dispose of all or a portion
of their investment. Sales of substantial amounts of New PRIMESTAR Class A
Common Stock by the former holders of Partnership Interests and PRIMESTAR
Assets following completion of the TSAT Merger, or the perception that such
sales could occur, could adversely affect the prevailing market price for New
PRIMESTAR Class A Common Stock.
UNCERTAINTY REGARDING TRADING PRICES OF NEW PRIMESTAR COMMON STOCK
If the TSAT Merger is consummated, holders of TSAT Series A Common Stock and
TSAT Series B Common Stock on the TSAT Closing Date will receive shares of New
PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock,
respectively, in exchange for their shares of TSAT Common Stock. Prior to the
TSAT Merger, there will have been no public market for the New PRIMESTAR
Common Stock (unless New PRIMESTAR shall have theretofore consummated an
initial public offering of its common stock). It is anticipated that the New
PRIMESTAR Class A Common Stock and the New PRIMESTAR Class B Common Stock will
trade on the NASDAQ/NM under the symbols "PSTRA" and "PSTRB," respectively.
However, there can be no assurance that an active public market will develop
or be sustained before or after the TSAT Merger, and there can be no assurance
as to whether the market value of the shares of New PRIMESTAR Class A Common
Stock and New PRIMESTAR Class B Common Stock to be received by TSAT
stockholders in exchange for their shares of TSAT Common Stock will be less
than, equal to or greater than the market value of shares of TSAT Common Stock
prior to the consummation of the TSAT Merger.
DILUTION OF VOTING RIGHTS
Consummation of the TSAT Merger will cause a significant dilution of voting
rights to the existing stockholders of TSAT. If the Restructuring Transaction
and the TSAT Merger had been consummated on
29
<PAGE>
September 30, 1997, current TSAT stockholders would have owned in the
aggregate approximately 34% of the outstanding shares of common equity of New
PRIMESTAR, representing approximately 36% of the total voting power of the
shares of New PRIMESTAR Common Stock that would have been outstanding on such
date, and TWE and Newhouse (collectively), Comcast, MediaOne, Cox and GE
Americom would have owned approximately 32%, 10%, 10%, 9% and 5%,
respectively, of New PRIMESTAR's outstanding common equity, representing
approximately 33%, 10%, 10%, 9% and 2%, respectively, of the total voting
power of the shares of New PRIMESTAR Common Stock that would have been
outstanding on such date, subject in each case to adjustments based on closing
subscriber counts and other factors. See "THE RESTRUCTURING AGREEMENT--
Consideration to be Received in the Restructuring Transaction" and "THE TSAT
MERGER AGREEMENT--Consideration to be Received in the TSAT Merger."
LACK OF OPERATING HISTORY OF NEW PRIMESTAR
New PRIMESTAR has had no operating history as a combined operating entity.
Since 1990, the business of operating the PRIMESTAR(R) satellite television
service has been owned and operated by the Partnership, and the businesses of
distributing PRIMESTAR(R) in various territories have been separately operated
by the Distributors. Following the Restructuring Transaction, the management
of New PRIMESTAR will have to integrate such separate businesses and to
develop and implement new business plans, policies, strategies and procedures
to operate the PRIMESTAR(R) business on a consolidated basis. Certain of such
plans, policies, strategies and procedures may be different from, or
additional to, the plans, policies, strategies and procedures utilized by the
Partnership and the Distributors separately prior to consummation of the
Restructuring Transaction. Any material delay in developing and implementing
such plans, policies, strategies or procedures, or any other material
difficulties that may be experienced in connection with the integration of the
PRIMESTAR(R) businesses, could have a material adverse effect on the
operations and results of operations of New PRIMESTAR.
HISTORY OF LOSSES OF TSAT AND OTHER RESTRUCTURING PARTIES
TSAT has had a limited history as a separate operating entity. From 1990 to
1995, TCI's business of distributing PRIMESTAR(R) was operated by TCIC, the
subsidiary of TCI that owns and operates cable systems in the U.S., and during
this period of time, such business sustained significant operating losses.
TSAT has similarly sustained significant losses in recent periods. TSAT's
operating losses were $122,748,000, $81,266,000 $184,284,000, $60,702,000 and
$9,144,000 for the nine months ended September 30, 1997 and 1996, and the
years ended December 31, 1996, 1995 and 1994, respectively, and TSAT's net
losses in such periods were $166,544,000, $56,594,000, $140,004,000,
$47,507,000 and $13,688,000, respectively. Each of the other parties to the
Restructuring Transaction have also sustained losses in their PRIMESTAR(R)-
related businesses. On a pro forma basis, after giving effect to the
Restructuring Transaction, the TSAT Merger and the ASkyB Transaction, New
PRIMESTAR would have had operating losses of $331,453,000 and $470,809,000,
for the nine months ended September 30 1997 and the year ended December 31,
1996, respectively, and net losses attributable to common stockholders in such
periods of $395,112,000 and $418,184,000, respectively. See the Primary and
Supplemental Condensed Pro Forma Combined Financial Statements and notes
thereto of New PRIMESTAR, included elsewhere in this Proxy
Statement/Prospectus. Improvements in results of operations of TSAT/New
PRIMESTAR are largely dependent upon its ability to increase its customer base
while maintaining its price structure, reducing the rate at which subscribers
terminate their PRIMESTAR(R) service ("churn") and effectively managing its
costs. No assurance can be given that any such improvements will occur. In
addition, TSAT incurs, and New PRIMESTAR will incur, significant sales
commission and installation costs when its customers initially subscribe to
the service. Management expects that the costs of acquiring subscribers will
continue to be significant so long as a rapid growth rate is maintained. The
high cost of obtaining new subscribers also magnifies the negative effects of
subscriber churn. See "--Ability to Manage Growth; Subscriber Churn."
Upon consummation of the Restructuring Transaction, the TSAT Business will
be consolidated into New PRIMESTAR. New PRIMESTAR will be a significantly
larger entity than TSAT, and it is anticipated that New PRIMESTAR will
initially incur significantly greater losses than TSAT due primarily to
disproportionately
30
<PAGE>
higher levels of depreciation, amortization and interest expense. In addition,
New PRIMESTAR intends to develop a high power DBS service, and New PRIMESTAR
may determine to migrate some or all of the existing PRIMESTAR(R) medium power
customers to such high power service. Under such circumstances, New PRIMESTAR
would necessarily be operating under a different cost structure than that of
the TSAT Business.
POTENTIAL INTERFERENCE WITH SATELLITE SIGNAL
The International Bureau of the FCC (the "International Bureau") has granted
EchoStar Satellite Corporation, a subsidiary of EchoStar Communications
Corporation (together with its consolidated subsidiaries, "EchoStar") a
conditional authorization to construct, launch and operate a Ku-band domestic
fixed satellite into the orbital position at 83(degrees) W.L., immediately
adjacent to that occupied by GE-2, the medium power satellite currently 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 60-90 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, are currently
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. However, it is uncertain whether
any agreement in respect of such coordination between the Partnership and
EchoStar will be reached, or that even if such agreement is reached, that
coordination will resolve such interference.
RISKS OF SATELLITE FAILURE
Limited Life of Satellites. All satellites have limited useful lives, which
vary as a result of their construction, the durability of their components,
the capability of their solar arrays and batteries, the amount of
stationkeeping fuel remaining once in orbit, the launch vehicle used and the
accuracy of the launch. Since March 10, 1997, the PRIMESTAR(R) service has
been transmitted from GE-2, a medium power satellite that was launched into
the 85(degrees) W.L. orbital position on January 30, 1997, and was declared
commercially operational March 6, 1997. The minimum design life of GE-2 is 15
years. There can be no assurance, however, that such satellite will achieve
its minimum design life, and the contract with GE Americom does not guarantee
the minimum useful life of GE-2. TSAT/New PRIMESTAR could be adversely
affected if GE-2 or any other satellite used in connection with its business
failed prior to its minimum design life. See "BUSINESS OF THE PARTNERSHIP--
PRIMESTAR(R) Satellite Signal."
The minimum design life of each of the Tempo Satellites is 12 years. There
can be no assurance, however, that either Tempo Satellite will achieve its
minimum design life, and the contract with Loral does not guarantee the
minimum useful life of the Tempo Satellites.
Risks of Satellite Defect, Loss or Reduced Performance. Satellites are
subject to significant risks, including: manufacturing defects affecting the
satellite or its components; launch failure resulting in damage to, or
destruction of, the satellite or incorrect orbital placement; and damage in
orbit caused by asteroids, space debris or electrostatic storms. Such factors
may prevent or limit commercial operation or reduce the satellite's useful
life. Neither TSAT nor the Partnership is entitled to the benefit of any
insurance relating to the operation of GE-2.
Tempo DBS-1 was outfitted with an antenna suitable for operation at the
119(degrees) W.L. orbital location and was launched into geosynchronous orbit
on March 8, 1997, on an Atlas rocket from Cape Canaveral by
31
<PAGE>
International Launch Services on behalf of Lockheed Martin Corporation. Tempo
DBS-1 is currently undergoing extended in-orbit testing under the Satellite
Construction Agreement. Since the launch of Tempo DBS-1, Loral has notified
Tempo of at least five separate occurrences of power reductions on Tempo
DBS-1. No assurance can be given that further power reductions will not occur
in the future. TSAT does not currently know the extent of such power
reductions, and cannot confirm the precise causes thereof; however, such
reductions could eventually affect the proposed operation of Tempo DBS-1,
either alone or together with other events that may arise during the expected
life of the satellite. TSAT believes that Tempo DBS-1 may not fully comply
with specifications, but has not yet determined the extent of any such non-
compliance. Tempo and Loral are currently engaged in discussions regarding
this matter, including the timing, extent and methodology of any further tests
to be conducted, and the terms of any monetary settlement with respect to the
satellite to which Tempo may be entitled under the Satellite Construction
Agreement. A defect or damage affecting Tempo DBS-1 could cause a substantial
monetary loss to TSAT/New PRIMESTAR.
TSAT is entitled to the benefit of certain limited warranties and insurance
coverage relating to the Tempo Satellites pursuant to the Satellite
Construction Agreement with Loral. However, such warranties and insurance
coverage might not be sufficient to compensate it for all of its losses in the
event of a partial or total satellite failure or casualty, even if such
failure or casualty were a covered loss. See "BUSINESS OF TSAT--Tempo--
Satellite Launches."
SUBSTANTIAL LEVERAGE; ADDITIONAL INDEBTEDNESS LIKELY
TSAT is highly leveraged and, following consummation of the Restructuring
Transaction, New PRIMESTAR will be highly leveraged. As of September 30, 1997,
TSAT had approximately $366 million of debt (approximately $476 of debt per
subscriber), and on a pro forma basis, after giving effect to the
Restructuring Transaction, the TSAT Merger and the ASkyB Transaction, New
PRIMESTAR would have had approximately $1.9 billion of debt (approximately
$1,056 of debt per subscriber), including (i) an aggregate of $921 million of
debt of TSAT and the Partnership that would have been assumed by New PRIMESTAR
if the Restructuring Transaction had occurred on September 30, 1997, (ii) an
aggregate of $136 million of debt that would have been incurred by New
PRIMESTAR to fund the estimated cash that would have been paid to certain of
the Partners if the Restructuring Transaction had occurred on September 30,
1997, (iii) an aggregate of $328 million of debt that would have been incurred
by New PRIMESTAR to repay the estimated debt that would have been assumed from
certain of the Partners if the Restructuring Transaction had occurred on
September 30, 1997, and (iv) $516 million estimated principal amount of the
New PRIMESTAR Convertible Subordinated Notes that would have been issued by
New PRIMESTAR if the ASkyB Transaction had occurred on September 30, 1997. See
"CAPITALIZATION" and the historical financial statements and notes thereto of
TSAT and the Primary and Supplemental Condensed Pro Forma Combined Financial
Statements and notes thereto of New PRIMESTAR, included elsewhere in this
Proxy Statement/Prospectus.
Upon consummation of the Restructuring Transaction and the TSAT Merger, TSAT
will be consolidated into New PRIMESTAR. New PRIMESTAR will be a significantly
larger entity than TSAT and will have significant financial obligations. As
described above, New PRIMESTAR will incur or assume a significant amount of
debt in connection with the Restructuring Transaction. Upon consummation of
the ASkyB Transaction, New PRIMESTAR will issue, subject to closing
adjustments, approximately $600 million liquidation value of New PRIMESTAR
Convertible Preferred Stock and $516 million aggregate principal amount of New
PRIMESTAR Convertible Subordinated Notes in connection with the ASkyB
Transaction. The New PRIMESTAR Convertible Subordinated Notes will be due and
payable, and the New PRIMESTAR Convertible Preferred Stock will be mandatorily
redeemable, on the tenth anniversary of the date of issuance. In addition to
the debt to be incurred and assumed in connection with the Restructuring
Transaction and the ASkyB Transaction, it is anticipated that New PRIMESTAR
will be required to seek significant additional debt financing to fund the
capital requirements of its business strategies, including the proposed
development of a high power DBS service and any possible migration of some or
all of the existing PRIMESTAR(R) medium power customers to such high power
service. No assurance can be given that New PRIMESTAR will be able to obtain
sufficient
32
<PAGE>
financial resources in order to satisfy short-term and long-term liquidity
requirements. The debt to be assumed by New PRIMESTAR in connection with the
Restructuring Transaction will include (i) the PRIMESTAR Credit Facility,
which was obtained by the Partnership to finance advances to Tempo for
payments due in respect of the construction of the Tempo Satellites, and which
is in turn supported by letters of credit arranged for by affiliates of all
but one of the Partners, (ii) the Notes and (iii) any amounts outstanding
under the Bank Credit Facility. In addition, New PRIMESTAR will be responsible
for payments due under (i) the GE-2 Agreement, which provides for the
Partnership's use of transponders on GE-2, (ii) certain specified contracts
and other obligations that will be assumed by New PRIMESTAR in connection with
the ASkyB Transaction, and (iii) various other commitments and contingent
liabilities associated with the businesses and assets that will comprise New
PRIMESTAR following consummation of the Restructuring Transaction and the
ASkyB Transaction. It is anticipated that New PRIMESTAR will also be required
to amend and/or refinance the Bank Credit Facility and the PRIMESTAR Credit
Facility to the extent they are not earlier refinanced by TSAT and/or the
Partnership. As of September 30, 1997, the Partnership's advances to Tempo to
finance construction of the Tempo Satellites aggregated $463,133,000, and the
Partnership's indebtedness under the PRIMESTAR Credit Facility aggregated
$555,000,000, including amounts borrowed to pay interest charges. The maturity
date of the PRIMESTAR Credit Facility has been extended to September 30, 1998.
Long-term financing alternatives with respect to the Tempo Satellites are
currently being evaluated. No assurance can be given that any such long-term
financing will be available on acceptable terms.
The degree to which TSAT/New PRIMESTAR is leveraged may adversely affect
TSAT/New PRIMESTAR'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 TSAT/New PRIMESTAR and its stockholders. TSAT/New
PRIMESTAR's ability to repay or refinance its debt will be dependent upon
TSAT/New PRIMESTAR's ability to generate substantial cash flow from operations
or to obtain additional debt or equity financing. There can be no assurance
that TSAT/New PRIMESTAR will be successful in generating sufficient cash flow
from operations or in a timely manner or in raising sufficient additional debt
or equity financing to enable it to repay or refinance its debt. In addition,
the failure of TSAT/New PRIMESTAR to have adequate access to capital may
adversely affect TSAT/New PRIMESTAR's ability, or choice, to launch proposed
products and services in the time frames discussed herein. Further, the
failure to comply with the covenants and other provisions of TSAT/New
PRIMESTAR's debt instruments could result in events of default under such
instruments. Such events of default could permit acceleration of the debt
under such instruments and, in some cases, acceleration of debt under other
instruments that contain cross-default or cross-acceleration provisions. See
"--Ability to Service Debt; Restrictive Covenants; Refinancing Risks" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources" of TSAT, included elsewhere
herein.
In the event that the Restructuring Transaction is not consummated, TSAT
believes that its cash and cash equivalents, together with borrowing
availability pursuant to the Bank Credit Facility and any funds generated by
TSAT's operating activities will be sufficient through December 31, 1998, to
fund TSAT'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 Restructuring
Transaction is not consummated and TSAT (i) funds all or any significant
portion of the cost of the Tempo Satellites, (ii) pursues a strategy with
respect to the high power segment of the digital satellite industry that
requires significant capital expenditures, (iii) completes any significant
acquisitions, (iv) enters into any other business activities that require
significant capital investments, (v) is unable (and/or the Partnership is
unable) to refinance the Tempo Satellites (to the extent not sold to a person
other than the Partnership) without a letter of credit and is unable to post
(or arrange for the posting of) such letter of credit, or is required to meet
other significant future liquidity requirements in addition to those described
above, TSAT anticipates that it would be required to obtain additional debt or
equity financing. No assurance can be given, however, that TSAT would be able
to obtain additional financing on terms acceptable to it, or at all.
33
<PAGE>
ABILITY TO MANAGE GROWTH; SUBSCRIBER CHURN
TSAT's business and the businesses of the Partnership and the other
Distributors have grown rapidly since 1994, when the Partnership completed its
adoption of digital technology. TSAT/New PRIMESTAR believes that such rapid
growth has been a factor in the increases it has experienced in both
subscriber churn and bad-debt write-offs. The ability of TSAT/New PRIMESTAR to
continue its expansion and increase its customer base while maintaining its
price structure, reducing its churn rate and managing costs will depend upon,
among other things, TSAT/New PRIMESTAR's ability to manage its growth
effectively. To manage growth effectively, TSAT/New PRIMESTAR must continue to
develop its internal and external sales force, installation capability,
customer service team and information systems, maintain its relationships with
third party vendors and implement efficient procedures to mitigate subscriber
credit risk. TSAT/New PRIMESTAR will also need to continue to grow, train and
manage its employee base, and its management will be required to assume
greater levels of responsibility. If TSAT/New PRIMESTAR is unable to manage
its growth effectively, TSAT/New PRIMESTAR's business and results of
operations could be materially adversely effected.
During the nine months ended September 30, 1997 and 1996, and the years
ended December 31, 1996, 1995 and 1994, (i) TSAT's annualized subscriber churn
rate (which represents the annualized number of subscriber terminations
divided by the weighted average number of subscribers during the period) was
32.2%, 38.9%, 38.5%, 24.7% and 16.1%, respectively, and (ii) the average
subscriber life implied by such subscriber churn rate was 3.1 years, 2.6
years, 2.6 years, 4.1 years and 6.2 years, respectively. TSAT experienced a
higher rate of subscriber churn in 1996, as compared to the first nine months
of 1997 and prior periods. TSAT believes that the higher 1996 churn rate is
primarily attributable to the fact that subscribers were allowed to initiate
service with no credit approval during the fourth quarter of 1995 and the
first six months of 1996. Although no assurance can be given, TSAT expects
that churn rates for future periods will be lower than the levels experienced
in 1996. If TSAT's churn rates were to return to, or increase from, such 1996
levels, TSAT believes that its financial condition and results of operations
would be adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of TSAT, included elsewhere
herein.
TSAT is currently unable to determine New PRIMESTAR's annualized subscriber
churn rate on a pro forma basis for past periods. If, following the Closing of
the Restructuring Transaction, New PRIMESTAR's churn rates exceed TSAT's churn
rate for the nine months ended September 30, 1997, or fail to improve from
such levels in subsequent periods, TSAT believes that the financial condition
and results of operations of New PRIMESTAR would be adversely affected.
ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS; REFINANCING RISKS
TSAT has incurred substantial indebtedness, all of which will be assumed by
New PRIMESTAR in connection with the Restructuring Transaction, and it is
expected that New PRIMESTAR will incur substantial indebtedness. See "--
Substantial Leverage; Additional Indebtedness Likely." The agreements pursuant
to which TSAT's existing indebtedness was incurred contain, and any additional
financing agreements may contain, certain restrictive covenants. The
restrictions contained in the existing financing agreements affect, and in
some cases limit, among other things, the ability of TSAT/New PRIMESTAR to
incur additional indebtedness, redeem or purchase subordinated indebtedness
(including the Notes), create certain liens, make certain restricted payments,
permit dividend and other payment restrictions to apply to certain
subsidiaries, enter into certain transactions with affiliates and certain
other related persons or consummate certain merger, consolidation or similar
transactions. In addition to the restrictive covenants described above, such
financing agreements require TSAT to maintain certain financial ratios and to
comply with other operating performance tests or other covenants. The failure
of TSAT/New PRIMESTAR to maintain such ratios or comply with such other tests
or covenants would constitute events of default under such agreements
(allowing the creditors to accelerate the maturity of the indebtedness
thereunder and may limit the availability of funds under such agreements to
amounts less than the stated maximum committed amounts thereunder),
notwithstanding the ability of TSAT/New PRIMESTAR to meet its debt service
obligations. Although these covenants are subject to a number of
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significant exceptions and qualifications, these restrictions may inhibit
TSAT/New PRIMESTAR's ability to manage its business and to react to changing
market conditions. See "DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT."
TSAT/New PRIMESTAR's ability to meet its debt service obligations will be
dependent upon TSAT/New PRIMESTAR's future performance, which is subject to
numerous factors, many of which are beyond its control. See "--Risks of
Satellite Failure" and "--Uncertainty Regarding High Power Strategies." There
can be no assurance that TSAT/New PRIMESTAR will generate sufficient cash flow
from operating activities to meet debt service, capital expenditure and
working capital requirements. It is anticipated that after consummation of the
Restructuring Transaction New PRIMESTAR will be required to amend and/or
refinance the Bank Credit Facility and the PRIMESTAR Credit Facility to the
extent they are not earlier amended and/or refinanced by TSAT and/or the
Partnership. TSAT expects that TSAT/New PRIMESTAR's other outstanding
indebtedness will need to be refinanced at maturity. TSAT/New PRIMESTAR's
ability to refinance such indebtedness will depend on, among other things, its
financial condition at the time, the restrictions in the instruments governing
its indebtedness and other factors, including market conditions, beyond the
control of TSAT/New PRIMESTAR. In addition, in the event TSAT/New PRIMESTAR
does not generate sufficient cash flow from operating activities to meet debt
service requirements, TSAT/New PRIMESTAR may need to seek additional debt or
equity financing. There can be no assurance that TSAT/New PRIMESTAR will be
successful in generating sufficient cash flow from operating activities or in
a timely manner or in raising sufficient additional debt or equity financing
on terms that are acceptable to TSAT/New PRIMESTAR, if at all, to enable it to
repay or refinance its debt. In the absence of such financing or refinancing,
TSAT/New PRIMESTAR could be forced to dispose of assets in order to cover any
shortfall in the payments due on its indebtedness and such disposition may
occur under circumstances that might not be favorable to realizing the highest
price for such assets. In addition, the failure of TSAT/New PRIMESTAR to have
adequate access to capital may adversely affect TSAT/New PRIMESTAR's ability,
or choice, to commercially launch proposed products and services in the time
frames discussed herein. See "--Substantial Leverage; Additional Indebtedness
Likely" and "--History of Losses of TSAT and Other Restructuring Parties."
RISKS ASSOCIATED WITH HOLDING COMPANY STRUCTURE
Following consummation of the Restructuring Transaction and prior to the
TSAT Merger, TSAT will be a holding company, with no substantial assets or
liabilities other than (i) 100% of the outstanding capital stock of Tempo,
which holds the FCC Permit and other assets and liabilities relating to a
proposed DBS system being constructed by Tempo, (ii) shares of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B Common Stock representing
approximately 36% of the outstanding shares of common equity (and
approximately 37% of the voting power) of New PRIMESTAR on the Closing Date,
subject to adjustments based on closing subscriber counts and other factors,
and (iii) its rights and obligations under the agreements with New PRIMESTAR
described in this Proxy Statement/Prospectus. See "THE RESTRUCTURING
AGREEMENT--Consideration to be Received in the Restructuring Transaction" and
"RELATED AGREEMENTS." As a holding company, TSAT's ability to satisfy any
liabilities or obligations will be dependent solely upon the earnings of Tempo
and New PRIMESTAR and the distribution or other payment of such earnings to
TSAT in the form of dividends, loans or other advances, payment or
reimbursement for management fees and expenses and/or, in the case of Tempo,
repayment of any loans or advances from TSAT. Moreover, during the term of the
TSAT Merger Agreement, TSAT will be subject to the covenants provided for
therein, including limitations on TSAT's ability to conduct business
activities, incur liabilities, and acquire or dispose of assets. The payment
of dividends or the making of loans or advances to TSAT by Tempo and New
PRIMESTAR may be subject to statutory, regulatory or contractual restrictions,
will be contingent upon the earnings of those subsidiaries and affiliates, and
will be subject to various business considerations. Moreover, TSAT will not
control New PRIMESTAR, and New PRIMESTAR will have no obligation, contingent
or otherwise, to make any funds available to TSAT, whether by dividends, loans
or other payments (except for the obligation of New PRIMESTAR to reimburse
TSAT for certain financial reporting, legal, accounting and other obligations
of TSAT as a public company, including payment of directors' fees and expenses
and maintenance of directors' and officers' insurance, as provided in the TSAT
Merger Agreement). In addition, New PRIMESTAR is, and Tempo in the future may
be, subject to loan
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agreements that prohibit or limit the transfer of funds to TSAT in the form of
dividends, loans, or advances and/or require that any indebtedness of such
subsidiaries or affiliates to TSAT be subordinate to the indebtedness under
such loan agreements.
TSAT's right to participate in the distribution of assets of either New
PRIMESTAR or Tempo upon the liquidation or reorganization of such entity would
be subject to the prior claims of the creditors of such entity, including
trade creditors, except to the extent that TSAT may itself be a creditor with
recognized claims against such entity.
RISKS OF FAILURE TO CONSUMMATE THE TSAT MERGER
Consummation of the TSAT Merger is subject to regulatory and other
conditions, including the right of New PRIMESTAR to terminate the TSAT Merger
Agreement under certain circumstances. Accordingly, there can be no assurance
that the TSAT Merger will be consummated. See "--Risks of Adverse Government
Regulations and Adjudications," "THE TSAT MERGER AGREEMENT--Conditions to the
TSAT Merger" and "THE TSAT MERGER AGREEMENT--Termination; Amendment and
Waiver." If the TSAT Merger is not consummated then TSAT will continue to be
subject to the risks associated with operating as a holding company and will
have to take steps to avoid being subject to the 1940 Act (although, if the
TSAT Merger Agreement is terminated, TSAT will no longer be bound by the
covenants therein restricting the operation of its business). See "--Risks
Associated with Holding Company Structure" and "--Investment Company Act
Considerations." TSAT has made no decision as to what course of action it
would pursue if the TSAT Merger is not consummated.
COMPETITIVE NATURE OF INDUSTRY
The business of providing video programming to consumers is highly
competitive. TSAT faces, and following consummation of the Restructuring
Transaction, New PRIMESTAR will face, competition from numerous other
companies offering video, audio and data products and services. The existing
and potential competitors of TSAT/New PRIMESTAR comprise a broad range of
companies engaged in communications and entertainment, including other digital
satellite programming distributors, cable operators, wireless cable operators,
television networks and home video products companies, as well as companies
developing new technologies and other purveyors of news, information and
entertainment. TSAT/New PRIMESTAR competes, among others, with companies
offering programming through various other satellite broadcasting systems,
including DirecTv, Inc. ("DirecTv"), a unit of Hughes Electronics Corp., which
is a division of the General Motors Corporation, United States Satellite
Broadcasting Corporation ("USSB") and EchoStar, which transmit from high power
satellites and generally use smaller dishes to receive their signals. There
can be no assurance that TSAT/New PRIMESTAR will be able to compete
successfully against current and prospective providers of digital satellite
programming services, some of which will have access to greater resources
and/or have secured the rights to broadcast from a greater number of satellite
transponder frequencies.
Many of TSAT/New PRIMESTAR's cable competitors have greater financial,
marketing and programming resources than TSAT/New PRIMESTAR. Cable operators
generally have large installed customer bases, and many cable operators have
significant investments in, and access to, programming. According to industry
sources, cable television service is currently available to more than 95% of
the approximately 97 million U.S. television households, and approximately 67%
of total U.S. television households currently subscribe to cable. In order to
substantially increase its subscriber base, TSAT/New PRIMESTAR will be
required to attract customers who currently subscribe to cable and to expand
commercial accounts, including hotels, motels, bars and restaurants as well as
MDUs. There can be no assurance that TSAT/New PRIMESTAR will be able to
substantially increase its subscriber base or successfully attract customers
in competition with cable operators.
See "THE DIGITAL SATELLITE TELEVISION INDUSTRY--Digital Satellite Services
Business" and "THE DIGITAL SATELLITE TELEVISION INDUSTRY--Competition."
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UNCERTAINTY REGARDING HIGH POWER STRATEGIES
TSAT currently intends to operate Tempo DBS-1 as a platform to provide high
power digital video and audio programming services to residential customers,
MDUs, commercial customers and resellers. If the TSAT Merger or the Tempo Sale
is consummated, such high power DBS services will be provided by New
PRIMESTAR. Otherwise, TSAT expects that such services will be provided through
the Partnership, which has exercised its option under the Tempo Option
Agreement to purchase or lease 100% of the capacity of Tempo DBS-1. See
"BUSINESS OF TSAT--Tempo--Tempo Option."
In addition to the possibility of satellite impairment or failure as
described above under the heading "--Risk of Satellite Failure--Risks of
Satellite Defect, Loss or Reduced Performance," there are numerous
uncertainties regarding the high power DBS business proposed to be operated by
TSAT/New PRIMESTAR:
(i) The proposed high power DBS business is currently in the development
stage. Programming content, pricing and other important decisions have not
been finalized. There can be no assurance that desired programming content
will be available on favorable terms.
(ii) The FCC Permit authorizes the use of only 11 transponders on Tempo
DBS-1, as compared to the 32 transponders operated in the aggregate by
DirecTv and USSB on DirecTv's full CONUS DBS satellite and the 21
transponders operated by EchoStar on its full CONUS DBS satellite. Although
TSAT/New PRIMESTAR intends to utilize advanced digital compression
technologies, including statistical multiplexing, to provide up to 100
video and 20 audio programming channels over such 11 transponders, there
can be no assurance that the relatively limited capacity of Tempo DBS-1
will not have an adverse effect on TSAT/New PRIMESTAR's proposed high power
DBS business. See "BUSINESS OF TSAT--Tempo."
(iii) If the ASkyB Transaction is consummated, the Partnership or New
PRIMESTAR will use the 28 transponders currently authorized to MCI in the
110(degrees) W.L. orbital location to provide high power DBS services to
residential customers, commercial customers and MDUs. It can be expected
that consummation of the ASkyB Transaction will have a material impact on
TSAT/New PRIMESTAR's strategy relating to the Tempo Satellites and FCC
Permit, although the full nature of such impact cannot presently be
determined. The ASkyB Transaction is subject to various regulatory
approvals, and there can be no assurance that such approvals will be
obtained, or if obtained, that such approvals will not be conditioned upon
modifications to the high power strategies of the Partnership, TSAT and/or
New PRIMESTAR, as currently proposed. The ASkyB Agreement requires the
Partnership to cause the divestiture of all rights of the Partnership and
any of the Partners under Tempo's FCC Permit with respect to the 11
transponder channels at 119(degrees) W.L., including divestiture of the
Partnership's right to purchase or lease 100% of the capacity thereunder
pursuant to the Tempo Option Agreement, if required as a condition to
regulatory approval of the ASkyB Transaction.
No assurance can be given as to the effect that the implementation of any
high power strategy will have on TSAT's or New PRIMESTAR's existing medium
power customer base.
No assurance can be given that TSAT/New PRIMESTAR will not significantly
change the direction of its high power strategy or that any high power
strategy will be successful. See "BUSINESS OF TSAT--Tempo."
In light of the pendency of the Restructuring Transaction, the TSAT Merger,
the Tempo Sale and the ASkyB Transaction, TSAT and the Partnership are
evaluating alternative future plans with respect to Tempo DBS-2, including its
use or disposition. Tempo DBS-2 presently serves as a ground spare for Tempo
DBS-1.
RISKS OF ADVERSE GOVERNMENT REGULATIONS AND ADJUDICATIONS
General. The construction and launch of DBS satellites and the operation of
DBS systems are subject to substantial regulation by the FCC. FCC rules are
subject to change in response to industry developments, new technology and
political considerations. TSAT/New PRIMESTAR's business and business prospects
could be adversely affected by the adoption of new laws, policies, and
regulations. There can be no assurance that TSAT/New PRIMESTAR will succeed in
obtaining all requisite regulatory approvals for its operations without
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the imposition of restrictions on, or adverse consequences to, TSAT/New
PRIMESTAR. There also can be no assurance that material adverse changes in
regulations affecting the digital satellite television industry or TSAT/New
PRIMESTAR will not occur in the future. See "--Potential Interference with
Satellite Signal" and "REGULATORY MATTERS."
FCC Permit. Tempo holds the FCC Permit, which authorizes construction of a
DBS system with 11 frequency channels at 119(degrees) W.L. that view the
entire continental U.S. and 11 frequency channels at 166(degrees) W.L. that
view only the western half of the continental U.S. and Alaska and Hawaii. The
FCC's DBS construction permits are conditioned on the satisfaction of ongoing
construction and related obligations. Under the FCC Permit, the time by which
the Tempo Satellites must be operational expires in May 1998. TSAT believes
that it has complied with the obligations for Tempo DBS-1 to become
operational by that date, but there can be no assurance that the FCC would
agree that such satellite is operational, and if an application for extension
of the FCC Permit were required, there can be no assurance that such an
extension would be granted by the FCC. See "--Risks of Satellite Failure."
At present, Tempo must continue to demonstrate that it is exercising due
diligence in progressing toward the completion of its DBS system at
166(degrees) W.L. and has in place the Satellite Construction Agreement with
Loral to fulfill this due diligence requirement. There can be no assurance
that Tempo will be able to comply with the FCC's due diligence obligations for
166(degrees) W.L. or that the FCC will determine that Tempo has complied with
such due diligence obligations. If Tempo is unable to meet the terms of the
FCC Permit, it would be required to apply to the FCC for an extension of time
to complete its DBS system at 166(degrees) W.L. Tempo cannot be certain that
an extension would be granted.
Tempo also may be required to file an application for a license to operate
its satellites in orbit. Tempo expects that the FCC would approve any such
request but cannot assure the ultimate outcome. FCC licenses must be renewed
at the end of each license term. Generally, FCC licenses are renewed in the
ordinary course, absent misconduct by the licensee.
On July 18, 1997, TSAT and the Partnership filed an application with the FCC
for consent to the transfer of control of Tempo, as the holder of the FCC
Permit, to New PRIMESTAR (the "Transfer Application"). See "REGULATORY
MATTERS--Required FCC Approvals." The Transfer Application must be approved by
the FCC before consummation of the TSAT Merger or any Tempo Sale. Petitions to
deny and comments were filed against the Transfer Application. The comments
and petitions urge the FCC to either deny the Partnership and those
Restructuring Parties affiliated with large cable operators the opportunity to
provide high power DBS service or to condition any such provision. TSAT and
the Partnership filed a joint opposition to these petitions and comments.
Before approving the Transfer Application, the FCC must review the petitions
filed and responsive pleadings and find that there are no material issues of
fact that should prevent approval of the TSAT Merger or any Tempo Sale and
that approval would serve the public interest. There can be no assurance that
the FCC's review of the Transfer Application and the petitions will be
favorable, or that the FCC will not impose conditions unacceptable to TSAT,
the Partnership, or the other Restructuring Parties in connection with its
review. Approval of the Transfer Application is a prerequisite of the TSAT
Merger (so long as TSAT controls Tempo) or any Tempo Sale, but is not required
to complete the Restructuring Transaction.
In addition, on August 15, 1997, the Partnership and MCI filed an
application with the FCC for consent to the assignment to New PRIMESTAR of the
high power DBS authorizations and certain other assets owned by MCI (the
"Assignment Application"). See "REGULATORY MATTERS--Required FCC Approvals."
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.
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.
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The issues raised in these petitions and comments include the following: (1)
opposition to the Partnership or New PRIMESTAR holding the 110(degrees) W.L.
authorization; (2) opposition to the Partnership or New PRIMESTAR
simultaneously holding authorizations for both the 110(degrees) W.L. orbital
position (28 transponders) and the 119(degrees) W.L. orbital position (11
transponders), which together represent about 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 satellite delivered programming to 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 (together with the rules and
regulations promulgated thereunder, the "Communications Act"). 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 New PRIMESTAR, MCI, ASkyB or News Corp. in connection with its
review.
MCI's authorization from the FCC to construct, launch and operate satellites
in the DBS service at 110(degrees) W.L. providing 28 transponder channels of
service (the "110 Slot"), one of MCI's DBS authorizations at issue in the
Assignment Application, was purchased by MCI at an FCC auction in January
1996. The other DBS authorization is a waiver of Section 319(d) of the
Communications Act, granting MCI authority to construct a DBS satellite
without an FCC construction permit at its own risk. Before the auction of the
110 Slot, the FCC imposed a one-time auction rule which required the entity
who bought the 110 Slot to divest any voting interest of five percent or
greater held in DBS permittees or licensees that hold FCC authorizations for
the two other DBS slots that view the entire continental U.S. (the
"Divestiture Requirement"). These two slots include 101(degrees) W.L. and
119(degrees) W.L. While the Divestiture Requirement was promulgated as a one-
time rule, the FCC may decide to impose this rule as a condition to approving
the Assignment Application and to require New PRIMESTAR to divest its interest
in 119(degrees) W.L.
Should the FCC determine that foreign ownership restrictions apply to
subscription DBS service providers, then, as a condition to the consummation
of the ASkyB Transaction, New PRIMESTAR would have to seek a waiver of such
restrictions. There can be no assurance that the FCC would grant such a
waiver. See "REGULATORY MATTERS--General."
SHVA. The Satellite Home Viewer Act of 1994 ("SHVA") prohibits the
retransmission by a satellite carrier of a television broadcast signal of a
network television station to households that receive a Grade B intensity
over-the-air signal of a television broadcast station affiliated with such
network and to households that receive (or within the past 90 days had
received) through a cable system the signal of a television station affiliated
with such network. In complying with the SHVA, the Partnership is required to
discontinue network service to certain of its subscribers who are able to
receive network services over the air. The Partnership has received numerous
challenges to its network subscribers from certain network affiliates and in
some instances has discontinued network service to certain subscribers. The
networks and their affiliates have commenced infringement actions against
certain other satellite carriers for violation of the network service
restrictions. However, while the networks and affiliates have from time to
time threatened litigation, none of the networks or affiliates has yet
asserted any claim for damages under applicable law against the Partnership or
any of the other parties to the Roll-up Plan. Negotiations are continuing
between representatives of the Partnership, the National Association of
Broadcasters, certain network-affiliated television stations, and their
respective affiliate associations, regarding a proposed Settlement and
Compliance Agreement, which agreement is expected to provide for pre-screening
techniques for customers based on zip codes and maps to ensure compliance with
SHVA procedures, the timing for disconnecting any existing non-compliant
network subscribers, and provisions for mutual release for any past or future
liability. Although a final agreement with respect to such matters has not yet
been executed, the Partnership currently expects to enter into such an
agreement during the first quarter of 1998. However, if an agreement is not
reached, it is likely that litigation will be initiated against the
Partnership. The SHVA provides for remedies which can include actual damages,
injunctions, and statutory damages. Statutory damages per individual claim are
limited to $5.00 per subscriber, per month, and statutory damages for a
pattern or practice of violations are limited to $250,000 in a six month
period. At present, the Partnership is unable to determine the basis upon
which any damages might be calculated or what their amount
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might be. Therefore, it is not possible to assess the impact, if any, of such
unasserted claims on the Partnership's results of operations of cash flow.
Management is also currently unable to determine the extent to which the
restriction on the delivery of network service to subscribers, as contemplated
by the proposed Settlement and Compliance Agreement, would have on the
marketing of its services generally.
Increase in Compulsory License Fees. A Copyright Arbitration Royalty Panel
("CARP"), convened pursuant to the terms of the SHVA, recommended to the
Librarian of Congress that the royalty fees paid by satellite carriers for the
distribution of superstations and network affiliates directly to homes should
be increased to a level commensurate with fair market value, which is far in
excess of the rate currently paid by cable operators. The Librarian of
Congress accepted CARP's recommendation to increase the royalty fees and
determined that the new fees should become effective as of January 1, 1998.
The Satellite Broadcasting and Communications Association ("SBCA"),
representing the satellite carriers, filed a petition with the Librarian of
Congress requesting a stay of the effectiveness of the decision, pending
judicial review or congressional action. The Librarian of Congress denied the
petition, and as of January 1, 1998, the rate increase went into effect. The
SBCA also filed a petition seeking review of the rate increase with the U.S.
Court of Appeals for the District of Columbia. In addition, the satellite
carriers have requested Congress to override the rate adjustment by
legislation. A bill has been introduced in the Senate (S. 1422) which would
delay an increase in the royalty fees until January 1, 1999 and would require
the FCC to report to Congress within 180 days of enactment of the legislation
on the effect of the increase of the royalty fees on the satellite carriers'
abilities to compete in the market for delivery of multichannel video
programming. A bill also has been introduced in the House of Representatives
(H.R. 2291) which is similar to the Senate bill and requires a stay of the
royalty increase until the FCC reviews the effects on the market and reports
to Congress; however, the stay would be in effect no later than 210 days after
enactment. No assurance can be given that the satellite carriers will be able
to obtain relief from the U.S. Court of Appeals or Congress. Should the
decision of the Librarian of Congress stand, Tempo or New PRIMESTAR (and all
other direct satellite service providers) may be competitively disadvantaged
vis-a-vis cable operators. See "REGULATORY MATTERS--General."
State Taxes. In addition to being subject to FCC regulation, operators of
DBS systems in the U.S. may be affected by imposition of state sales taxes on
satellite-delivered programming. According to the SBCA, several states,
including Maryland, Missouri, North Dakota, New York and Washington have
either adopted or proposed such taxes. Other states are in various stages of
considering proposals that would tax providers of satellite-delivered
programming and other communications providers. The provision of state imposed
sales taxes could have adverse consequences to TSAT/New PRIMESTAR's business.
There can be no assurance that additional government regulations affecting
DBS permittees and licensees will not occur in the future.
Issues Affecting Competitors. On July 18, 1997, EchoStar and DirectSat
Corporation, a subsidiary of EchoStar ("DirectSat"), filed a consolidated
application for special temporary authority ("STA Application") to provide DBS
service over the 11 channels at 119(degrees) W.L. currently held by Tempo.
EchoStar and DirectSat hold the authorization to use the remaining 21 channels
at the 119(degrees) W.L. orbital location and currently are offering service
from that location as the DISH Network.
EchoStar temporarily used certain of Tempo's channels prior to Tempo's March
1997 satellite launch. However, in June 1996, the FCC denied both EchoStar's
and DirectSat's requests to extend the STA Application for use of the Tempo
channels. The FCC was concerned that when Tempo eventually launched its
satellite and commenced its own service, the resultant reduction in service by
EchoStar and DirectSat would confuse customers. While EchoStar and DirectSat
claimed that customers would not miss their proposed pay-per-view services to
be offered over Tempo's channels, the FCC disagreed and denied their requests.
In their STA Application, EchoStar and DirectSat argued that Tempo was
either wasting its allocated channels by not using them or warehousing the
channels for use by another party. Furthermore, EchoStar and DirectSat stated
that New PRIMESTAR, which is set to acquire Tempo or Tempo's assets pursuant
to the TSAT Merger or any Tempo Sale, indicated its willingness to return
Tempo's 11 channels at 119(degrees) W.L., if required, as a condition for FCC
approval of the Assignment Application. Tempo has filed a petition to deny the
STA Application, but the outcome of the proceeding cannot be guaranteed.
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DirecTv recently filed an application with the FCC to expand its existing
satellite system, currently located at 101(degrees) W.L. In its June 5, 1997
application, DirecTv requested orbital slots located at 96.5(degrees) W.L. and
105.5(degrees) W.L. To implement this expansion, DirecTv must secure
additional frequencies in order to transmit and receive signals at these
additional orbital locations. Thus, in a related petition for rulemaking (also
filed June 5, 1997), DirecTv requested that the FCC reallocate certain
frequencies for DBS use. DirecTv also requested that the standard 9(degrees)
spacing policy be abandoned in favor of a 4.5(degrees) spacing policy. The
public was invited to comment on DirecTv's petition, and comments were filed
by interested parties on July 31, 1997. Commenters generally complained that
interference with other satellite transmissions might result from DirecTv's
expansion plan. The FCC to date has not issued a Notice of Proposed Rulemaking
in this matter, which is a prerequisite to the frequency reallocation
requested by DirecTv. In addition, even if the reallocation is eventually
granted, there can be no guarantee that DirecTv will be assigned the frequency
authorizations and orbital locations it has requested. These authorizations
would be available to competing applicants as well.
Should the FCC adopt a 4.5(degrees) spacing policy for DBS providers, it is
possible that the FCC would grant authorizations for satellites at locations
adjacent to Tempo's and the Partnership's satellites which may cause
interference. Moreover, if the FCC adopts a 4.5(degrees) spacing policy, it is
possible that a competitor would control more full CONUS DBS transmission
capacity than New PRIMESTAR and therefore, potentially would be able to offer
more services than New PRIMESTAR. In any event, it is uncertain whether
DirecTv's requests will be granted.
UNCERTAINTIES OF OPERATIONS FOLLOWING THE RESTRUCTURING TRANSACTION
The success of the Restructuring Transaction and the related transactions
will depend in part on the ability of New PRIMESTAR to integrate effectively
the businesses of TSAT and the Partnership and the PRIMESTAR(R) distribution
businesses of the other Distributors, each of which currently operates
separately. There can be no assurance that successful integration of such
businesses or that the benefits expected to result from such integration will
be realized. The process of integrating such businesses may also require a
disproportionate amount of time and attention of New PRIMESTAR's management
and financial and other resources of New PRIMESTAR. In addition, the
integration of the businesses of TSAT and the Partnership and the PRIMESTAR(R)
distribution businesses of the other Distributors may be made more difficult
initially by the necessity of coordinating geographically separated
organizations and integrating personnel with disparate business backgrounds
and corporate cultures. If New PRIMESTAR is not successful in integrating the
strategies and operations of such businesses or if such integrated operations
fail to achieve consumer acceptance, the combined business could be adversely
affected. Further, any delays or unexpected costs that arise in connection
with such integration could have a material adverse effect on the business,
results of operations or financial condition of New PRIMESTAR, as well as the
market value of New PRIMESTAR securities.
CONTROL OF NEW PRIMESTAR BY PRINCIPAL STOCKHOLDERS
If the Restructuring Transaction had occurred on September 30, 1997, the
Class C Stockholders would have received an aggregate of approximately 108
million shares of New PRIMESTAR Class A Common Stock (approximately 59% of the
shares of New PRIMESTAR Class A Common Stock that would have been outstanding
on such date) and all of the shares of New PRIMESTAR Class C Common Stock,
representing in the aggregate approximately 61% of the combined voting power
of the New PRIMESTAR Common Stock that would have been outstanding on such
date. Based on the foregoing, the Class C Stockholders collectively will
control a majority of the combined voting power of the New PRIMESTAR Common
Stock, and have the power to control all matters requiring the approval of the
holders of New PRIMESTAR Common Stock voting together as a single class,
including the election of the Common Directors, although no Class C
Stockholder individually will have such control and such powers. In addition,
the New PRIMESTAR Charter provides that certain actions may not be taken by
New PRIMESTAR without the approval of holders of a majority of the outstanding
shares of New PRIMESTAR Class B Common Stock and holders of 83% of the
outstanding shares of New PRIMESTAR Class C Common Stock. Further, under the
New PRIMESTAR Charter, the Class C Stockholders will initially have the power
to elect a majority of the members of the New PRIMESTAR Board. The New
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PRIMESTAR Charter provides that, so long as the Class C Stockholders own in
the aggregate at least 80% of the number of shares of New PRIMESTAR Class C
Common Stock issued in the Restructuring Transaction, the Class C Stockholders
will have the right to elect six of the eleven directors. Pursuant to the
Stockholders Agreement, initially, three of the six Class C Directors will be
nominated by TWE (and TWE has agreed with Newhouse pursuant to the
TWE/Newhouse Voting Agreement that of such three, one will be nominated by
Newhouse), and one will be nominated by each of Cox, Comcast and MediaOne. The
New PRIMESTAR Bylaws provide that actions of the New PRIMESTAR Board, with
certain exceptions, may be approved by a simple majority vote. See "--
Potential Conflicts of Interest," "MANAGEMENT OF NEW PRIMESTAR--Board
Composition," "SECURITY OWNERSHIP OF NEW PRIMESTAR," "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK" and "RELATED AGREEMENTS--Stockholders Agreement."
POTENTIAL CONFLICTS OF INTEREST
Following consummation of the Restructuring Transaction, TWE and Newhouse
(collectively), Comcast, MediaOne, Cox and GE Americom will own approximately
31%, 10%, 9%, 9% and 5%, respectively, of the shares of New PRIMESTAR Common
Stock outstanding and approximately 32%, 10%, 10%, 9% and 2%, respectively, of
the total voting power of the shares of New PRIMESTAR Common Stock
outstanding, in each case subject to adjustments based on closing subscriber
counts and other factors. See "THE RESTRUCTURING AGREEMENT--Consideration to
be Received in the Restructuring Transaction." In addition, following
consummation of the TSAT Merger, John C. Malone, the Chairman of the Board and
a director of TCI (and also Chairman of the Board and a director of TSAT) will
own approximately 2.0% of the shares of New PRIMESTAR Common Stock outstanding
and approximately 8.8%, of the total voting power of the shares of New
PRIMESTAR Common Stock outstanding at the Closing of the Restructuring
Transaction. See "SECURITY OWNERSHIP OF NEW PRIMESTAR."
Affiliates of each of the Class C Stockholders and TCI and GE Americom,
individually and in joint ventures with each other and others, have
substantial other interests in the communications and entertainment
industries, some of which may compete with the business of, or provide
programming to, New PRIMESTAR. All of the Class C Stockholders and TCI,
through their respective subsidiaries and affiliates, own or have controlling
interests in cable systems throughout the United States, and because New
PRIMESTAR will be competing with such cable systems in the provision of multi-
channel video programming services, there is the potential for conflicts of
interest. The New PRIMESTAR Charter provides for two independent directors,
and Section 144 of the DGCL, in general, provides that no related party
transaction is void or voidable solely for this reason, if: (i) the material
facts as to the related party transaction are disclosed or are known to the
board of directors or the committee which authorizes the transaction, and the
board or committee in good faith authorizes the transaction by the affirmative
votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as
to the related party transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the related party
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the board of directors, a committee or the
stockholders.
Pursuant to the Restructuring Agreement, at the Closing, New PRIMESTAR will
enter into a Transition Period Agency Agreement with each Class C Stockholder
(or their respective affiliates), pursuant to which each such party will be
designated as a servicing agent in assigned non-exclusive territories with
respect to New PRIMESTAR's medium power PRIMESTAR(R) subscribers, for a period
of up to six months following the Closing. In addition, each Class C
Stockholder and TCI (or their respective affiliates) will have the right to
enter into an HP Agency Agreement with New PRIMESTAR, pursuant to which such
party will act as a non-exclusive retail sales and servicing agent of any
stand-alone retail high power PRIMESTAR(R) programming service. Pursuant to
the Restructuring Agreement, each Class C Stockholder and TCI (or their
respective affiliates) will also have a right to enter into a Sales Agency
Agreement, pursuant to which such party will act as a non-exclusive retail
sales agent of (i) the PRIMESTAR(R) medium power programming service, or (ii)
at any time that such party is not a party to an HP Agency Agreement, any
stand-alone retail high power PRIMESTAR(R)
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programming service. Such agreements could give rise to potential conflicts of
interest since in those territories served by cable television, New PRIMESTAR
will be competing for subscribers with the cable systems owned and operated by
the Class C Stockholders and TCI, and the respective ownership interests of
the Class C Stockholders and TCI in the applicable cable systems may be
greater than their respective ownership interests in New PRIMESTAR. In order
to offset this potential for conflicts of interest, the HP Agency Agreements
and the Sales Agency Agreements will contain performance standards designed to
ensure that New PRIMESTAR's customers receive appropriate service from the
applicable Class C Stockholder or TCI with respect to installation,
maintenance and other service functions. In the event a Class C Stockholder or
TCI fails materially to satisfy the service performance standards, such party
may lose its right to provide service, but will not lose its right to act as a
sales agent or to receive the fees associated with performance of its sales
agent obligations. See "RELATED AGREEMENTS--Agency Agreements."
INVESTMENT COMPANY ACT CONSIDERATIONS
Following consummation of the Restructuring Transaction, TSAT will be a
holding company, with no substantial assets or liabilities other than (i) 100%
of the outstanding capital stock of Tempo, which holds the FCC Permit and
other assets and liabilities relating to a proposed DBS system being
constructed by Tempo, (ii) shares of New PRIMESTAR Class A Common Stock and
New PRIMESTAR Class B Common Stock representing approximately 36% of the
outstanding shares of common equity (and approximately 37% of the voting
power) of New PRIMESTAR on the Closing Date, subject to adjustments based on
closing subscriber counts and other factors, and (iii) its rights and
obligations under the agreements with New PRIMESTAR described in this Proxy
Statement/Prospectus. See "THE RESTRUCTURING AGREEMENT--Consideration to be
Received in the Restructuring Transaction" and "RELATED AGREEMENTS." As a
result, TSAT may be deemed to be an "investment company" within the meaning of
the 1940 Act, which defines an investment company as one engaged in the
business of investing or holding securities and owning "investment securities"
having a value exceeding 40% of the value of such company's total assets.
Generally, an investment company is required to register as such with the SEC.
Registered investment companies are subject to extensive, restrictive and
potentially adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions with
affiliates.
A company is deemed not to be an investment company for one year if it has a
bona fide intent to be engaged in a business other than investing, holding or
trading in securities. TSAT does not intend to be an investment company and
believes that it qualifies for such exemption. TSAT currently expects that
prior to the expiration of the one-year exemption period for so-called
"transient investment companies," the TSAT Merger will be consummated.
However, consummation of the TSAT Merger is subject to regulatory approval and
other conditions (including the right of New PRIMESTAR to terminate the TSAT
Merger Agreement if the TSAT Merger has not been consummated by June 30,
1998), and no assurance can be given that the TSAT Merger will be consummated
within such one-year exemption period, or at all. In such event, TSAT expects
that it would (a) acquire control of an operating company or business, (b)
dispose of investment securities (including potentially some or all of its
interest in New PRIMESTAR), or (c) take such other actions or combination of
actions as may be available in order to avoid application of the 1940 Act.
Application of the provisions of the 1940 Act to TSAT could have a material
adverse effect on TSAT.
RISKS ASSOCIATED WITH THE ASKYB TRANSACTION
Increased Financial Obligations. Consummation of the ASkyB Transaction will
impose additional financial obligations on New PRIMESTAR. The consideration to
be paid by New PRIMESTAR in connection with the ASkyB Transaction will
include, subject to closing adjustments, $600 million liquidation value of New
PRIMESTAR Convertible Preferred Stock and $516 million principal amount of New
PRIMESTAR Convertible Subordinated Notes. New PRIMESTAR will also assume
certain obligations under certain specified contracts and other arrangements
binding upon ASkyB, News Corp. and/or MCI, which will require New PRIMESTAR to
make payments, subject to the terms and conditions of such contracts and
arrangements. At September 30, 1997, the remaining commitments under such
obligations to be assumed aggregated approximately $187 million. See
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"THE ASKYB TRANSACTION." Consummation of the ASkyB Transaction will make New
PRIMESTAR's future operations more heavily dependent than they otherwise would
be on the success of the proposed high power DBS business, which is subject to
numerous uncertainties. See "--Uncertainty Regarding High Power Strategies."
New PRIMESTAR will incur additional costs if it converts all or some of its
existing medium power customers to the high power satellite service expected
to be provided with the assets acquired through the ASkyB Transaction.
New PRIMESTAR's ability to meet the dividend payment and debt service
obligations it will incur as a result of the ASkyB Transaction, to fulfill the
contractual obligations it will assume and to fund the costs associated with
operating the proposed high power DBS business will depend upon New
PRIMESTAR's future performance, particularly the performance of the proposed
high power DBS business, which is subject to numerous factors, many of which
are beyond New PRIMESTAR's control. See "--Risks of Satellite Failure" and "--
Uncertainty Regarding High Power Strategies." There can be no assurance that
the high power DBS business will be successful or that New PRIMESTAR will
generate sufficient cash flow from operating activities to meet these
obligations. If New PRIMESTAR does not generate sufficient cash flow from
operating activities to meet these obligations New PRIMESTAR may need to seek
additional debt or equity financing, which may not be available on terms
acceptable to New PRIMESTAR. See "--Ability to Service Debt; Restrictive
Covenants; Refinancing Risks," "--Substantial Leverage; Additional
Indebtedness Likely" and "--History of Losses of TSAT and Other Restructuring
Parties."
Dilution of Voting Power. Consummation of the ASkyB Transaction could result
in dilution of the voting power of New PRIMESTAR common stockholders,
including the former TSAT stockholders if the TSAT Merger shall have been
consummated. Although the New PRIMESTAR Convertible Preferred Stock, New
PRIMESTAR Convertible Subordinated Notes and New PRIMESTAR Class D Common
Stock are themselves non-voting, they may result in the issuance of shares of
New PRIMESTAR Class A Common Stock (which has one vote per share) to any
holder other than ASkyB, News Corp. or any of their respective affiliates,
upon conversion or in payment of dividend or interest obligations, as
applicable. Any New PRIMESTAR Class D Common Stock held by ASkyB, News Corp.
or any of their respective affiliates, will automatically convert, on a one-
for-one basis, into New PRIMESTAR Class A Common Stock upon the transfer of
such New PRIMESTAR Series D Common Stock to someone other than ASkyB, News
Corp. or any of their respective affiliates. The issuance of additional shares
of New PRIMESTAR Class A Common Stock, as dividend or interest payments to
holders of New PRIMESTAR Convertible Preferred Stock or New PRIMESTAR
Convertible Subordinated Notes, upon conversion of New PRIMESTAR Convertible
Preferred Stock or New PRIMESTAR Convertible Subordinated Notes, or upon the
transfer of New PRIMESTAR Class D Common Stock to someone other than ASkyB,
News Corp. or any of their respective affiliates, would dilute the voting
power of existing New PRIMESTAR common stockholders. The consideration to be
issued by New PRIMESTAR in connection with the ASkyB Transaction, if converted
in full into New PRIMESTAR Class A Common Stock by holders other than ASkyB,
News Corp. and their respective affiliates, would represent in the aggregate
approximately 11% of the aggregate voting power of the New PRIMESTAR Common
Stock, based on the number of shares of New PRIMESTAR Common Stock of each
class expected to be issued in the Restructuring Transaction and the ASkyB
Transaction, subject to various adjustments described herein. See "THE ASKYB
TRANSACTION--The ASkyB Agreement" and "DESCRIPTION OF NEW PRIMESTAR CAPITAL
STOCK."
Dilution of Common Stock. Consummation of the ASkyB Transaction has the
potential to result in dilution of the outstanding New PRIMESTAR Common Stock.
The price at which New PRIMESTAR Convertible Preferred Stock and New PRIMESTAR
Convertible Subordinated Notes will be converted into New PRIMESTAR Common
Stock will be based on the value of New PRIMESTAR and the value of the
consideration received by New PRIMESTAR as of the closing date of the ASkyB
Transaction, in accordance with the terms of the ASkyB Agreement. Such
conversion price may be less than or greater than the market price for shares
of New PRIMESTAR Common Stock on such date. To the extent that the New
PRIMESTAR Convertible Preferred Stock and New PRIMESTAR Convertible
Subordinated Notes are issued at an effective price less than the aggregate
fair market value on such date of the shares of New PRIMESTAR Common Stock
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into which such securities are ultimately convertible, such issuance would be
dilutive to the holders of then outstanding shares of New PRIMESTAR Common
Stock, including the former TSAT stockholders if the TSAT Merger shall have
been consummated.
Failure to Consummate the ASkyB Transaction. The ASkyB Transaction is
subject to regulatory and other conditions. If the ASkyB Transaction is not
consummated, then New PRIMESTAR may not be able to secure access to the
capacity of the 110(degrees) W.L. orbital slot on terms favorable to New
PRIMESTAR or on any terms. Although New PRIMESTAR intends in such event to
pursue the proposed high power DBS business using the transponder capacity of
Tempo DBS-1, failure of New PRIMESTAR to secure the availability of a full
CONUS DBS slot with greater capacity could have an adverse effect on its
proposed high power DBS business. See "--Uncertainty Regarding High Power
Strategies" and "BUSINESS OF TSAT--Tempo."
EchoStar-News Corp. Litigation. In May 1997, EchoStar filed suit against
News Corp. with respect to their previously announced and then aborted
business combination. EchoStar seeks specific performance and damages against
News Corp., including lost profits alleged by EchoStar to exceed $10 billion
over a ten-year period. In June 1997, News Corp. filed an answer and
counterclaims against EchoStar seeking unspecified damages. News Corp.'s
answer denies all material allegations in EchoStar's amended complaint and
asserts numerous defenses, including bad faith, misconduct and failure to
disclose material information on the part of EchoStar. The parties are now in
discovery. The case has been set for trial commencing June 15, 1998, but that
date may be postponed.
None of TSAT, the Partnership, New PRIMESTAR or any of the other parties to
the Roll-up Plan have been named as defendants in the EchoStar-News Corp.
litigation. However, EchoStar has from time to time threatened to name some or
all of such parties as defendants in such action. Moreover, if EchoStar is
awarded specific performance, News Corp. may be prevented from consummating
the ASkyB Transaction.
In connection with the ASkyB Transaction, News Corp., TSAT, the Partnership,
Time Warner, Comcast, Cox, MediaOne, Newhouse and GE Americom entered into the
ASkyB Indemnification Agreement, which agreement provides for News Corp. to
indemnify the PRIMESTAR Indemnitees (as defined therein) against, and hold
them harmless from, losses, liabilities, claims, damages, costs and expenses
relating to the foregoing claims by EchoStar and/or certain related matters.
See "THE ASKYB TRANSACTION--ASkyB Indemnification Agreement" for a more
detailed description of the ASkyB Indemnification Agreement.
DEPENDENCE ON THIRD PARTY PROGRAMMERS
New PRIMESTAR will be dependent on third parties to provide New PRIMESTAR
with programming. The Partnership's existing programming agreements, of which
approximately 8% expire in 1998, 43% expire in 1999, 24% expire in 2000 and
25% expire at various times between 2001 and 2008, contain various renewal and
cancellation provisions. There can be no assurance that any of these
agreements will be renewed or will not be canceled prior to expiration of
their original term. In the event that any such agreements are not renewed or
are canceled, there can be no assurance that New PRIMESTAR would be able to
obtain or develop substitute programming, or that such substitute programming
would be comparable in quality or cost to the Partnership's existing
programming. The Partnership's competitors currently offer substantially the
same programming as the Partnership. The ability of New PRIMESTAR to compete
successfully will depend on New PRIMESTAR's ability to continue to obtain
desirable programming and attractively package it to its customers at
competitive prices. See "BUSINESS OF THE PARTNERSHIP--PRIMESTAR(R)
Programming."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Restructuring Transaction, there are expected to be
approximately 205.6 million shares of New PRIMESTAR Common Stock outstanding.
Approximately 74.8 million of these shares will initially be held by TSAT. The
Class C Stockholders and GE Americom will own the remaining 130.8 million
shares of New PRIMESTAR Common Stock. If the TSAT Merger is consummated, each
outstanding share of
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TSAT Series A Common Stock on the TSAT Closing Date will be converted into the
right to receive one share of New PRIMESTAR Class A Common Stock, each
outstanding share of TSAT Series B Common Stock on such date will be converted
into the right to receive one share of New PRIMESTAR Class B Common Stock and
the shares of New PRIMESTAR Common Stock then held by TSAT will be canceled.
Following the TSAT Merger, the shares issued in the TSAT Merger will be freely
transferable without restriction or further registration under the Securities
Act, except that (i) shares of New PRIMESTAR Common Stock held by persons who
are deemed "affiliates" (as such term is defined under the Securities Act) of
TSAT prior to the TSAT Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act (or
Rule 144 in the case of such persons who become affiliates of New PRIMESTAR)
or as otherwise permitted under the Securities Act, and (ii) shares of New
PRIMESTAR Class B Common Stock held by the Specified Class B Stockholders will
be subject to restrictions under the Stockholders Agreement. In general, Rule
144 permits affiliates and holders of "restricted securities" of an issuer to
sell such securities without registration subject to certain conditions,
including, in the case of "restricted securities," a one year minimum holding
period.
In addition, upon completion of the ASkyB Transaction, New PRIMESTAR will
issue, subject to closing adjustments, approximately $600 million aggregate
liquidation value of New PRIMESTAR Convertible Preferred Stock (convertible
into approximately 52 million shares of New PRIMESTAR Class D Common Stock,
subject to adjustment) and approximately $516 million principal amount of New
PRIMESTAR Convertible Subordinated Notes (convertible into approximately 45
million shares of New PRIMESTAR Class D Common Stock, subject to adjustment).
Shares of New PRIMESTAR Class D Common Stock issued to ASkyB or any of its
affiliates upon conversion of such New PRIMESTAR Convertible Preferred Stock
and New PRIMESTAR Convertible Subordinated Notes, or in payment of dividend or
interest obligations thereunder, will in turn automatically convert into
shares of New 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. New PRIMESTAR also may decide to issue additional shares of New
PRIMESTAR Common Stock or preferred stock ("New PRIMESTAR Preferred Stock") in
the future. As used herein, the term "New PRIMESTAR Preferred Stock" includes
the proposed New PRIMESTAR Convertible Preferred Stock to be authorized in
connection with the ASkyB Transaction and any other series of the Preferred
Stock of New PRIMESTAR as may from time to time be designated pursuant to the
New PRIMESTAR Charter.
No predictions can be made as to the effect, if any, following the TSAT
Merger, that sales of New PRIMESTAR Common Stock, or the availability of
additional shares of New PRIMESTAR Common Stock for future sales, will have on
the market price of shares of New PRIMESTAR Class A Common Stock or New
PRIMESTAR Class B Common Stock prevailing from time to time. Sales of
substantial amounts of New PRIMESTAR Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for New
PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock and
could impair New PRIMESTAR's future ability to raise capital through an
offering of its equity securities. To the best of TSAT's knowledge, New
PRIMESTAR does not have any current plan or intention to issue any additional
shares of New PRIMESTAR Common Stock or New PRIMESTAR Preferred Stock, except
in connection with the Restructuring Transaction, the TSAT Merger and the
ASkyB Transaction, as described in this Proxy Statement/Prospectus.
ASkyB, News Corp. and their respective affiliates will have certain demand
and "piggyback" registration rights with respect to the New PRIMESTAR Class A
Common Stock into which the New PRIMESTAR Convertible Preferred Stock and the
New PRIMESTAR Convertible Subordinated Notes issuable to them is ultimately
convertible, pursuant to which such parties will have the right, under
specific circumstances, to cause New PRIMESTAR to register such shares of New
PRIMESTAR Class A Common Stock under the Securities Act. See "THE ASKYB
TRANSACTION--Registration Rights." Each of the Class C Stockholders, the
Specified Class B Stockholders, GE Americom and their respective affiliates
will also be granted certain demand and "piggyback" registration rights with
respect to the New PRIMESTAR Common Stock issuable to them in the
Restructuring Transaction or, in the case of the Specified Class B
Stockholders, the TSAT Merger (or
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acquired by them in accordance with certain provisions of the Stockholders
Agreement), pursuant to which such stockholders will have certain rights,
under specific circumstances and subject to certain conditions and exceptions,
to cause New PRIMESTAR to register under the Securities Act all or any portion
of their respective shares of New PRIMESTAR Class A Common Stock or New
PRIMESTAR Class B Common Stock, at the expense of New PRIMESTAR. However,
pursuant to the Stockholders Agreement, each of the Class C Stockholders and
the Specified Class B Stockholders will be subject to certain restrictions on
the sale of their respective shares of New PRIMESTAR Common Stock after the
Closing Date. See "RELATED AGREEMENTS--Registration Rights Agreement" and
"RELATED AGREEMENTS--Stockholders Agreement."
POTENTIAL ANTITAKEOVER EFFECTS
Certain provisions of the New PRIMESTAR Charter and the New PRIMESTAR
Bylaws, along with the Stockholders Agreement, may have the effect of making
more difficult an acquisition of control of New PRIMESTAR in a transaction not
approved by the New PRIMESTAR Board. These provisions include the disparate
voting rights of the New PRIMESTAR Class A Common Stock compared to the New
PRIMESTAR Class B Common Stock and the New PRIMESTAR Class C Common Stock;
provisions giving the New PRIMESTAR Board the power to issue shares of New
PRIMESTAR Preferred Stock and to fix the rights and preferences thereof,
without further authorization of New PRIMESTAR's common stockholders (subject
to the provisions of the New PRIMESTAR Charter); the requirement of a
supermajority vote to approve specified actions; the power of the New
PRIMESTAR Board to redeem stock from stockholders when necessary to protect
New PRIMESTAR's regulatory licenses; and certain other provisions. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock" and "COMPARISON OF
STOCKHOLDERS' RIGHTS." In addition, of the eleven members of the New PRIMESTAR
Board, the Class C Stockholders will be entitled to elect six members and the
holders of New PRIMESTAR Class B Common Stock will be entitled to elect three
members. Following the Restructuring Transaction, 100% of the issued and
outstanding shares of New PRIMESTAR Class B Common Stock will be owned by
TSAT, and following the TSAT Merger, 100% of such shares will be owned by the
holders of TSAT Series B Common Stock on the TSAT Closing Date. The Class C
Stockholders together with the holders of New PRIMESTAR Class B Common Stock
collectively will own an aggregate of approximately 81% of the equity interest
of New PRIMESTAR and, therefore, will generally be able to control the vote on
all matters submitted to a vote of the holders of New PRIMESTAR Common Stock.
Further, the New PRIMESTAR Charter requires the approval of (i) a majority of
the total voting power of outstanding shares of New PRIMESTAR Class B Common
Stock and (ii) 83% of the total voting power of the outstanding shares of New
PRIMESTAR Class C Common Stock to approve specified actions, including
approval of a merger or other transaction constituting a change in control,
making the consummation of any such transaction, if opposed by such
stockholders, difficult to obtain. Thus, the Class C Stockholders and/or the
holders of New PRIMESTAR Class B Common Stock will be in a position to prevent
a takeover of New PRIMESTAR by one or more third parties, which could deprive
New PRIMESTAR's minority stockholders of a premium that might otherwise be
realized by them in connection with an acquisition of New PRIMESTAR. Certain
provisions of the Stockholders Agreement, such as the rights of first refusal,
could also have the effect of discouraging or rendering more difficult an
acquisition of control of New PRIMESTAR or deterring a third party from
seeking to acquire control of New PRIMESTAR. The combined effect of the
foregoing could diminish the opportunities for a stockholder to participate in
tender offers, including tender offers at a price above the then current
market value of New PRIMESTAR Common Stock, inhibit fluctuations in the market
price of New PRIMESTAR Common Stock that could result from takeover attempts,
and have the effect of making it more difficult for third parties to cause the
immediate removal and replacement of the members of the then current New
PRIMESTAR Board or the then current management of New PRIMESTAR without the
concurrence of the New PRIMESTAR Board. See "COMPARISON OF STOCKHOLDERS'
RIGHTS" and "RELATED AGREEMENTS--Stockholders Agreement."
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DIVIDENDS AND DIVIDEND POLICY
Historically, TSAT has never declared or paid cash dividends on TSAT Common
Stock. TSAT anticipates that no cash dividends will be paid on the TSAT Common
Stock in the foreseeable future. Payment of cash dividends on the TSAT Common
Stock, if any, in the future will be determined by the TSAT Board in light of
TSAT's earnings, financial condition and other relevant considerations.
Following the Restructuring Transaction and prior to the TSAT Merger, TSAT
will be a holding company and, as such, TSAT's ability to pay cash dividends
will be dependent on its ability to receive cash dividends and advances from
its subsidiaries and New PRIMESTAR. Moreover, during the term of the TSAT
Merger Agreement, TSAT will be subject to the covenants provided for therein,
including TSAT's agreement not to, and to cause each of its subsidiaries not
to, declare, set aside or pay any dividend with respect to any shares of its
capital stock.
Any future payments of dividends by New PRIMESTAR will depend on decisions
that will be made by the New PRIMESTAR Board from time to time in the exercise
of its business judgment, taking into account, among other things, New
PRIMESTAR's results of operations and financial condition, any then existing
or proposed commitments by New PRIMESTAR for the use of available funds, and
New PRIMESTAR's obligations with respect to the holders of any then
outstanding indebtedness or preferred stock. The Indentures and the Bank
Credit Facility, both of which will be assumed by New PRIMESTAR in connection
with the Restructuring Transaction, contain, and the New Notes and the Interim
Credit Facility are expected to contain, restrictions with respect to the
payment of dividends. In addition, if the ASkyB Transaction is consummated,
the holders of the New PRIMESTAR Convertible Preferred Stock and the New
PRIMESTAR Convertible Subordinated Notes will be entitled to receive all
cumulative dividend payments and interest payments payable under such
securities before any dividends can be paid on the New PRIMESTAR Common Stock.
In addition, New PRIMESTAR may in the future issue additional debt securities
or preferred stock or enter into loan agreements or other agreements that
restrict the payment of dividends on the New PRIMESTAR Common Stock. TSAT
anticipates that New PRIMESTAR will retain future earnings for use in its
business and will not pay any dividends on New PRIMESTAR Common Stock in the
foreseeable future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" of TSAT, included elsewhere herein,
"DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT" and "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK."
RISK OF SIGNAL PIRACY
In common with all providers of subscription television programming,
TSAT/New PRIMESTAR faces the risk that the PRIMESTAR(R) programming signal
will be obtained by unauthorized users. If signal piracy became widespread,
TSAT/New PRIMESTAR's revenue and cash flow from operations could be adversely
affected, and New PRIMESTAR's ability to contract for video and audio services
provided by programmers could be adversely affected. Historically, signal
piracy in the C-band, cable television and European digital satellite
industries has been widely reported and, more recently, published reports
indicate that the DirecTv and USSB encryption systems have been compromised.
While TSAT management believes that the encryption method utilized by the
Partnership, which was developed by an affiliate of General Instrument
Corporation ("GI"), has been effective in minimizing signal piracy, and there
have been no published reports of breaches in PRIMESTAR(R) security, there can
be no assurance that changes in technology will not render less effective the
anti-piracy efforts associated with PRIMESTAR(R).
RISK OF TECHNOLOGICAL CHANGES
Technology in the digital satellite television industry is subject to rapid
change, and new technologies are continuously being developed. Some
competitors of TSAT/New PRIMESTAR may have or may obtain access to proprietary
technologies that are perceived by the satellite services industry or
customers as superior to, or more desirable than, the technology of TSAT/New
PRIMESTAR and/or the technology used in the PRIMESTAR(R) system. There can be
no assurance that TSAT/New PRIMESTAR could obtain access to any such
technology or that the lack of any such technology would not adversely affect
the ability of TSAT/New PRIMESTAR to compete with such competitors.
48
<PAGE>
In addition, in order to implement successfully its high power business
plan, TSAT/New PRIMESTAR will need access to statistical multiplexing
technology or other advances in digital compression technology that are
currently under development or being tested by several third parties. Such
technology would enable TSAT/New PRIMESTAR to increase the number of digital
program signals that could be transmitted simultaneously over a single
satellite transponder, thus effectively increasing the digital compression
ratio. See "THE DIGITAL SATELLITE TELEVISION INDUSTRY--Industry Overview."
Although TSAT/New PRIMESTAR does not currently have any agreement with respect
to the use of any such technology, TSAT believes that TSAT/New PRIMESTAR would
be able to obtain the rights to use such technology. However, in the event
that TSAT/New PRIMESTAR were unable to obtain such rights, its high power
business plan could be adversely affected.
49
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical cash and capitalization of
TSAT as of September 30, 1997, and (ii) the pro forma cash and capitalization
of TSAT and New PRIMESTAR assuming the indicated transactions had occurred as
of that date. This table should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" of
TSAT, TWSSI, Cox Satellite, Comcast Satellite, MediaOne Satellite and the
Partnership and is qualified in its entirety by reference to the Primary and
Supplemental Condensed Pro Forma Combined Financial Statements of New
PRIMESTAR and the historical financial statements and notes thereto of TSAT,
TWSSI, Cox Satellite, Comcast Satellite, MediaOne Satellite and the
Partnership.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------------------------------------------------
ROLL-UP PLAN NEW
--------------------------------------------- PRIMESTAR
NEW PRO FORMA FOR
NEW PRIMESTAR RESTRUCTURING
TSAT PRIMESTAR PRO FORMA FOR TRANSACTION,
PRO FORMA FOR PRO FORMA FOR RESTRUCTURING TSAT MERGER
TSAT RESTRUCTURING RESTRUCTURING TRANSACTION AND AND ASKYB
HISTORICAL TRANSACTION(1) TRANSACTION(2) TSAT MERGER(3) TRANSACTION(3)
---------- -------------- -------------- --------------- --------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Cash.................... $ 19,279 -- 54,698 54,698 54,698
========== ======== ========= ========= =========
Due to the
Partnership(4)......... $ 463,133 463,133 -- -- --
Bank Credit
Facility(5)............ -- -- -- -- --
PRIMESTAR Credit
Facility(6)............ -- -- 555,000 555,000 555,000
Acquisition debt(7)..... -- -- 483,736 483,736 483,736
10.875% Senior
Subordinated Notes due
2007................... 200,000 -- 200,000 200,000 200,000
12.25% Senior
Subordinated Discount
Notes due 2007......... 163,634 -- 163,634 163,634 163,634
5% New PRIMESTAR
Convertible
Subordinated Notes due
2008 .................. -- -- -- -- 516,300
Other debt.............. 2,126 -- 2,126 2,126 2,126
New PRIMESTAR
Convertible Preferred
Stock ($.01 par value);
120,000 shares issued.. -- -- -- -- 600,000
Equity:
TSAT Preferred Stock
($.01 par value):
5,000,000 shares
authorized; none
issued................ -- -- -- -- --
TSAT Common Stock ($1
par value):
Series A; 185,000,000
shares authorized;
58,237,114 issued..... 58,237 58,237 -- -- --
Series B; 10,000,000
shares authorized;
8,465,324 issued...... 8,465 8,465 -- -- --
New PRIMESTAR Preferred
Stock ($.01 par
value);
350,000,000 shares
authorized............ -- -- -- -- --
New PRIMESTAR Common
Stock ($.01 par
value):
Class A; 850,000,000
shares authorized;
175,222,922 assumed
issued on a pro forma
basis................. -- -- 1,752 1,752 1,752
Class B; 50,000,000
shares authorized;
8,465,324 shares
assumed issued on a
pro forma basis....... -- -- 85 85 85
Class C; 30,000,000
shares authorized;
13,786,687 shares
assumed issued on a
pro forma basis....... -- -- 138 138 138
Class D; 150,000,000
shares authorized;
none assumed issued
on a pro forma
basis................. -- -- -- -- --
Additional paid-in
capital............... 523,295 747,707 1,198,262 1,580,585 1,580,585
Accumulated deficit.... (382,323) (382,323) -- (382,323) (382,323)
---------- -------- --------- --------- ---------
Total equity........ 207,674 432,086 1,200,237 1,200,237 1,200,237
---------- -------- --------- --------- ---------
Total
capitalization..... $1,036,567 895,219 2,604,733 2,604,733 3,721,033
========== ======== ========= ========= =========
</TABLE>
50
<PAGE>
- --------
(1) Represents the cash and capitalization of TSAT after giving effect to the
TSAT Asset Transfer and the other elements of the Restructuring
Transaction. For additional information concerning the pro forma
adjustments, see the Primary Condensed Pro Forma Combined Financial
Statements of New PRIMESTAR, included elsewhere herein.
(2) Represents the cash and capitalization of New PRIMESTAR as affected by the
assumed consummation of the Restructuring Transaction. For additional
information concerning the pro forma adjustments, see the Supplemental
Condensed Pro Forma Combined Financial Statements of New PRIMESTAR,
included elsewhere herein.
(3) Represents the cash and capitalization of New PRIMESTAR after giving
effect to the indicated transactions. For additional information
concerning the pro forma adjustments, see the Primary Condensed Pro Forma
Combined Financial Statements of New PRIMESTAR, included elsewhere herein.
(4) Represents advances received by Tempo from the Partnership to fund the
majority of Tempo's obligations under the Satellite Construction Agreement
and certain related costs. The Partnership financed such advances to Tempo
through borrowings under the PRIMESTAR Credit Facility, which was in turn
supported by letters of credit arranged for by affiliates of the Partners.
(5) On December 31, 1996, TSAT entered into the Bank Credit Facility. As a
result of the February 1997 issuance of the Notes and the March 1997
determination that GE-2 was commercially operational, the maximum
commitments under the Bank Credit Facility were increased from
$350,000,000 to $750,000,000. At September 30, 1997, $720,000,000 of such
maximum commitments were unused. The availability of such commitments for
borrowing is subject to TSAT's compliance with operating and financial
covenants and other customary conditions. Commencing March 31, 2001,
aggregate commitments will be reduced quarterly in accordance with a
schedule, until final maturity at June 30, 2005. TSAT anticipates that it
will be required to refinance and/or amend the Bank Credit Facility prior
to the consummation of the Restructuring Transaction. No assurance can be
given that any such refinancing and/or amendment will be completed on
terms acceptable to TSAT. See note 10 to the Unaudited Financial
Statements of TSAT, included elsewhere herein.
(6) The PRIMESTAR Credit Facility was obtained by the Partnership to finance
advances to Tempo for payments due in respect of the construction of the
Tempo Satellites, and is supported by letters of credit arranged for by
affiliates of all but one of the Partners. The maturity date of the
PRIMESTAR Credit Facility has been extended to September 30, 1998. Long-
term financing alternatives with respect to the Tempo Satellites are
currently being evaluated. No assurance can be given that any such long-
term financing will be available on acceptable terms.
(7) It is anticipated that debt financing will be obtained to finance the cash
requirements of the Restructuring Transaction and to finance the capital
requirements of New PRIMESTAR's business strategies. No assurance can be
given that any such debt financing will be obtained on terms acceptable to
New PRIMESTAR. See "THE ROLL-UP PLAN--Financing in Connection with the
Restructuring Transaction."
51
<PAGE>
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
This Proxy Statement/Prospectus and the accompanying form of proxy are being
furnished to holders of TSAT Common Stock in connection with the solicitation
of proxies by the TSAT Board for use at the Meeting to be held on March 6,
1998, at the offices of Tele-Communications, Inc., 5619 DTC Parkway,
Englewood, Colorado, commencing at 10:00 a.m. local time. At the Meeting,
holders of TSAT Common Stock will be asked to consider and vote upon (i) the
Roll-up Proposal, (ii) the TSAT Nonemployee Director Plan Proposal and (iii)
such other matters as may properly be brought before the Meeting. Copies of
the Restructuring Agreement, the TSAT Asset Transfer Agreement, the TSAT
Merger Agreement and the TSAT Nonemployee Director Plan are included as
Appendices A-1, A-2, B and J, respectively, to this Proxy
Statement/Prospectus.
VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
The TSAT Board has fixed the close of business on January 6, 1998, as the
Record Date for the determination of the TSAT stockholders entitled to notice
of and to vote at the Meeting. Accordingly, only holders of record of shares
of TSAT Common Stock at the close of business on the Record Date will be
entitled to notice of, and to vote at, the Meeting. At the close of business
on the Record Date, there were 58,240,572 shares of TSAT Series A Common Stock
outstanding and entitled to vote, held by 5,834 holders of record, and
8,465,324 shares of TSAT Series B Common Stock outstanding and entitled to
vote, held by 355 holders of record. Each holder of record of shares of TSAT
Series A Common Stock on the Record Date is entitled to cast one vote per
share on each proposal properly submitted for the vote of the TSAT
stockholders at the Meeting. Each holder of record of shares of TSAT Series B
Common Stock on the Record Date is entitled to cast ten votes per share on
each such proposal. Votes may be cast in person or by properly executed proxy
at the Meeting. Pursuant to the DGCL and the TSAT Bylaws, the presence, in
person or by properly executed proxy, of the holders of a majority in total
voting power of the outstanding shares of TSAT Common Stock entitled to vote
is necessary to constitute a quorum at the Meeting. Abstentions will be
counted in determining whether a quorum is present.
Under the TSAT Charter and the DGCL, (i) the affirmative vote of the holders
of 66 2/3% of the combined voting power of the shares of TSAT Series A Common
Stock and TSAT Series B Common Stock issued and outstanding on the Record
Date, voting together as a single class, is required to approve the Roll-up
Proposal and (ii) the affirmative vote of a majority of the combined voting
power of the outstanding shares of TSAT Series A Common Stock and TSAT Series
B Common Stock present and entitled to vote thereon at the Meeting, voting
together as a single class, is required to approve the TSAT Nonemployee
Director Plan Proposal. If the Roll-up Proposal is approved, the Restructuring
Transaction will be consummated prior to the anticipated closing date of the
TSAT Merger. Consummation of the TSAT Merger is subject to regulatory approval
and other conditions to closing set forth in the TSAT Merger Agreement. See
"THE TSAT MERGER AGREEMENT--Conditions to the TSAT Merger." Accordingly, there
can be no assurances that the TSAT Merger will be consummated, even if the
Roll-up Proposal is approved and the Restructuring Transaction is consummated.
See "RISK FACTORS-- Risks of Failure to Consummate the TSAT Merger." In
addition, approval of the TSAT Nonemployee Director Plan Proposal is not a
condition to the consummation of the Roll-up Plan or any part thereof. Under
the TSAT Charter, stockholder action must be taken at a meeting and may not be
taken by written consent. Abstentions and broker non-votes in respect of the
Roll-up Proposal will have the same effect as negative votes. Under the DGCL,
there are no appraisal rights for TSAT stockholders in connection with the
transactions contemplated by the Roll-up Plan. See "THE ROLL-UP PLAN--Absence
of Appraisal Rights."
A vote in favor of the Roll-up Proposal will also constitute a vote in favor
of the election as directors of the members of the New PRIMESTAR Board and the
adoption of the New PRIMESTAR Bylaws and the New PRIMESTAR Charter, as in
effect at the time of the closing of the TSAT Merger. See "MANAGEMENT OF NEW
PRIMESTAR--Directors and Executive Officers" for a description of the
qualifications of the initial members of the New PRIMESTAR Board. See
"DESCRIPTION OF NEW PRIMESTAR COMMON STOCK" for a description of the terms of
the New PRIMESTAR Common Stock and "COMPARISON OF
52
<PAGE>
STOCKHOLDERS' RIGHTS" for a description of the material differences between
the rights of holders of TSAT Common Stock and the rights of holders of New
PRIMESTAR Common Stock. See also Appendices E and F, which contain the
complete text of the New PRIMESTAR Charter and the New PRIMESTAR Bylaws,
respectively.
Pursuant to the TSAT Voting Agreements, which are attached as Appendix H to
this Proxy Statement/Prospectus, John C. Malone and certain other TSAT
stockholders with the power to vote or direct the vote of, in the aggregate,
2,557,629 shares of TSAT Series A Common Stock and 6,543,451 shares of TSAT
Series B Common Stock, or 47.6% of the total voting power of the shares of
TSAT Common Stock outstanding on the Record Date, have agreed to vote such
shares of TSAT Common Stock (or cause them to be voted) in favor of approval
of the Roll-up Proposal. See "RELATED AGREEMENTS--TSAT Voting Agreements" and
"THE ROLL-UP PLAN--Interests of Certain Persons in the Roll-up Plan."
As of the Record Date, TSAT's directors and executive officers beneficially
owned 581,852 outstanding shares of TSAT Series A Common Stock and 3,441,393
outstanding shares of TSAT Series B Common Stock, representing approximately
24.5% of the total voting power of the shares of TSAT Common Stock outstanding
on such date. See "SECURITY OWNERSHIP OF TSAT--Security Ownership of
Management." TSAT's directors and executive officers have informed TSAT that
they intend to vote all of their shares of TSAT Common Stock in favor of the
Roll-up Proposal. See "THE ROLL-UP PLAN--Interests of Certain Persons in the
Roll-up Plan."
PROXIES
All shares of TSAT Common Stock represented by properly executed proxies
received prior to or at the Meeting, and not revoked, will be voted in
accordance with the instructions indicated on such proxies; however, properly
executed proxies marked "ABSTAIN," although counted for purposes of
determining whether there is a quorum at the Meeting, will not be voted. If no
instructions are indicated, such proxies will be voted FOR the Roll-up
Proposal and FOR the TSAT Nonemployee Director Plan Proposal.
At the date of this Proxy Statement/Prospectus, the TSAT Board does not know
of any business to be presented at the Meeting other than as set forth in the
notice accompanying this Proxy Statement/Prospectus. If any other matters
should properly be presented at the Meeting for consideration, including,
among other things, consideration of a motion to adjourn the Meeting to
another time and/or place, the persons named in the enclosed form of proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment.
A stockholder may revoke his or her proxy at any time prior to its use by
(i) delivering to the Secretary of TSAT a signed notice of revocation bearing
a later date than the proxy, or a duly executed later-dated proxy relating to
the same shares or (ii) attending the Meeting and voting in person. Attendance
at the Meeting will not in itself constitute the revocation of a proxy. Any
written notice of revocation or subsequent proxy should be sent so as to be
delivered to TSAT at 8085 South Chester, Suite 300, Englewood, Colorado 80112,
Attention: Secretary, or hand-delivered to the Secretary of TSAT at the
aforementioned address at or before the taking of the vote at the Meeting.
EXPENSES
Costs and expenses incurred in connection with the printing and mailing of
this Proxy Statement/Prospectus, as well as the costs and expenses of
solicitation of proxies, will be paid by TSAT. In addition to solicitation by
mail, proxies may be solicited by directors, officers and employees of TSAT in
person or by telephone, telegram or other means of communication. Such
directors, officers and employees will receive no additional compensation for
such services, but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. Brokerage firms, banks, nominees,
fiduciaries and other custodians will be requested to forward proxy
solicitation materials to the beneficial owners of shares held of record by
them, and will be reimbursed for the reasonable expenses incurred by them in
connection therewith. TSAT has retained Georgeson & Company
53
<PAGE>
Inc., a professional proxy solicitation firm, to perform various proxy
advisory, distribution and solicitation services. The fee of Georgeson &
Company Inc. is currently estimated to be approximately $6,500 plus
reimbursement of out-of-pocket expenses, and will be paid by TSAT.
If your shares of TSAT Common Stock are held in the name of a brokerage
firm, bank nominee or other institution, only it can sign a proxy card with
respect to your shares of TSAT Common Stock. Accordingly, please contact the
person responsible for your account and give instructions for a proxy card to
be signed representing your shares of TSAT Common Stock.
If you have any questions about giving your proxy or require assistance,
please contact TSAT, at 8085 South Chester, Suite 300, Englewood, Colorado
80112 (telephone: (303) 712-4600); Attention: Investor Relations.
TSAT STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
54
<PAGE>
THE ROLL-UP PLAN
BACKGROUND
At various times during the first half of 1996, representatives of some or
all of the then partners of the Partnership discussed certain possible
transactions involving the Partnership, including: (i) a possible transaction
in which the then distributors of PRIMESTAR(R) (each of which was affiliated
with a partner) would contribute their respective PRIMESTAR(R) subscriber
accounts, customer-premises equipment and inventory to the Partnership, in
return for additional partnership interests; (ii) a change in the
organizational structure of the Partnership from a limited partnership to a
corporation; and (iii) a private placement or public offering of debt or
equity securities of the Partnership. Such potential transactions were
considered both separately and in various combinations. The parties were
unable to reach any understanding or agreement with respect to any such
transaction, and such discussions had ceased by May 1996.
In December 1996, following the effectiveness of the TSAT Spin-off,
representatives of TSAT and the other Partners began to discuss the
possibility of combining the Partnership Interests of each of the Partners and
the PRIMESTAR(R)-related assets of each of the Distributors with or into TSAT,
in a transaction through which the Partners and the Distributors would receive
a combination of debt and equity securities of the combined entity. The goals
of such discussions were to combine the parties' interests in the PRIMESTAR(R)
subscribers and the Partnership into a single, publicly-traded entity with the
capacity to fund the growth of the PRIMESTAR(R) business through a combination
of debt and equity; to enable national ownership of subscribers and consistent
pricing and packaging; and to streamline governance to further the effective
management and operation of the PRIMESTAR(R) business.
The discussions initiated in December 1996 continued throughout the first
half of 1997, focusing primarily on (i) the structure of the transaction,
including the parties' desire that the issuance of securities be tax-free to
the recipients; (ii) management, governance and stockholder issues; (iii)
valuation issues; (iv) the combined entity's strategy for entering the high
power segment of the digital satellite industry; (v) the economics of the
combined entity and (vi) the terms on which the Distributors or their
affiliates would be available to provide sales and fulfillment services to the
combined entity on an agency basis after the closing. During that time,
representatives of the Partners met on several occasions to negotiate a term
sheet, and open issues were also discussed during regularly scheduled meetings
of the Partners Committee.
The consideration to be received by the Restructuring Parties, other than
TSAT, including the respective terms of each class of New PRIMESTAR Common
Stock and the types and numbers of shares to be received by such parties, was
determined by negotiation among TSAT and such other parties and their
representatives. One of the factors considered in such negotiations was the
proportion that the number of shares of New PRIMESTAR Class C Common Stock to
be issued to the Class C Stockholders would bear to the number of shares of
New PRIMESTAR Class A Common Stock to be issued to the Class C Stockholders,
as compared to the proportion that the number of shares of TSAT Series B
Common Stock outstanding on the Closing Date bears to the number of shares of
TSAT Series A Common Stock outstanding on the Closing Date. Another factor
considered was the proportion that the amount of cash consideration (or
assumption of debt in lieu of cash consideration) payable to the Class C
Stockholders, divided by the number of PRIMESTAR(R) subscribers of such Class
C Stockholders on the Closing Date, would bear to the amount of indebtedness
of TSAT assumed by New PRIMESTAR in connection with the Restructuring
Transaction, divided by the number of PRIMESTAR(R) subscribers of TSAT on such
date.
In conducting such negotiations, TSAT's management considered, among other
factors, the percentage of the outstanding New PRIMESTAR Common Stock to be
owned by the former stockholders of TSAT immediately following the Closing of
the proposed transaction, as compared to (i) the percentage of the total
number of PRIMESTAR(R) subscribers at the Closing attributable to TSAT and
(ii) TSAT's percentage interest in the Partnership. Representatives of Dr.
Malone were consulted by TSAT from time to time in connection with such
negotiations, particularly in connection with matters relating to the rights
and privileges of holders of New PRIMESTAR Common Stock and the terms of the
TSAT Voting Agreements and the Stockholder Agreement.
55
<PAGE>
In May 1997, EchoStar filed suit against News Corp. with respect to their
previously-announced and then aborted business combination. After News Corp.
approached the Partnership regarding a possible business combination or other
strategic transaction, the terms of the ASkyB Transaction were negotiated in
late May and early June 1997.
On June 10, 1997, (a) the TSAT Board unanimously approved the terms of (i) a
transaction (the "Original Restructuring Transaction") in which the businesses
operated by TSAT and the Partnership and the PRIMESTAR(R) distribution
business of each of the other Distributors would be combined into New
PRIMESTAR, (ii) the ASkyB Transaction and (iii) the TSAT Voting Agreements,
and (b) the Partnership approved the ASkyB Transaction by unanimous written
consent. On June 11, 1997, TSAT, the Partnership, TWE (through its division
Time Warner Cable), Newhouse, Comcast, Cox, MediaOne, GE Americom and John C.
Malone entered into a letter agreement, with attached summary of business
terms, with respect to the Original Restructuring Transaction, and the
Partnership, News Corp., MCI, ASkyB and, for certain purposes only, each of
the Partners, entered into the ASkyB Agreement.
The June 11, 1997 letter agreement provided for TSAT to participate in the
Original Restructuring Transaction by merging with and into New PRIMESTAR.
Since Tempo is currently a wholly-owned subsidiary of TSAT, as a result of
such merger, Tempo would have become a wholly-owned subsidiary of New
PRIMESTAR. Thus, the Original Restructuring Transaction would have resulted in
a change in control of Tempo, and accordingly would have required FCC
approval.
On July 18, 1997, TSAT filed the Transfer Application with the FCC,
requesting consent to transfer control of Tempo to New PRIMESTAR. At such
time, the Restructuring Parties expected that the Transfer Application would
be approved in time to allow the Original Restructuring Transaction to be
closed by the end of 1997.
From June 1997 through December 1997, TSAT and the other Restructuring
Parties negotiated the terms and provisions of definitive agreements relating
to the Original Restructuring Agreement.
In late December 1997, the FCC informed TSAT that the FCC would not render a
decision with respect to the Transfer Application within the time frame
anticipated by the parties. On December 24, 1997, representatives of the
parties, as well as the independent members of the Partners Committee of the
Partnership, met by telephonic conference to discuss the possibility of
modifying the Original Restructuring Transaction so that FCC approval would
not be required. Following such conference call, representatives of the
Restructuring Parties continued to discuss such an alternative structure, and
in January 1998, a revised term sheet was distributed among the parties
setting forth the principal terms of the Roll-up Plan, including the
Restructuring Transaction, the TSAT Merger, the Tempo Sale and the agreements
and other transactions contemplated thereby, substantially as described in
this Proxy Statement/Prospectus.
In negotiating the Restructuring Transaction, the TSAT Merger and the Tempo
Sale, TSAT intended to preserve as closely as possible the economics and
perceived commercial benefits of the Original Restructuring Transaction, while
avoiding the delay occasioned by the requirement of FCC approval. The intended
result was sought by, in effect, dividing the Original Restructuring
Transaction into the Restructuring Transaction and the TSAT Merger. Because
the Restructuring Transaction does not result in a change of control of Tempo,
consummation of the Restructuring Transaction does not require FCC approval of
the Transfer Application. However, the Restructuring Transaction does result
in (i) New PRIMESTAR being a private company, (ii) TSAT continuing in
existence as a holding company, with no assets or liabilities other than its
investment in New PRIMESTAR, the capital stock of Tempo and its rights and
obligations under certain related agreements, and (iii) the business and
assets of Tempo being separated from the business and assets of New PRIMESTAR.
Under the terms of the Restructuring Transaction, immediately following the
consummation of the Restructuring Transaction, TSAT will own the same interest
in New PRIMESTAR that the former stockholders would have owned (in the
aggregate) pursuant to the Original Restructuring Transaction, immediately
after consummation thereof.
56
<PAGE>
If the Transfer Application is approved and either the TSAT Merger or the
Tempo Sale is effected, New PRIMESTAR will own all the assets and businesses
that it would have owned following consummation of the Original Restructuring
Transaction, and, if the TSAT Merger is consummated, the former stockholders
of TSAT will own the same interest in New PRIMESTAR that they would have owned
following consummation of the Original Restructuring Transaction (in each
case, in all material respects). Consummation of the TSAT Merger would also
result in (i) New PRIMESTAR becoming a publicly-traded entity, (ii) TSAT
ceasing to have a separate existence, and (iii) subject to any prior
divestiture of Tempo by TSAT in accordance with the TSAT Tempo Agreement,
Tempo becoming a wholly-owned subsidiary of New PRIMESTAR.
From the time that TSAT and the other Restructuring Parties began
negotiating the terms and conditions of the Original Restructuring Transaction
until December 1997, the parties intended that the Restructuring Transaction
and the TSAT Merger would be consummated concurrently. However, as a result of
the factors described above, the Restructuring Transaction is now expected to
be consummated prior to the TSAT Merger. Consummation of the TSAT Merger is
subject to regulatory and other conditions; accordingly, even though approval
of the Roll-Up Proposal by TSAT stockholders at the Meeting constitutes
approval of both the Restructuring Transaction and the TSAT Merger, it is
possible that only the Restructuring Transaction and not the TSAT Merger will
be consummated.
During the period between the Closing of the Restructuring Transaction and
June 30, 1998, TSAT must use its best efforts, and New PRIMESTAR must use its
commercially reasonable efforts, to cause the Transfer Application to be
approved, and to cause all other conditions to closing the TSAT Merger to be
satisfied; and, if such conditions have been satisfied, TSAT and New PRIMESTAR
have agreed to cause the TSAT Merger to be consummated. However, if the
conditions to closing the TSAT Merger have not been satisfied by such date,
New PRIMESTAR will thereafter have the right to terminate the TSAT Merger
Agreement on ten days notice. In negotiating the right of New PRIMESTAR to
terminate the TSAT Merger Agreement under such circumstances, TSAT and New
PRIMESTAR considered (i) the uncertainties regarding the substance and timing
of the FCC's decision with respect to the Transfer Application, (ii) TSAT's
need for flexibility in addressing its possible classification as an
investment company under the 1940 Act, and (iii) New PRIMESTAR's need for
flexibility in responding to the competitive and rapidly changing nature of
the digital satellite television industry.
In January 1998, the draft definitive agreements were modified to reflect
the terms of the Roll-up Plan, including the Restructuring Transaction, the
TSAT Merger, the Tempo Sale and other transactions. The Roll-up Plan,
including the Restructuring Transaction, the TSAT Merger, the Restructuring
Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger Agreement, the
Stockholders Agreement, the TSAT Stockholders Agreement and the TSAT Tempo
Agreement, and the other transactions and agreements contemplated thereby,
were approved unanimously by the TSAT Board on February 6, 1998, and the
Restructuring Agreement and the TSAT Merger Agreement were entered into as of
February 6, 1998.
REASONS FOR THE ROLL-UP PLAN; RECOMMENDATION OF THE TSAT BOARD
THE TSAT BOARD HAS UNANIMOUSLY APPROVED THE ROLL-UP PLAN, INCLUDING THE
TERMS OF THE RESTRUCTURING AGREEMENT, THE TSAT ASSET TRANSFER AGREEMENT AND
THE TSAT MERGER AGREEMENT, HAS DETERMINED THAT THE ROLL-UP PLAN IS ADVISABLE
AND FAIR AND IN THE BEST INTERESTS OF TSAT AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT TSAT STOCKHOLDERS VOTE FOR APPROVAL OF THE ROLL-UP
PROPOSAL. In reaching its decision to approve the Roll-up Plan and to
recommend that TSAT's stockholders vote to approve the Roll-up Proposal, the
TSAT Board considered the following factors: (i) industry and market
conditions, including the increasing competition in the multichannel
television services business, including competition from other satellite
services providers and cable operators; (ii) the terms of the Restructuring
Agreement, the TSAT Asset Transfer Agreement and the TSAT Merger Agreement,
including the consideration to be received by TSAT in the Restructuring
Transaction and by TSAT stockholders in the TSAT Merger; (iii) the opportunity
for TSAT (and, following the TSAT Merger, TSAT stockholders) to participate,
as holders of New PRIMESTAR Common Stock, in a national provider of satellite
television services with a cohesive, national focus, and to do so by means of
a transaction that is designed to be
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tax-free to TSAT (and, following the TSAT Merger, TSAT stockholders); and (iv)
the opinion of Merrill Lynch as to the fairness, from a financial point of
view, of the consideration to be received by TSAT and its stockholders
pursuant to the Roll-up Plan. See "--TSAT Fairness Opinion." For a discussion
of the interests of certain members of the TSAT Board in the Roll-up Plan, see
"--Interests of Certain Persons in the Roll-up Plan."
In addition, TSAT and each of the other Restructuring Parties believes that
the Restructuring Transaction will benefit the PRIMESTAR(R) digital satellite
business currently owned and operated on a decentralized basis by the
Partnership, and by TSAT and the other Distributors by (i) providing increased
access to capital markets to finance growth prospects, (ii) facilitating the
implementation of a national sales strategy for the PRIMESTAR(R) service with
consistent programming, packages and pricing, (iii) enhancing PRIMESTAR(R)'s
expansion into more retail distribution channels, and (iv) providing increased
agility to compete in a rapidly changing marketplace by nationalizing the
local business units of the PRIMESTAR(R) Distributors. Consummating the
Restructuring Transaction without waiting for the FCC to render its decision
on the Transfer Application allows TSAT and the other Restructuring Parties to
realize these benefits even if such approval is not obtained. However, TSAT
and New PRIMESTAR will both be able to operate more efficiently as a combined
company, and, by proceeding with the TSAT Merger after the regulatory issues
have been resolved (subject to the conditions set forth in the TSAT Merger
Agreement), TSAT stockholders will be able to realize these benefits directly
rather than through a holding company. See "RISK FACTORS--Risks Associated
with Holding Company Structure," "RISK FACTORS--Investment Company Act
Considerations" and "RISK FACTORS--Risks of Failure to Consummate the TSAT
Merger."
TSAT FAIRNESS OPINION
The TSAT Board retained Merrill Lynch to act as the financial advisor to
TSAT in connection with the Roll-up Plan. On February 6, 1998, Merrill Lynch
delivered its oral opinion (which it subsequently confirmed in writing) to the
TSAT Board, to the effect that, as of February 6, 1998, and based upon the
assumptions made, matters considered and limits of the review, as set forth in
such opinion, the consideration to be received by TSAT and its stockholders
pursuant to the Roll-up Plan, including the consideration to be received by
TSAT pursuant to the Restructuring Agreement, the TSAT Tempo Agreement and the
TSAT Asset Transfer Agreement and the consideration to be received by TSAT's
stockholders pursuant to the TSAT Merger Agreement, taken as a whole, is fair
to TSAT and its stockholders (other than TSAT's affiliates) from a financial
point of view. Merrill Lynch has consented to the inclusion of the Merrill
Lynch Opinion as Appendix I to this Proxy Statement/Prospectus.
A COPY OF THE MERRILL LYNCH OPINION IS ATTACHED HERETO AS APPENDIX I.
HOLDERS OF TSAT COMMON STOCK ARE URGED TO READ THE MERRILL LYNCH OPINION IN
ITS ENTIRETY FOR THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE
REVIEW BY MERRILL LYNCH. THE MERRILL LYNCH OPINION IS DIRECTED ONLY TO THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED
BY TSAT AND ITS STOCKHOLDERS (EXCEPT TSAT'S AFFILIATES) PURSUANT TO THE ROLL-
UP PLAN, INCLUDING THE CONSIDERATION TO BE RECEIVED BY TSAT PURSUANT TO THE
RESTRUCTURING AGREEMENT, THE TSAT TEMPO AGREEMENT AND THE TSAT ASSET TRANSFER
AGREEMENT AND THE CONSIDERATION TO BE RECEIVED BY TSAT'S STOCKHOLDERS PURSUANT
TO THE TSAT MERGER AGREEMENT, TAKEN AS A WHOLE, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY TSAT STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE
AT THE MEETING. THE SUMMARY OF THE MERRILL LYNCH OPINION AS SET FORTH IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
FULL TEXT OF THE MERRILL LYNCH OPINION.
In arriving at its opinion, Merrill Lynch, among other things, (1) reviewed
certain publicly available business and financial information relating to TSAT
and the Partnership that it deemed relevant; (2) reviewed certain financial
information, including financial forecasts, relating to the business,
earnings, cash flow, assets, liabilities and prospects of the Partnership,
each of the other Restructuring Parties and New PRIMESTAR, as well as the
amount and timing of the projected cost savings and related expenses expected
to result from the Roll-up Plan (the "Expected Cost Savings") furnished to
Merrill Lynch by TSAT, the Partnership and each of
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the other Restructuring Parties, respectively; (3) conducted discussions with
members of senior management and representatives of TSAT concerning the
matters described in clauses (1) and (2) above, as well as their respective
businesses and prospects before and after giving effect to the Roll-up Plan
and the Expected Cost Savings; (4) attended meetings of the Partnership during
which the Restructuring Parties discussed the Roll-up Plan; (5) reviewed the
historical market prices, trading activity and valuation multiples for TSAT
Common Stock and compared them with those of certain publicly traded companies
that Merrill Lynch deemed to be comparable; (6) compared the proposed
financial terms of the Roll-up Plan with the financial terms of certain other
private acquisition transactions that Merrill Lynch believed to be generally
comparable; (7) participated in certain discussions and negotiations among
representatives of TSAT, the Partnership and each of the other Restructuring
Parties and their financial and legal advisors; (8) reviewed the Limited
Partnership Agreement dated February 8, 1990, among ATC Satellite Inc.,
Comcast DBS, Inc., Continental Satellite Company, Inc., Cox Satellite, Inc.,
G.E. Americom Services, Inc., New Vision Satellite, TCI K-1, Inc., United
Artists K-1 Investments, Inc., Viacom K-Band, Inc. and Warner Cable SSD, Inc.,
and the amendments thereto dated September 1, 1993, December 15, 1993 and
October 18, 1996; (9) reviewed drafts dated February 6, 1998 of the
Restructuring Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger
Agreement, the TSAT Tempo Agreement, the TSAT Stockholders Agreement, the
Stockholders Agreement, and the Registration Rights Agreement, and the forms
of the proposed certificate of incorporation and by-laws of New PRIMESTAR
(collectively, the "Relevant Documents"); (10) reviewed the preliminary proxy
statement as filed on January 26, 1998; (11) reviewed the draft commitment
letter dated January 30, 1998 and related term sheet relating to interim
financing to be provided in connection with the Restructuring Transaction; and
(12) reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including an assessment
of general economic, market and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to it
by TSAT, the Partnership and the other Partners, and Merrill Lynch has not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of TSAT, the Partnership or the other Partners or been furnished
with any such evaluation or appraisal. In addition, Merrill Lynch has not
assumed any obligation to conduct any physical inspection of the properties or
facilities of TSAT, the Partnership or the other Partners. With respect to the
financial forecast information and the Expected Cost Savings furnished to or
discussed with Merrill Lynch by TSAT, the Partnership or the other Partners,
Merrill Lynch has assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgment of TSAT's, the
Partnership's or the other Partners' management as to the expected future
financial performance and the Expected Cost Savings of TSAT, New PRIMESTAR,
the Partnership or the other Partners, as the case may be.
The Merrill Lynch Opinion is necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and on the information
made available to Merrill Lynch as of the date thereof. Merrill Lynch further
assumed that (i) the TSAT Asset Transfer will be treated for U.S. federal
income tax purposes as a tax-free exchange and that no gain or loss will be
recognized by TSAT except for the possibility that gain or income may be
recognized by TSAT in connection with the assumption of TSAT's outstanding
debt; (ii) if the TSAT Merger is consummated pursuant to the TSAT Merger
Agreement, the TSAT Merger will qualify as a tax-free reorganization pursuant
to Section 368(a)(1) of the Internal Revenue Code of 1986, as amended, and
that no gain or loss will be recognized by TSAT or by TSAT stockholders as a
result of the TSAT Merger; (iii) in the course of obtaining the necessary
regulatory approvals or other consents or approvals (contractual or otherwise)
for the Restructuring Transaction and the TSAT Merger, no restrictions,
requirements, amendments or modifications will be imposed that will have an
adverse effect on the contemplated benefits of the Roll-up Plan; (iv) under
U.S. generally accepted accounting principles the TSAT Asset Transfer will be
recorded at TSAT's historical cost and the remaining elements of the
Restructuring Transaction will be treated as the acquisition by New PRIMESTAR
of the Partnership Interests and the PRIMESTAR Assets, and the assumption by
New PRIMESTAR of the PRIMESTAR Liabilities other than those of TSAT, and such
acquisition will be accounted for using the purchase method of accounting; (v)
the TSAT Merger will be treated as the acquisition of TSAT by New PRIMESTAR
and such acquisition will be accounted for at TSAT's historical cost; and
(vi) TSAT is not and will not be subject to registration or regulation under
the 1940 Act, and therefore
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Merrill Lynch has not considered the effect or impact upon the business,
operations or prospects of TSAT or the value of the capital stock of TSAT of
TSAT becoming subject to regulation or registration under the 1940 Act. In
addition, TSAT has advised Merrill Lynch that New PRIMESTAR intends to
refinance (subject to market conditions) as soon as practicable after the
consummation of the Restructuring Transaction any interim financing drawn down
at the consummation of the Restructuring Transaction with long-term financing
on market terms.
Merrill Lynch expressed no opinion as to what the value of New PRIMESTAR
Common Stock actually will be when issued to the stockholders of TSAT pursuant
to the TSAT Merger Agreement or the prices at which New PRIMESTAR Common Stock
will trade subsequent to the TSAT Merger. Merrill Lynch also assumed for
purposes of its opinion that the terms of any additional documents that may be
agreed to other than those reviewed by Merrill Lynch would not affect Merrill
Lynch's analyses. In connection with the preparation of its opinion, Merrill
Lynch was not authorized by TSAT or the TSAT Board to solicit, nor did Merrill
Lynch solicit, third party indications of interest for the acquisition of all
or any part of TSAT. The specific consideration payable in the Restructuring
Transaction and the TSAT Merger was determined by negotiations among the
parties to the Roll-up Plan.
Merrill Lynch performed the following analyses in rendering its opinion to
TSAT: (1) compared the shareholder profile of TSAT before the TSAT Merger with
the shareholder profile of New PRIMESTAR; (2) performed a sensitivity analysis
to determine what the economic ownership profile of New PRIMESTAR would be to
the extent that the subscriber multiples used in calculating such economic
ownership in the Restructuring Agreement were $800, $1,100 and $2,000; (3)
derived Subscriber Multiples (as defined below) for comparable public
companies and TSAT; (4) examined the trading history of TSAT and comparable
public companies; (5) calculated implied relative values per share of the TSAT
Common Stock and the New PRIMESTAR Common Stock using various valuations of
TSAT Common Stock and New PRIMESTAR Common Stock including (a) current market
value of TSAT versus a subscriber multiple analysis for New PRIMESTAR; (b) a
subscriber multiple analysis; (c) a discounted cash flow ("DCF") analysis; (d)
an EBITDA contribution analysis; and (e) an unlevered free cash flow
contribution analysis; (6) analyzed the impact, in aggregate and on a per
share basis, to TSAT stockholders of certain items relating to the Roll-up
Plan; and (7) examined the Expected Cost Savings information furnished by the
management of TSAT and others.
SHAREHOLDER PROFILES
TSAT Shareholder Profile--Pre-Restructuring Transaction. Merrill Lynch
analyzed the respective ownership percentages and voting power of TSAT held by
TSAT's affiliates, certain corporate holders and the public. The economic
ownership of TSAT held by TSAT's affiliates, certain corporate holders and the
public is 24.5%, 2.6% and 72.9% respectively. The voting power in TSAT held by
TSAT's affiliates, certain corporate holders and the public is 55.3%, 5.5% and
39.2% respectively.
New PRIMESTAR Shareholder Profile--Post Restructuring Transaction. Merrill
Lynch analyzed the respective ownership percentages and voting power of New
PRIMESTAR held by TWE and Newhouse (collectively), Comcast, Cox, MediaOne, GE
Americom and former holders of TSAT broken down by TSAT's affiliates, certain
corporate holders and the public. Based on TSAT management's estimate of the
total number of PRIMESTAR(R) subscribers of each Distributor as of March 31,
1998 and TSAT's estimated net debt as of March 31, 1998, the economic
ownership of New PRIMESTAR held by TWE and Newhouse (collectively), Comcast,
Cox, MediaOne, GE Americom, TSAT's affiliates, certain corporate holders and
the public is expected to be 30.0%, 9.8%, 9.4%, 9.7%, 4.3%, 9.0%, 1.0% and
26.8% respectively. The voting power in New PRIMESTAR held by TWE and Newhouse
(collectively), Comcast, Cox, MediaOne, GE Americom, TSAT's affiliates,
certain corporate holders and the public is expected to be 30.6%, 10.1%, 9.5%,
9.9%, 2.2%, 19.8%, 2.2% and 15.7% respectively.
New PRIMESTAR Shareholder Profile--Sensitivity Analysis. Merrill Lynch
performed a sensitivity analysis to determine what TSAT's and each Partner's
economic ownership of New PRIMESTAR would be by
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applying variable value per subscriber amounts of $800, $1,100 and $2,000
(each, an "Applicable Subscriber Multiple") to the methodology used in the
Restructuring Agreement. Economic ownership was determined by performing the
following calculation for TSAT and each other Partner: Dividing equity
received in the Restructuring Transaction by TSAT or such other Partner
("Adjusted Equity") by total adjusted equity (the sum of TSAT's and each of
the other Partners' Adjusted Equities). Adjusted Equity was calculated,
pursuant to the Restructuring Agreement, by subtracting the amount of cash
consideration to be received or debt to be assumed in the Restructuring
Transaction, if any, (the "Adjusted Cash") from adjusted aggregate value;
adjusted aggregate value was calculated pursuant to the Restructuring
Agreement as the number of subscribers as of March 31, 1998 multiplied by the
Applicable Subscriber Multiple plus the at-cost value of the Partnership
Interest. Based on TSAT management's estimate of the total number of
PRIMESTAR(R) subscribers of each Distributor as of March 31, 1998 and TSAT's
estimated net debt as of March 31, 1998, TSAT's, TWE's and Newhouse's
(collectively), Cox's, Comcast's, MediaOne's and GE Americom's economic
ownership of New PRIMESTAR, based on a value per subscriber of (i) $800 would
be 32.6%, 30.7%, 9.7%, 10.1%, 9.9% and 7.0% respectively; (ii) $1,100 would be
36.8%, 30.0%, 9.4%, 9.8%, 9.7% and 4.3% respectively; and (iii) $2,000 would
be 40.5%, 29.3%, 9.1%, 9.6%, 9.4% and 2.0 % respectively.
COMPARABLE PUBLIC COMPANY ANALYSIS
Subscriber Multiple Analysis of Comparable Companies. Merrill Lynch reviewed
certain publicly available financial information regarding the following three
selected publicly-traded DBS companies: EchoStar, USSB and Pegasus
Communications, Inc. ("Pegasus") (each a "Comparable Company"). With respect
to each Comparable Company, Merrill Lynch calculated the adjusted enterprise
value per subscriber (the "Subscriber Multiple") for projected 1997 and 1998,
based on publicly filed SEC documents, public research and in certain cases,
Merrill Lynch estimates. Merrill Lynch calculated the Subscriber Multiple by
dividing the adjusted market capitalization by an estimated number of
subscribers for each Comparable Company. Adjusted market capitalization was
calculated by adding market value as of January 30, 1998, total debt as of
September 30, 1997, preferred stock as of September 30, 1997, minority
interest as of September 30, 1997 and less cash and less estimated public
market value of other assets. All data used in such calculations was adjusted
for transactions which were completed or are expected to be completed after
the date of the most recent financial statement or research report, as
applicable. Merrill Lynch determined that the 1997 and 1998 Subscriber
Multiples were $1,469 and $794 for EchoStar, $381 and $301 for USSB, $2,490
and $2,058 for Pegasus and $652 and $545 for TSAT, respectively.
Stock Price as a Percent of Private Market Value. Merrill Lynch calculated,
for each of TSAT and the Comparable Companies, the stock price as a percentage
of the private market value per share as determined from public research and
Merrill Lynch estimates, and found such percentages to be 39.2% for EchoStar,
66.6% for USSB, 77.6% for Pegasus and 41.0% for TSAT.
Trading History of Comparable Companies. Merrill Lynch examined the
historical stock price performance of TSAT and the Comparable Companies for
various periods. Merrill Lynch did not draw any conclusions for the TSAT Board
with respect to the stock trading history of the common stock of the
Comparable Companies.
Merrill Lynch indicated that no company utilized in the comparable companies
analysis was identical to TSAT or to New PRIMESTAR. Each Comparable Company
has unique attributes and accordingly, Merrill Lynch believes that a purely
quantitative comparable company analysis would not be dispositive in the
context of the Roll-up Plan; rather, an appropriate use of a comparable
company analysis in this instance involves qualitative judgments concerning
differences in historical and projected financial and operating
characteristics and other factors that could affect the analysis. In addition,
the Wall Street research for each of the Comparable Companies was not reliable
due to divergent subscriber forecasts and limited availability of recent
research.
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CONSIDERATION ANALYSIS
Merrill Lynch analyzed the value of TSAT prior to the Roll-up Plan relative
to the value of the consideration to be received by TSAT and its stockholders
(such relative value, a "consideration ratio") under five different valuation
methodologies as more fully described in the paragraphs that follow the below
list:
(1) current market value of TSAT versus a subscriber multiple analysis of
New PRIMESTAR;
(2) a subscriber multiple analysis for both TSAT and New PRIMESTAR;
(3) a DCF analysis for both TSAT and New PRIMESTAR;
(4) an EBITDA contribution analysis; and
(5) an unlevered free cash flow contribution analysis.
TSAT CURRENT MARKET VALUE VERSUS NEW PRIMESTAR SUBSCRIBER MULTIPLE ANALYSIS
Current Market Value of TSAT. Merrill Lynch reviewed the performance of the
stock market price of TSAT Common Stock from November 20, 1996 (which was the
date that "when-issued" trading of TSAT began) to January 30, 1998. During
this period, Merrill Lynch noted that the TSAT Common Stock traded at a high
stock market price of $19.00 and a low stock market price of $5.50 per share.
As of January 30, 1998, TSAT Common Stock was trading at a stock market price
of $5.50 per share.
Subscriber Multiple Analysis--New PRIMESTAR Public Market Value. Utilizing a
subscriber multiple range of $800 to $1,100 (the "Subscriber Multiple Range"),
Merrill Lynch estimated the public market value of New PRIMESTAR Common Stock
on a pro forma basis. Merrill Lynch derived New PRIMESTAR's public market
value range by dividing New PRIMESTAR's estimated total equity value by the
estimated number of outstanding New PRIMESTAR shares. Total equity value was
calculated by multiplying the applicable subscriber multiple by the total
estimated number of New PRIMESTAR subscribers as of March 31, 1998 as
furnished by TSAT management, and adding to that product, the value of New
PRIMESTAR's high power service as determined by a DCF analysis, the at-cost
value of the satellites and the value of the Expected Cost Savings and
subtracting net debt as of March 31, 1998, as furnished by TSAT management.
Merrill Lynch calculated that, based on the Subscriber Multiple Range, New
PRIMESTAR Common Stock would have an implied high public market value of
$11.34 per share and an implied low public market value of $8.35 per share.
Based on the current market value of TSAT of $5.50 per share as of January
30, 1998 and the New PRIMESTAR public market value range of $8.35 to $11.34
per share derived from the Subscriber Multiple Range, Merrill Lynch derived an
implied consideration ratio range of .485 to .659.
SUBSCRIBER MULTIPLE ANALYSIS
TSAT Public Market Value Analysis. Utilizing the Subscriber Multiple Range,
Merrill Lynch estimated the public market value of TSAT Common Stock. Merrill
Lynch determined the public market value range of TSAT Common Stock by
dividing TSAT's total equity value by the number of outstanding TSAT shares on
a fully diluted basis as of September 30, 1997. Total equity value was
calculated by multiplying the applicable subscriber multiple by the total
estimated number of TSAT subscribers as of March 31, 1998 as furnished by TSAT
management, and adding to that product, the value of TSAT's high power service
as determined by a DCF analysis. the value of TSAT's interest in the
Partnership as determined by a DCF analysis and subtracting net debt as of
March 31, 1998, as furnished by TSAT management. Merrill Lynch calculated
that, based on the Subscriber Multiple Range, TSAT Common Stock would have an
implied high public market value of $11.07 per share and an implied low public
market value of $7.51 per share.
New PRIMESTAR Public Market Value. Merrill Lynch utilized the same analysis
as described above under the caption "--TSAT Current Market Value Versus New
PRIMESTAR Subscriber Multiple Analysis--Subscriber Multiple Analysis--New
PRIMESTAR Public Market Value."
Based on TSAT's public market value range of $11.07 to $7.51 per share and
New PRIMESTAR's public market value range of $11.34 to $8.35 per share, each
as derived from the subscriber multiple analysis, Merrill Lynch derived an
implied consideration ratio range of .899 to .976.
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DISCOUNTED CASH FLOW ANALYSES
TSAT Discounted Cash Flow Analyses. Merrill Lynch performed a DCF analysis
of TSAT based upon projections furnished by the management of TSAT and the
Partnership for 1998 through 2007. The DCF for TSAT's medium power service was
calculated assuming discount rates ranging from 14% to 16% and terminal value
multiples of EBITDA in 2007 ranging from 10.0x to 12.0x. The DCF for TSAT's
high power service was calculated assuming discount rates ranging from 16% to
18% and terminal value multiples of EBITDA in 2007 ranging from 10.0x to
12.0x. The DCF for the Partnership was calculated assuming discount rates
ranging from 14% to 16% and terminal value multiples of EBITDA in 2006 ranging
from 7.0x to 8.0x. By aggregating the DCF valuations of the medium power
service, the high power service and the Partnership, subtracting estimated net
debt as of December 31, 1997, and dividing by the number of outstanding TSAT
shares on a fully diluted basis as of September 30, 1997, Merrill Lynch
calculated TSAT's per share value on a DCF basis ranging from a high of $8.48
to a low of $4.34.
New PRIMESTAR Discounted Cash Flow Analyses. Merrill Lynch performed a DCF
analysis of New PRIMESTAR based upon projections furnished by the management
of TSAT and the Partnership for 1998 through 2007. The DCF for New PRIMESTAR's
medium power service was calculated assuming discount rates ranging from 14%
to 16% and terminal value multiples of EBITDA in 2007 ranging from 10.0x to
12.0x. The DCF for New PRIMESTAR's high power service was calculated assuming
discount rates ranging from 16% to 18% and terminal value multiples of EBITDA
in 2007 ranging from 10.0x to 12.0x. By aggregating the DCF valuations of the
medium power service and the high power service, adding the value of the Tempo
Satellites at cost, subtracting estimated net debt as of December 31, 1997,
and dividing by the estimated number of outstanding New PRIMESTAR shares,
Merrill Lynch calculated New PRIMESTAR's per share value on a DCF basis
ranging from a high of $11.55 to a low of $7.52.
Based on TSAT's DCF valuation range of $8.48 to $4.34 per share and New
PRIMESTAR's DCF valuation range of $11.55 to $7.52 per share, Merrill Lynch
derived an implied consideration ratio range of .577 to .734.
CONTRIBUTION ANALYSIS
Merrill Lynch calculated the actual or projected total percentages, as
applicable, of TSAT's contribution to New PRIMESTAR for the years 1997, 1999,
2002 and 2005 for each of subscribers, revenues, EBITDA, and unlevered free
cash flow, which was defined as EBITDA minus capital expenditures. Based on an
estimated number of subscribers before and after the Restructuring
Transaction, and based on projections furnished by the management of TSAT and
each of the Distributors, Merrill Lynch estimated that TSAT would contribute
to New PRIMESTAR: (i) 44% in 1997, 48% in 1999, 49% in 2002, and 50% in 2005
of the combined subscribers; (ii) 46% in 1997, 48% in 1999, 51% in 2002, and
53% in 2005 of the combined revenues; (iii) 37% in 1997, 20% in 1999, 36% in
2002, and 40% in 2005 of the combined EBITDA; and (iv) a non-meaningful amount
in 1997, a non-meaningful amount in 1999, 12% in 2002, and 31% in 2005 of the
combined unlevered free cash flow.
Merrill Lynch calculated the implied consideration ratio based on EBITDA
contribution analysis range to be 0.531 to 1.090. Merrill Lynch calculated the
implied consideration ratio by dividing TSAT's contribution to EBITDA in each
of 1997, 1999, 2002 and 2005 by, in each case, TSAT's estimated economic
ownership of New PRIMESTAR.
Merrill Lynch calculated the implied consideration ratio based on unlevered
free cash flow contribution analysis range to be .338 to .844. Merrill Lynch
calculated the implied consideration ratio by dividing TSAT's contribution to
unlevered free cash flow in each of 1997, 1999, 2002 and 2005 by, in each
case, TSAT's estimated economic ownership of New PRIMESTAR.
Comparison of Distributors. For the year ended 1997, based on information
furnished to Merrill Lynch by TSAT and each of the other Distributors, Merrill
Lynch compared revenues per subscriber, EBITDA per subscriber, churn and
unlevered free cash flow per subscriber of TSAT to that of the weighted
average of the Distributors (other than TSAT). Merrill Lynch determined that
(i) TSAT expects to have $60.73 in revenues per
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subscriber per month and the Distributors (other than TSAT) expect to have
$58.25 per subscriber per month on a weighted average basis; (ii) TSAT expects
to have $7.51 in EBITDA per subscriber per month and the Distributors (other
than TSAT) expect to have $9.33 per subscriber per month on a weighted average
basis; (iii) TSAT expects to have 29.9% churn and the Distributors (other than
TSAT) expect to have 25.8% churn on a weighted average basis; and (iv) TSAT
expects to have negative $18.16 unlevered free cash flow per subscriber per
month and the Distributors (other than TSAT) expect to have negative $18.86
per subscriber per month on a weighted average basis.
Value Creation/Leakage. Merrill Lynch calculated the aggregate and per share
value loss or gain to the stockholders of TSAT as a result of the
Restructuring Transaction based on the Restructuring Agreement's
treatment/valuation of (i) the Partnership; and (ii) GE Americom's Partnership
Interest. Merrill Lynch determined that TSAT stockholders would experience, an
(i) aggregate loss as a result of the valuation of the Partnership ranging
from a high of $0 to a low of $38.8 million or a high of $0 to a low of $0.52
per share; and (ii) aggregate loss as a result of the treatment of GE
Americom's Partnership Interest, of $10.8 million or $0.14 per share.
Merrill Lynch calculated the aggregate and per share value loss or gain to
the stockholders of TSAT as a result of (i) the impact of the Restructuring
Transaction to TSAT's share of the economics of the high power service; and
(ii) the Expected Cost Savings. Merrill Lynch estimated that as a result of
clause (i) above, TSAT stockholders would experience an aggregate loss based
on a DCF ranging from a high of $42.0 million to a low of $31.8 million or a
high of $0.56 to a low of $0.43 per share; and as a result of clause (ii)
above, based on the valuation of the Expected Cost Savings described below,
TSAT stockholders would experience an aggregate gain ranging from a high of
$371.5 million to a low of $151.4 million or a high of $4.98 to low of $2.03
per share. The valuation of the Expected Cost Savings was calculated by
applying a multiple of 6.0x to 8.0x to the Expected Cost Savings range of
$68.5 million to $126.1 million on an aggregate annual basis, as defined
below. Aggregating the above aggregate and per share value losses and gains,
Merrill Lynch projected that as a result of the Restructuring Transaction,
TSAT stockholders would realize a benefit ranging from a high of $318.6
million to a low of $69.9 million gain on an aggregate basis and a high of
$4.27 to a low of a $0.94 gain on a per share basis, or a high of 77.6% to a
low 17.0% gain as a percentage of TSAT's market price as of January 30, 1998.
Expected Cost Savings. Merrill Lynch examined the Expected Cost Savings to
New PRIMESTAR associated with the Restructuring Transaction, as furnished by
TSAT management. TSAT management compared the costs by Distributor and for the
Partnership in 1998 if the Restructuring Transaction were not to occur ("Pre-
Restructuring") to the expected costs in 1998 of New PRIMESTAR, assuming the
Restructuring Transaction occurred on January 1, 1998 ("Post-Restructuring").
Pre-Restructuring, TSAT management estimated that the Distributors would pay
a fee to the Partnership of approximately $8.52 per subscriber per month, or
an aggregate of approximately $220.8 million, to cover satellite, uplink and
national marketing expenses (the "Partnership Fee"). In addition, TSAT
management estimated that local marketing expenses for the Distributors would
aggregate approximately $37.0 million, or approximately $1.43 per subscriber
per month, and general and administrative expenses would aggregate
approximately $172.7 to $230.3 million, or approximately $6.66 to $8.89 per
subscriber per month, in 1998 Pre-Restructuring. Such expenses combined would
aggregate approximately $430.5 to $488.1 million, or approximately $16.61 to
$18.83 per subscriber per month, in 1998 Pre-Restructuring.
Post-Restructuring, according to TSAT management, the Partnership Fee would
be eliminated and New PRIMESTAR would incur expenses directly for satellite,
uplink and national marketing expenses. Post-Restructuring. TSAT management
estimated that satellite and uplink expenses would be approximately $79.5 and
$12.0 million, respectively, or approximately $3.07 and $0.46 per subscriber
per month, respectively. In addition, TSAT management estimated that combined
marketing expenses would be approximately $73.3 million, or $2.83 per
subscriber per month and that general and administrative expenses would be
approximately $197.3 million, or approximately $7.61 per subscriber per month,
in 1998 Post-Restructuring. Such expenses combined would aggregate
approximately $362.0 million, or approximately $13.97 per subscriber per
month, in 1998 Post-Restructuring.
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By subtracting the amount of combined expenses in 1998 Post-Restructuring
from the amount of combined expenses in 1998 Pre-Restructuring, Merrill Lynch
calculated that the Expected Cost Savings were approximately $68.5 to $126.1
million, or approximately $2.64 to $4.86 per subscriber per month.
The summary of analyses performed by Merrill Lynch as set forth above does
not purport to be a complete description of the analyses underlying Merrill
Lynch's opinion. The preparation of a fairness opinion is a complex analytic
process involving various determinations as to the most appropriate and
relevant methods of financial analyses and the application of these methods to
the particular circumstances, and, therefore, such an opinion is not readily
susceptible to partial or summary description. No company, business or
transaction used in such analyses as a comparison is identical to TSAT, New
PRIMESTAR, the Partnership, the Partners or the Roll-up Plan, nor is an
evaluation of the results of such analyses entirely mathematical; rather, it
involves complex considerations and judgments concerning financial and
operating characteristics and other factors that could affect the acquisition,
public trading or other values of the companies, business segments or
transactions being analyzed. The estimates contained in such analyses and the
ranges in valuations resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by such analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses, companies or securities actually may be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
CONCLUSION
On the basis of the foregoing analysis, Merrill Lynch concluded that the
consideration to be received by TSAT and its stockholders pursuant to the
Roll-up Plan, including the consideration to be received by TSAT pursuant to
the Restructuring Agreement, the TSAT Tempo Agreement and that TSAT Asset
Transfer Agreement and the consideration to be received by TSAT's stockholders
pursuant to the TSAT Merger Agreement, taken as a whole, is fair to TSAT and
its stockholders (except TSAT's affiliates) from a financial point of view.
MERRILL LYNCH FEES
Pursuant to a letter agreement between TSAT and Merrill Lynch, dated
November 7, 1997, and amendment dated February 2, 1998, TSAT engaged Merrill
Lynch to provide investment banking services to the TSAT Board in connection
with its review and analysis of the proposed Roll-up Plan. TSAT agreed to pay
Merrill Lynch an advisory fee of $1.0 million upon delivery of the Merrill
Lynch Opinion. TSAT has agreed to indemnify Merrill Lynch for certain
liabilities related to or arising out of its engagement, including liabilities
under the federal securities laws.
MISCELLANEOUS
TSAT retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm. Merrill Lynch, as part of its investment banking business,
is continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes.
Merrill Lynch has in the past provided, and may in the future provide,
financial advisory and financing services to TSAT and/or its affiliates and
has received, and may receive, customary fees for the rendering of such
services. In addition, in the ordinary course of its business, Merrill Lynch
and its affiliates may actively trade the debt and equity securities of TSAT,
as well as the New PRIMESTAR shares or shares of any Partners and other
securities of TSAT, New PRIMESTAR and any of the Partners for their own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is the opinion of Baker & Botts, L.L.P., that the following is a correct
description of the material federal income tax consequences of the Roll-up
Plan. Such opinion is not binding on the Internal Revenue Service
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("IRS"). The following discussion is based upon current provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
Regulations promulgated thereunder, judicial decisions and current
administrative rulings, any of which may be changed at any time with
retroactive effect. The discussion does not address all aspects of federal
income taxation that may be important to particular taxpayers in light of
their personal investment or tax circumstances, or to taxpayers subject to
special treatment under the federal income tax laws (including, without
limitation, insurance companies, foreign persons and foreign entities, holders
who acquired their TSAT Common Stock pursuant to the exercise of employee
stock options or otherwise as compensation and persons who hold the TSAT
Common Stock or will hold the New PRIMESTAR Common Stock as part of a
straddle, hedge or conversion transaction) and does not address any aspect of
state, local or foreign taxation. The discussion also assumes that TSAT Common
Stock will be held as a capital asset at the time of the consummation of the
TSAT Merger. No rulings have been or will be requested from the IRS with
respect to the Restructuring Transaction, the TSAT Merger or the other
transactions contemplated by this Proxy Statement/Prospectus, and there can be
no assurance that the IRS or a court will not challenge the tax-free status of
the Restructuring Transaction or the TSAT Merger.
The Restructuring Transaction. Based upon representation certificates, which
will be reconfirmed prior to the closing of the Restructuring Transaction, it
is the opinion of Baker & Botts, L.L.P., that: (i) the contribution by TSAT of
the TSAT Business to New PRIMESTAR in the Restructuring Transaction in
exchange for New PRIMESTAR Common Stock will be treated for federal income tax
purposes as a tax-free exchange, and no gain or loss will be recognized by
TSAT except for the possibility that gain or income may be recognized by TSAT
in connection with the assumption of the Notes. The opinion is based on
current law and assumes that the Restructuring Transaction will be consummated
as described in this Proxy Statement/Prospectus and in accordance with the
Restructuring Agreement, the TSAT Asset Transfer Agreement and related
agreements in their current form. It is possible that TSAT may recognize gain
or income in connection with the assumption of the Notes in the Restructuring
Transaction, but TSAT believes that such gain or income, if any, will not be
substantial.
The TSAT Merger. Based upon representation certificates, which will be
reconfirmed prior to the closing of the TSAT Merger, it is the opinion of
Baker & Botts, L.L.P., that the TSAT Merger will qualify as a tax-free
reorganization pursuant to Section 368(a) of the Code, and no gain or loss
will be recognized by TSAT or by TSAT stockholders as a result of the TSAT
Merger. The tax basis of the New PRIMESTAR Common Stock received by a holder
of TSAT Common Stock whose shares are exchanged in the TSAT Merger will be
equal to the tax basis of the TSAT Common Stock so exchanged, and the holding
period of the New PRIMESTAR Common Stock will include the holding period of
the TSAT Common Stock so exchanged. The opinion is based on current law and
assumes that the TSAT Merger will be consummated as described in the Proxy
Statement/Prospectus and in accordance with the TSAT Merger Agreement in its
current form.
Disposition of New PRIMESTAR Common Stock. A holder of New PRIMESTAR Common
Stock will recognize gain or loss upon the sale or other disposition of such
stock measured by the difference (if any) between (i) the amount of cash and
the fair market value of any property received and (ii) the holder's adjusted
tax basis in such New PRIMESTAR Common Stock. Special rules may apply to
redemptions of New PRIMESTAR Common Stock which may result in different
treatment. Any such gain or loss should be capital gain or loss. The maximum
capital gains rate for individuals on gain on certain assets is 20% if such
asset is held for more than eighteen months and 28% if such asset is held for
more than one year but no more than eighteen months.
THIS FEDERAL INCOME TAX DISCUSSION MAY NOT APPLY TO ALL HOLDERS OF TSAT
COMMON STOCK. EACH TSAT STOCKHOLDER IS URGED TO CONSULT A TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE TSAT MERGER THAT MAY APPLY TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS,
AND POSSIBLE CHANGES IN FEDERAL INCOME TAX LAW SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
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INTERESTS OF CERTAIN PERSONS IN THE ROLL-UP PLAN
In considering the recommendation of the TSAT Board with respect to the
Roll-up Plan, stockholders of TSAT should be aware that certain members of
TSAT's management and the TSAT Board have certain interests in the Roll-up
Plan that are different from, or in addition to, the interests of stockholders
of TSAT generally. The TSAT Board was aware of these interests and considered
them among other matters in approving the Roll-up Plan.
Directors and Officers of New PRIMESTAR. Certain of the current directors
and officers of TSAT will become directors and officers of New PRIMESTAR upon
consummation of the Restructuring Transaction and will serve as directors and
officers of both TSAT and New PRIMESTAR until the TSAT Merger is consummated,
at which time they will cease to be officers and directors of TSAT and will
continue as officers and directors of New PRIMESTAR (unless they have been
earlier replaced in accordance with the New PRIMESTAR Charter and New
PRIMESTAR Bylaws). See "MANAGEMENT OF NEW PRIMESTAR."
Treatment of TSAT Options, Stock Appreciation Rights and Restricted Stock
Awards. As of February 3, 1998, executive officers and directors of TSAT held
options ("TSAT Options") under the TCI Satellite Entertainment, Inc. 1996
Stock Incentive Plan (the "TSAT 1996 Plan") to purchase an aggregate of
1,064,076 shares of TSAT Series A Common Stock at various exercise prices and
subject to various vesting schedules. All of the TSAT Options issued under the
TSAT 1996 Plan were issued in tandem with stock appreciation rights ("TSAT
SARs") with respect to TSAT Series A Common Stock. In the case of a tandem
option or stock appreciation right, the related stock appreciation right or
option, as the case may be, is considered to have been exercised to the extent
of the number of shares of TSAT Common Stock with respect to which such
related tandem option or stock appreciation right is exercised.
The TSAT Options and TSAT SARs will remain outstanding following the
consummation of the Restructuring Transaction, as obligations of TSAT, but
will be amended to provide that service as an employee of, or consultant to,
New PRIMESTAR following the Closing Date will be deemed to constitute service
as an employee of, or consultant to, TSAT, for all purposes of such awards and
the TSAT 1996 Plan.
At the TSAT Effective Time, (x) all TSAT Options outstanding immediately
prior to the TSAT Effective Time, whether vested or unvested, (y) all
obligations of TSAT under the TSAT 1996 Plan and the TSAT Nonemployee Director
Plan (collectively, the "TSAT Plans") and (z) the agreements evidencing the
grants of such TSAT Options will be assumed by New PRIMESTAR. Pursuant to the
TSAT Merger Agreement, at the TSAT Effective Time, each TSAT Option
outstanding immediately prior to the TSAT Effective Time will be deemed to
constitute an option to acquire, on the same terms and conditions as were
applicable under such TSAT Option, the same number of shares of New PRIMESTAR
Class A Common Stock as the holder of such TSAT Option would have been
entitled to receive pursuant to the TSAT Merger had such holder exercised such
TSAT Option in full immediately prior to the TSAT Effective Time, at a price
per share equal to the exercise price for the shares of TSAT Series A Common
Stock otherwise purchasable pursuant to such TSAT Option; provided, however,
that in the case of any option to which Section 421 of the Code applies by
reason of its qualification under either Section 422 or 424 of the Code
("qualified stock options"), the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise
of such option will be determined in order to comply with Section 424(a) of
the Code. The TSAT Merger Agreement provides that New PRIMESTAR will comply
with the terms of the TSAT Plans and ensure, to the extent required by, and
subject to the provisions of, the TSAT Plans, that the TSAT Options that
qualified as qualified stock options prior to the TSAT Effective Time continue
to qualify as qualified stock options after the TSAT Effective Time. New
PRIMESTAR will be entitled to make any changes to the TSAT Plans as will be
necessary to give effect to the TSAT Merger. TSAT SARs issued in tandem with
TSAT Options will be similarly modified.
On November 10, 1997, the TSAT Board and the Compensation Committee of the
TSAT Board approved modifications to the vesting provisions of all TSAT
Options issued pursuant to the TSAT 1996 Plan and the TSAT Nonemployee
Director Plan, accelerating the vesting schedules under such options from five
to three
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years, subject to consummation of the Restructuring Transaction. Accordingly,
if the Roll-up Proposal is approved and the Restructuring Transaction is
consummated, such TSAT Options will vest in three equal annual installments,
commencing February 1998. TSAT Options granted prior to the TSAT Spin-Off,
which were 40% vested in February 1998, will become two-thirds vested in
February 1999 and fully vested in February 2000. If the Restructuring
Transaction is not consummated, such options will continue to vest in five
equal annual installments, commencing February 1998.
The following table indicates for each person who is an executive officer or
director of TSAT and who held TSAT Options (including TSAT Options issued in
tandem with TSAT SARs) at February 3, 1998, (a) the number of shares of TSAT
Series A Common Stock subject to such options and/or stock appreciation rights
that were vested at February 3, 1998, (b) the number of shares of TSAT Series
A Common Stock subject to such options and/or stock appreciation rights that
were not vested at such date, (c) the exercise price per share of TSAT Series
A Common Stock of all such options and/or stock appreciation rights (whether
vested or unvested), (d) the total number of shares of New PRIMESTAR Class A
Common Stock that would be subject to such options and/or stock appreciation
rights immediately following the TSAT Effective Time assuming that all such
options and/or stock appreciation rights continue to be outstanding
immediately prior to the TSAT Effective Time and (e) the exercise or base
price per share of New PRIMESTAR Class A Common Stock of such options and/or
stock appreciation rights immediately following the TSAT Effective Time. The
TSAT Options listed opposite the name of each person in the table below
(including TSAT Options issued in tandem with TSAT SARs) include all TSAT
Options and TSAT SARs granted to such person under incentive plans of TSAT or
otherwise. The vesting information indicated assumes that the Restructuring
Transaction is consummated.
<TABLE>
<CAPTION>
NEW
PRIMESTAR
NEW CLASS A
TSAT SERIES A TSAT SERIES A PRIMESTAR COMMON STOCK
COMMON STOCK COMMON STOCK EXERCISE CLASS A COMMON SUBJECT TO EXERCISE
SUBJECT TO SUBJECT TO PRICE OF STOCK SUBJECT TO ASSUMED PRICE OF
VESTED UNVESTED TSAT ASSUMED OPTIONS OPTIONS ASSUMED
OPTIONS OPTIONS OPTIONS AND/OR SARS AND/OR SARS OPTIONS
OPTION AND SAR HOLDER AND/OR SARS AND/OR SARS AND/OR SARS (VESTED) (UNVESTED) AND/OR SARS
--------------------- ------------- ------------- ----------- ---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 265,630 398,446 $8.86 265,630 398,446 $8.86
Christopher Sophinos.... 33,333 66,667 $8.00 33,333 66,667 $8.00
Kenneth G. Carroll...... 33,333 66,667 $8.00 33,333 66,667 $8.00
Lloyd S. Riddle......... 33,333 66,667 $8.00 33,333 66,667 $8.00
William D. Myers........ 33,333 66,667 $8.00 33,333 66,667 $8.00
John C. Malone.......... 16,667 33,333 $8.00 16,667 33,333 $8.00
William E. Johnson...... 16,667 33,333 $8.00 16,667 33,333 $8.00
John W. Goddard......... 16,667 33,333 $8.00 16,667 33,333 $8.00
David P. Beddow......... 132,815 199,223 $8.86 132,815 199,223 $8.86
16,667 33,333 $8.00 16,667 33,333 $8.00
Leo J. Hindery, Jr. .... -- 50,000 $6.50 -- 50,000 $6.50
</TABLE>
As of February 3, 1998, executive officers and directors of TSAT held
restricted stock awards ("TSAT Restricted Stock Awards") under the TSAT 1996
Plan representing the right to receive, upon vesting as described below, an
aggregate of 325,000 shares of TSAT Series A Common Stock. As originally
granted, each TSAT Restricted Stock Award vested 50% on each of January 1,
2001 and January 1, 2002. On November 10, 1997, the TSAT Board and the
Compensation Committee of the TSAT Board approved modifications to the terms
of such awards, accelerating the vesting provisions to provide for vesting of
50% on each of the second and third anniversaries of the date of grant,
subject to consummation of the Restructuring Transaction. At the TSAT
Effective Time, pursuant to the TSAT Merger Agreement, (x) all TSAT Restricted
Stock Awards outstanding immediately prior to the TSAT Effective Time, whether
vested or unvested, and the agreements evidencing the grants of such TSAT
Restricted Stock Awards, will be assumed by New PRIMESTAR, and (y) each TSAT
Restricted Stock Award will be deemed to constitute a restricted stock award,
on the same terms, with respect to a number of shares of New PRIMESTAR Class A
Common Stock equal to the number of shares of TSAT Series A Common Stock
previously subject to such TSAT Restricted Stock Award.
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The following table indicates for each person who is an executive officer or
director of TSAT and who held TSAT Restricted Stock Awards at February 3,
1998, (a) the number of shares of TSAT Series A Common Stock subject to TSAT
Restricted Stock Awards that were vested at February 3, 1998, (b) the number
of shares of TSAT Series A Common Stock subject to TSAT Restricted Stock
Awards that were not vested at such date and (c) the total number of shares of
New PRIMESTAR Class A Common Stock that would be subject to restricted stock
awards immediately following the TSAT Effective Time assuming that all such
TSAT Restricted Stock Awards continue to be outstanding immediately prior to
the TSAT Effective Time.
<TABLE>
<CAPTION>
TSAT SERIES A NEW PRIMESTAR
COMMON STOCK CLASS A COMMON
RESTRICTED SUBJECT TO STOCK SUBJECT
STOCK TSAT RESTRICTED TO RESTRICTED
AWARD HOLDER STOCK AWARDS STOCK AWARDS
------------ --------------- ---------------
<S> <C> <C>
Gary S. Howard
Vested....................................... -- --
Unvested..................................... 125,000 125,000
Christopher Sophinos
Vested....................................... -- --
Unvested..................................... 50,000 50,000
Kenneth G. Carroll
Vested....................................... -- --
Unvested..................................... 50,000 50,000
Lloyd S. Riddle III
Vested....................................... -- --
Unvested..................................... 50,000 50,000
William D. Myers
Vested....................................... -- --
Unvested..................................... 50,000 50,000
</TABLE>
Indemnification. The TSAT Merger Agreement provides that all rights to
indemnification for acts or omissions occurring prior to the TSAT Effective
Time existing in favor of the current or former directors or officers of TSAT
and its subsidiaries will survive the consummation of the TSAT Merger and
continue in full force and effect in accordance with their respective terms.
Directors' and Officers' Liability Insurance. The TSAT Merger Agreement
provides that, for a period of not less than three years from the TSAT
Effective Time, directors' and officers' liability insurance will be
maintained covering current TSAT directors and officers on terms and
conditions no less advantageous than TSAT's existing insurance, to the extent
such coverage can be maintained or procured by the payment of an annual
premium not exceeding one and one-half times the current annual premium paid
by TSAT for its existing coverage.
Registration Rights. Pursuant to the Registration Rights Agreement, the
Specified Class B Stockholders (including John C. Malone, currently Chairman
of the Board and a director of TSAT) will have, subject to certain conditions,
both "demand" and "piggyback" registration rights to require New PRIMESTAR to
register all or any portion of the New PRIMESTAR Common Stock then owned by
them. See "RELATED AGREEMENTS--Registration Rights Agreement."
Stockholders Agreement. The Stockholders Agreement will provide that, in
connection with certain proposed transfers of New PRIMESTAR securities by a
Class C Stockholder, a Specified Class B Stockholder or GE Americom, the other
such parties will have certain rights to acquire such securities, on the terms
and conditions set forth therein. See "RELATED AGREEMENTS--Stockholders
Agreement--Rights of First Refusal." Although immediately following the
closing of the Restructuring Transaction, John C. Malone will not own directly
any shares of New PRIMESTAR Class B Common Stock (all of which will be owned
by TSAT), Dr. Malone will execute the Stockholders Agreement on the Closing
Date as a Specified Class B Stockholder, and will be entitled to exercise
certain rights thereunder, including the rights of first refusal. TSAT
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will also be a party to the Stockholders Agreement as a Specified Class B
Stockholder, prior to consummation of the TSAT Merger, and accordingly will be
bound by, and entitled to the benefits of, the rights of first refusal set
forth therein. However, during the term of the TSAT Merger Agreement, certain
covenants provided for in the TSAT Merger Agreement may, as a practical
matter, prevent TSAT from exercising such rights. TSAT's inability to exercise
its rights of first refusal under the Stockholders Agreement during the term
of the TSAT Merger Agreement may have the effect of enhancing the rights of
Dr. Malone under the Stockholders Agreement during such period.
CERTAIN CONSEQUENCES OF THE RESTRUCTURING TRANSACTION
As a result of the Restructuring Transaction, New PRIMESTAR will own the
entire PRIMESTAR(R) digital satellite business and TSAT and the other Partners
and Distributors (or their respective affiliates) will in the aggregate own
all the outstanding capital stock of New PRIMESTAR. TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of the
outstanding capital stock of Tempo, (ii) its ownership interest in New
PRIMESTAR, and (iii) its rights and obligations under the agreements with New
PRIMESTAR described in this Proxy Statement/Prospectus. See "RELATED
AGREEMENTS." TSAT will own approximately 36% of the outstanding shares of New
PRIMESTAR Common Stock at the Closing, representing approximately 37% of the
combined voting power of the New PRIMESTAR Common Stock, and TWE and Newhouse
(collectively), Comcast, MediaOne, Cox and GE Americom will own approximately
31%, 10%, 9%, 9% and 5%, respectively, of the outstanding shares of New
PRIMESTAR Common Stock at the Closing, representing approximately 32%, 10%,
10%, 9% and 2%, respectively, of such voting power, subject in each case to
adjustments based on closing subscriber counts and other factors. See "THE
RESTRUCTURING AGREEMENT--Consideration to be Received in the Restructuring
Transaction." Accordingly, the Class C Stockholders will beneficially own, in
the aggregate, outstanding shares of New PRIMESTAR Common Stock representing
over 60% of the total voting power of the New PRIMESTAR Common Stock
outstanding on the Closing Date (subject to closing adjustments). The Class C
Stockholders will therefore be able to approve or disapprove any matter
presented to stockholders of New PRIMESTAR, regardless of the vote of the
other stockholders of New PRIMESTAR, except to the extent limited by the New
PRIMESTAR Charter, the New PRIMESTAR Bylaws and the Stockholders Agreement. In
addition, in accordance with the New PRIMESTAR Charter, the Class C
Stockholders will have six designees on the New PRIMESTAR Board. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock" and "RELATED
AGREEMENTS--Stockholders Agreement."
CERTAIN CONSEQUENCES OF THE TSAT MERGER
Upon consummation of the TSAT Merger, the present holders of TSAT Common
Stock who receive New PRIMESTAR Common Stock in the TSAT Merger, by virtue of
such receipt, will share in any future earnings and growth of the combined
assets and businesses of Tempo and New PRIMESTAR. As described under the
caption "--Absence of Appraisal Rights," stockholders of TSAT do not have the
right to pursue appraisal rights in lieu of receiving New PRIMESTAR Common
Stock pursuant to the TSAT Merger. TSAT stockholders who receive shares of New
PRIMESTAR Common Stock pursuant to the TSAT Merger will remain stockholders of
a Delaware corporation, but will be governed by the New PRIMESTAR Charter and
the New PRIMESTAR Bylaws, and New PRIMESTAR will be under the direction of the
New PRIMESTAR Board and New PRIMESTAR's management. See "--Board of Directors
of New PRIMESTAR" and "--Management and Operations of New PRIMESTAR." A
summary description of the principal differences between the New PRIMESTAR
Charter and New PRIMESTAR Bylaws and the TSAT Charter and TSAT Bylaws,
respectively, is set forth herein under "COMPARISON OF STOCKHOLDERS' RIGHTS."
The descriptions of the New PRIMESTAR Charter, the New PRIMESTAR Bylaws, the
TSAT Charter and the TSAT Bylaws set forth herein do not purport to be
complete, and are qualified in their entireties by the complete text of such
documents, which have been filed as exhibits to the Registration Statement.
Copies of the forms of the New PRIMESTAR Charter and the New PRIMESTAR Bylaws
are also attached hereto as Appendices E and F, respectively. Reference is
also made to the Stockholders Agreement, which contains certain additional
provisions with respect to the nomination and election of directors to the New
PRIMESTAR Board. See "RELATED AGREEMENTS--Stockholders Agreement."
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As a result of the TSAT Merger, stockholders of TSAT on the TSAT Closing
Date will own approximately 34% of the outstanding shares of New PRIMESTAR
Common Stock, and the shares of New PRIMESTAR Common Stock then held by TSAT
will be canceled. The ownership of the New PRIMESTAR Common Stock not then
held by TSAT at the TSAT Closing will not be affected by the TSAT Merger. See
"THE TSAT MERGER AGREEMENT--Consideration to be Received in the TSAT Merger."
Accordingly, the Class C Stockholders will continue to beneficially own, in
the aggregate, outstanding shares of New PRIMESTAR Common Stock representing
over 60% of the total voting power of the New PRIMESTAR Common Stock
outstanding on the TSAT Closing Date. See "--Certain Consequences of the
Restructuring Transaction."
BOARD OF DIRECTORS OF NEW PRIMESTAR
Upon consummation of the Restructuring Transaction, the New PRIMESTAR Board
will consist of eleven members, of which the three Class B Directors will be
elected by holders of the New PRIMESTAR Class B Common Stock and the six Class
C Directors will be elected by holders of the New PRIMESTAR Class C Common
Stock, in each case voting as a separate class. Pursuant to the Stockholders
Agreement, initially, of the six Class C Directors, three will be nominated by
TWE (and TWE has agreed with Newhouse pursuant to the TWE/Newhouse Voting
Agreement that of such three, one will be nominated by Newhouse), and one will
be nominated by each of Cox, Comcast and MediaOne. Pursuant to the New
PRIMESTAR Charter, the remaining two Common Directors will be nominated by a
supermajority vote of the Class B Directors and Class C Directors, and elected
by the holders of the New PRIMESTAR Voting Common Stock, voting together as a
single class. The number of Class B Directors will decrease as the number of
shares of New PRIMESTAR Class B Common Stock outstanding decreases, and the
number of Class C Directors will decrease as the number of shares of New
PRIMESTAR Class C Common Stock outstanding decreases, in each case in
accordance with a schedule set forth in the New PRIMESTAR Charter. The special
class rights of the holders of New PRIMESTAR Class B Common Stock and the
holders of New PRIMESTAR Class C Common Stock, each voting as a separate
class, to elect the Class B Directors and the Class C Directors, respectively,
will automatically terminate on the Class C Termination Date. At any time
prior to the Class C Termination Date that the maximum number of Class B
Directors or Class C Directors is decreased, the number of Common Directors
will be correspondingly increased, so that the total number of directors
constituting the entire New PRIMESTAR Board remains at eleven. On and after
the Class C Termination Date, all members of the New PRIMESTAR Board will be
elected by the holders of New PRIMESTAR Voting Common Stock, voting together
as a single class. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common
Stock--Board of Directors," "RELATED AGREEMENTS--Stockholders Agreement" and
"RELATED AGREEMENTS--TWE/Newhouse Voting Agreement."
At the Closing of the Restructuring Transaction, 100% of the issued and
outstanding shares of New PRIMESTAR Class B Common Stock, and approximately
36% of the issued and outstanding shares of New PRIMESTAR Class A Common
Stock, will be owned by TSAT. Accordingly, TSAT will be entitled to elect the
three initial Class B Directors. If the TSAT Merger is consummated, each
outstanding share of TSAT Series B Common Stock on the TSAT Closing Date will
be converted into the right to receive one share of New PRIMESTAR Class B
Common Stock, and each outstanding share of TSAT Series A Common Stock on such
date will be converted into the right to receive one share of New PRIMESTAR
Class A Common Stock. See "THE TSAT MERGER AGREEMENT."
MANAGEMENT AND OPERATIONS OF NEW PRIMESTAR
Immediately following the consummation of the Restructuring Transaction, New
PRIMESTAR will operate the business of TSAT, the business of the Partnership
and the PRIMESTAR(R) distribution businesses of the other Distributors, and
the corporate headquarters of New PRIMESTAR will be in Englewood, Colorado. A
determination with respect to the position of Chief Executive Officer of New
PRIMESTAR has not yet been made. It is expected that the New PRIMESTAR Board
will name a Chief Executive Officer shortly after the Closing. Jim Gray, the
current Chairman and Chief Executive Officer of the Partnership, has indicated
a desire to retire from that position during 1998. Mr. Gray will participate
in the search for the Chief Executive Officer
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of New PRIMESTAR and is expected to assist the New PRIMESTAR Board in
transitional matters following the Closing Date. Daniel J. O'Brien, the
current President of the Partnership, will be the President and Chief
Operating Officer of New PRIMESTAR. Other members of the executive management
team will include: Kenneth G. Carroll, the current Senior Vice President and
Chief Financial Officer of TSAT, who will be the Chief Financial Officer of
New PRIMESTAR; Marcus O. Evans, the current Senior Vice President and General
Counsel of the Partnership, who will be the General Counsel of New PRIMESTAR;
Joel Ginsparg, the current Senior Vice President, Technology and Operations of
the Partnership, who will be the Senior Vice President, Technology and
Operations of New PRIMESTAR; Christopher Sophinos, the current President of
TSAT, who will be the Senior Vice President, Sales and Distribution of New
PRIMESTAR; and Denny Wilkinson, the current Senior Vice President, Marketing
and Programming of the Partnership, who will be the Senior Vice President,
Marketing and Programming of New PRIMESTAR. See "MANAGEMENT OF NEW PRIMESTAR."
New PRIMESTAR does not have any plan or intention to dispose of or transfer,
whether to related or unrelated persons, any significant portion of the TSAT
Business, the business of the Partnership or the PRIMESTAR Assets. New
PRIMESTAR expects to evaluate the individual and combined operations and
formulate arrangements, as appropriate, to integrate effectively the
businesses.
REGULATORY APPROVALS
HSR Act and Antitrust Matters. Under the HSR Act, and the rules promulgated
thereunder by the FTC, the Roll-up Plan may not be consummated until (i)
applicable Notification and Report Forms have been submitted and certain
information has been furnished to the FTC and the Antitrust Division; and (ii)
required waiting periods have expired or terminated. Each of TSAT, on behalf
of itself and New PRIMESTAR, and the Partnership, Time Warner, Cox
Enterprises, Comcast, Newhouse Broadcasting, US WEST, Inc. and GE filed
Notification and Report Forms with the FTC and the Antitrust Division in July
1997, and the waiting periods under the HSR Act with respect to the
transactions described in such filings, which effectively incorporated both
the Restructuring Transaction and the TSAT Merger, have since expired in
accordance with the HSR Act.
Antitrust authorities, including the Antitrust Division and the FTC, often
scrutinize the legality under the antitrust laws of transactions such as the
Roll-up Plan. The termination of the HSR Act waiting periods does not preclude
such authorities from challenging the Roll-up Plan (or any part thereof) on
antitrust grounds. Accordingly, at any time before or after the consummation
of the Restructuring Transaction and/or the TSAT Merger and notwithstanding
the expiration of the HSR Act waiting periods, any federal or state antitrust
authorities could take action under the antitrust laws as they deem necessary
or desirable in the public interest. Such action could include, among other
things, seeking to enjoin the consummation of the Roll-up Plan (or any part
thereof). Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
FCC Approval Process. TSAT believes that consummation of the Restructuring
Transaction does not require any FCC approval. However, consummation of the
TSAT Merger is subject to all orders and approvals of the FCC required in
connection with the transactions contemplated by the TSAT Merger Agreement
having been obtained or made. On July 18, 1997, TSAT filed an application with
the FCC requesting consent to transfer control of Tempo and its DBS assets to
New PRIMESTAR. Pursuant to the Restructuring Agreement, each Restructuring
Party has agreed to use its commercially reasonable efforts to respond to
requests for information from all governmental entities relating to the TSAT
Merger, including the FCC. Pursuant to the TSAT Merger Agreement, TSAT has
agreed to use its best efforts, and New PRIMESTAR has agreed to use its
commercially reasonable efforts, to respond to requests for information from
all governmental entities relating to the TSAT Merger, including the FCC.
However, no assurance can be given that FCC approval of the transfer of
control of Tempo and its DBS assets to New PRIMESTAR will be obtained. See
"RISK FACTORS--Risks of Adverse Government Regulations and Adjudications" and
"REGULATORY MATTERS--Required FCC Approvals." The Restructuring Parties are
currently in discussions with the FCC in respect of the FCC orders and
approvals
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which are required in connection with the TSAT Merger. Such discussions may
result in agreements relating to the conduct of New PRIMESTAR's business
following consummation of the TSAT Merger, none of which, individually or in
the aggregate, are expected to have a material adverse effect on New
PRIMESTAR.
ACCOUNTING TREATMENT
The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT. The
remaining elements of the Restructuring Transaction will be treated as the
acquisition by New PRIMESTAR of the Partnership Interests and the PRIMESTAR
Assets, and the assumption by New PRIMESTAR of the PRIMESTAR Liabilities, of
the Restructuring Parties other than TSAT, and such acquisition will be
accounted for using the purchase method of accounting. TSAT has been
identified as the acquiror for accounting purposes and the predecessor for
reporting purposes due to the fact that TSAT will own the largest interest in
New PRIMESTAR immediately following consummation of the Restructuring
Transaction. Accordingly, the fair value of the consideration paid to the
Restructuring Parties other than TSAT will be allocated to the identifiable
assets acquired and liabilities assumed based upon their respective estimated
fair values. See the Primary and Supplemental Condensed Pro Forma Combined
Financial Statements of New PRIMESTAR, included elsewhere in this Proxy
Statement/Prospectus.
The TSAT Merger will be treated as the acquisition of TSAT by New PRIMESTAR.
Such acquisition will be accounted for at TSAT's historical cost since (i) the
percentage of New PRIMESTAR to be owned by TSAT prior to consummation of the
TSAT Merger will be approximately equal to the percentage of New PRIMESTAR to
be owned by TSAT stockholders following consummation of the TSAT Merger and
(ii) the TSAT Merger and the Restructuring Transaction are both part of the
Roll-up Plan. See the Primary and Supplemental Condensed Pro Forma Combined
Financial Statements of New PRIMESTAR, included elsewhere herein.
ABSENCE OF APPRAISAL RIGHTS
Under the DGCL, holders of TSAT Common Stock are not entitled to dissenters'
appraisal rights in connection with the Restructuring Transaction because the
outstanding shares of TSAT Series A Common Stock and TSAT Series B Common
Stock will remain outstanding and will not be directly affected by the
Restructuring Transaction.
Under the DGCL, holders of TSAT Common Stock are also not entitled to
dissenters' appraisal rights in connection with the TSAT Merger because the
TSAT Series A Common Stock and the TSAT Series B Common Stock are designated
as national market system securities on an interdealer quotation system by the
National Association of Securities Dealers, Inc. and the consideration that
such holders will be entitled to receive in the TSAT Merger will consist
solely of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common
Stock, which will also be designated as national market system securities on
an interdealer quotation system by the National Association of Securities
Dealers, Inc.
NASDAQ/NM LISTINGS AND DELISTINGS
The TSAT Series A Common Stock and the TSAT Series B Common Stock are
currently listed on the NASDAQ/NM, and the Restructuring Transaction is not
expected to have any effect on such listing. At the Closing of the
Restructuring Transaction, all the issued and outstanding shares of New
PRIMESTAR Common Stock will be held beneficially and of record by the
Restructuring Parties, and the New PRIMESTAR Common Stock will not be listed
for trading on any securities exchange or included in any interdealer
quotation system. However, it is a condition to the Restructuring Transaction
and to the TSAT Merger that the shares of New PRIMESTAR Class A Common Stock
and New PRIMESTAR Class B Common Stock issuable to the stockholders of TSAT as
a result of the TSAT Merger be approved for listing on the NASDAQ/NM, subject
to official notice of issuance. It is expected that, following the TSAT
Merger, the New PRIMESTAR Class A Common Stock and the New PRIMESTAR Class B
Common Stock will trade under the symbols "PSTRA" and "PSTRB," respectively.
If the TSAT Merger is consummated, TSAT Series A Common Stock and TSAT Series
B Common Stock will be delisted from the NASDAQ/NM.
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FINANCING IN CONNECTION WITH THE RESTRUCTURING TRANSACTION
If the Restructuring Transaction had occurred on September 30, 1997, the
total amount of funds required to be paid by New PRIMESTAR to the
Restructuring Parties other than TSAT as cash consideration (or assumption of
debt in lieu of cash consideration) in the Restructuring Transaction would
have been approximately $464 million, comprising (i) approximately $136
million in cash to be paid in the aggregate to Cox and MediaOne and (ii)
approximately $328 million of debt to be assumed by New PRIMESTAR in the
aggregate in respect of TWE and Newhouse (collectively), Comcast and GE
Americom. In addition, New PRIMESTAR would have assumed indebtedness of TSAT
and the Partnership aggregating approximately $921 million if the
Restructuring Transaction had occurred on September 30, 1997. See "RISK
FACTORS--Substantial Leverage; Additional Indebtedness Likely" and
"DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT." The actual cash consideration
to be paid to, or debt to be assumed in respect of, such parties will be based
on, among other things, subscriber counts and TSAT's debt balance at the
Closing Date. See "THE RESTRUCTURING AGREEMENT--Consideration to be Received
in the Restructuring Transaction."
In order to fund such cash consideration and repay the debt to be assumed by
New PRIMESTAR from the Restructuring Parties other than TSAT, New PRIMESTAR
intends (i) to assume the amended and/or refinanced Bank Credit Facility at
the Closing, (ii) to enter into the Interim Credit Facility at the Closing,
and (iii) to seek additional long-term debt financing through the New Notes
Offering as soon as possible after the Closing, subject to market conditions
and other factors. It is expected that the amended and/or refinanced Bank
Credit Facility will be used to fund the cash consideration under the
Restructuring Agreement, and that the amended and/or refinanced Bank Credit
Facility together with the Interim Credit Facility will be used to assume the
debt to be assumed by New PRIMESTAR from TWE and Newhouse (collectively),
Comcast and GE Americom. If the New Notes Offering is successful, it is
expected that the proceeds of such offering would be used first to repay the
Interim Credit Facility and second to reduce the amount outstanding under the
Bank Credit Facility, as then in effect. It is expected that the debt to be
assumed by New PRIMESTAR from TSAT in the Restructuring Transaction
(consisting primarily of the Senior Subordinated Notes and the Senior
Subordinated Discount Notes) will remain outstanding following the Closing
Date, with New PRIMESTAR as the obligor.
No assurances can be given that the Interim Credit Facility, or the
amendment and/or refinancing of the Bank Credit Facility, will be completed
successfully, or that the proceeds from such facilities will be sufficient for
New PRIMESTAR to fund such cash consideration, and to repay the debt to be
assumed by New PRIMESTAR from the Restructuring Parties other than TSAT, in
full in accordance with the Restructuring Agreement. In addition, no assurance
can be given that the New Notes Offering will be completed successfully, or
that the proceeds from the New Notes Offering will be sufficient to repay all
amounts borrowed or assumed by New PRIMESTAR under the Interim Credit Facility
and the amended and/or refinanced Bank Credit Facility. If New PRIMESTAR is
unable to repay such amounts with the proceeds of the New Notes Offering, New
PRIMESTAR could be adversely affected. See "RISK FACTORS--Substantial
Leverage; Additional Indebtedness Likely."
The terms of the amended and/or refinanced Bank Credit Facility, the Interim
Credit Facility and the New Notes have not been finalized, but will be
negotiated prior to the Closing Date. Such facilities and notes will include
covenants that prohibit or limit, among other things, the incurrence of
additional indebtedness, the creation of certain liens, the payment of
dividends and other restricted payments, transactions with affiliates and
certain other related persons and certain merger, consolidation or similar
transactions. These covenants will be subject to a number of significant
exceptions and qualifications. It is expected that the Interim Credit Facility
will provide for (i) periodic scheduled increases in the base interest rate
payable thereunder, after an initial period during which the interest rate
will be fixed, as an incentive for early repayment, and (ii) the issuance of
warrants to purchase capital stock of New PRIMESTAR, as additional
compensation to the lenders if all amounts outstanding under such facility are
not repaid, and the facility is not terminated, on or before the first
anniversary of the Closing Date. It is expected that the New Notes will also
contain provisions requiring New PRIMESTAR to make an offer to purchase the
New Notes upon the occurrence of certain events, including, among others, a
change in control, certain asset sales and other dispositions of assets.
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RESALE OF NEW PRIMESTAR COMMON STOCK ISSUED IN THE TSAT MERGER; AFFILIATES
The shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B
Common Stock to be issued in the TSAT Merger will be registered under the
Securities Act and freely transferable under the federal securities laws,
except that shares issued to any TSAT stockholder who may be deemed to be an
"affiliate" (as defined under the Securities Act) of TSAT prior to the TSAT
Merger for purposes of Rule 145 under the Securities Act may be resold by them
only in transactions permitted by the resale provisions of Rule 145 (or Rule
144 in the case of such persons who become affiliates of New PRIMESTAR) or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of TSAT or New PRIMESTAR generally include individuals or entities
that control, are controlled by, or are under common control with such party
and may include certain officers and directors of such party as well as
principal stockholders of such party. The TSAT Merger Agreement provides that
the obligations of New PRIMESTAR to consummate the TSAT Merger is subject to
New PRIMESTAR receiving, prior to the Closing Date, a letter agreement from
each affiliate of TSAT to the effect that such person will not offer or sell
or otherwise dispose of any shares of New PRIMESTAR Class A Common Stock or
New PRIMESTAR Class B Common Stock issued to such person in or pursuant to the
TSAT Merger in violation of the Securities Act or the rules and regulations
promulgated thereunder. This Proxy Statement/Prospectus does not cover resales
of shares of New PRIMESTAR Class A Common Stock or New PRIMESTAR Class B
Common Stock received by any person who may be deemed to be an affiliate of
TSAT.
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THE RESTRUCTURING AGREEMENT
The following description of the material provisions of the Restructuring
Agreement is qualified in its entirety by reference to the complete text of
the Restructuring Agreement, which is incorporated by reference herein and a
copy of which (exclusive of certain exhibits and schedules) is attached to
this Proxy Statement/Prospectus as Appendix A.
GENERAL; EFFECTIVE TIME
The Restructuring Agreement was entered into by New PRIMESTAR, TWE,
Newhouse, Comcast, Cox, MediaOne, GE Americom and TSAT. The Restructuring
Agreement provides that, upon the terms and subject to the conditions of the
Restructuring Agreement, (i) New PRIMESTAR will acquire and succeed to the
TSAT Business as a result of the TSAT Asset Transfer, (ii) New PRIMESTAR will
acquire the respective Partnership Interests and PRIMESTAR Assets from each of
TWE, Newhouse, Comcast, Cox, MediaOne and GE Americom, as applicable, as a
result of the Mergers and the other Asset Transfers and (iii) TSAT will enter
into certain other agreements with New PRIMESTAR, including, without
limitation, the TSAT Merger Agreement, the Stockholders Agreement, the TSAT
Stockholders Agreement and the TSAT Tempo Agreement. See "--Structure of the
Restructuring Transaction" and "RELATED AGREEMENTS."
The Restructuring Transaction will become effective on the Closing Date upon
the filing with the Delaware Secretary of State of the certificates of merger
relating to the Mergers in accordance with the applicable provisions of the
DGCL or at such subsequent time as is stated in the certificates of merger.
Subject to the terms and conditions of the Restructuring Agreement, the
Closing of the Restructuring Transaction will take place, unless otherwise
agreed among the parties, on the later of (x) March 31, 1998 and (y) the first
business day following the date on which the last of the conditions precedent
to the Restructuring Transaction set forth in the Restructuring Agreement is
fulfilled or, to the extent permissible, waived.
STRUCTURE OF THE RESTRUCTURING TRANSACTION
TSAT Asset Transfer. Pursuant to the Restructuring Agreement, upon the terms
and subject to the conditions set forth therein and in the TSAT Asset Transfer
Agreement, TSAT will contribute and transfer to New PRIMESTAR the TSAT
Business, comprising all of TSAT's assets and liabilities, except (i) the
capital stock of Tempo, (ii) the consideration to be received by TSAT in the
Restructuring Transaction and (iii) the rights and obligations of TSAT under
the various related agreements contemplated by the Restructuring Agreement to
which TSAT is a party, including, without limitation, the TSAT Merger
Agreement, the Stockholders Agreement, the TSAT Stockholders Agreement and the
TSAT Tempo Agreement, each of which is described herein. See "RELATED
AGREEMENTS." In connection with the TSAT Asset Transfer, at the Closing, New
PRIMESTAR will assume all of TSAT's indebtedness on such date, and TSAT will
receive from New PRIMESTAR such number of shares of New PRIMESTAR Class A
Common Stock and New PRIMESTAR Class B Common Stock, respectively, as equals
the number of shares of TSAT Series A Common Stock and TSAT Series B Common
Stock, respectively, issued and outstanding or deemed to be issued and
outstanding on the Closing Date, in accordance with the Restructuring
Agreement and the TSAT Asset Transfer Agreement. See "--Consideration to be
Received in the Restructuring Transaction."
Mergers. Pursuant to the Restructuring Agreement, upon the terms and subject
to the conditions set forth therein, each of Comcast DBS, Comcast SCI, Cox SI
and GEAS, respectively, will merge with and into New PRIMESTAR, in each case
in accordance with the terms and subject to the conditions of the applicable
Merger Agreement, and in accordance with the DGCL, and New PRIMESTAR will be
the surviving corporation of each such Merger. Each such Merger will become
effective upon the filing with the Delaware Secretary of State of the
certificate of merger relating to such Merger or other appropriate documents
in accordance with the applicable provisions of the DGCL. Such filings are
expected to take place on the Closing Date or as soon as practicable
thereafter. In connection with such Mergers, at the Closing, each of Comcast,
Cox and GE Americom will, directly or indirectly, receive from New PRIMESTAR,
(i) in the case of Cox, an amount of cash, and in the case of Comcast and GE
Americom, an assumption of indebtedness by New PRIMESTAR, (ii) shares of New
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PRIMESTAR Class A Common Stock and (iii) except in the case of GE Americom,
shares of New PRIMESTAR Class C Common Stock, in each case in such amounts as
are determined in accordance with the methodology set forth in the
Restructuring Agreement. See "--Consideration to be Received in the
Restructuring Transaction." Each such Merger will have the effects set forth
in Section 259 of the DGCL.
Other Asset Transfers. Pursuant to the Restructuring Agreement, upon the
terms and subject to the conditions set forth therein, each of TWE, Newhouse
and MediaOne (and its subsidiaries), respectively, will assign and transfer to
New PRIMESTAR, and New PRIMESTAR will accept and receive from such party, all
of such party's rights, title and interests in, to and under such party's
Partnership Interest and PRIMESTAR Assets, and New PRIMESTAR will assume all
of such party's PRIMESTAR Liabilities, in each case in accordance with the
terms of the applicable Asset Transfer Agreement. At the Closing, each of
MediaOne, Newhouse and TWE will receive from New PRIMESTAR, in connection with
such Asset Transfers, (i) in the case of MediaOne, an amount of cash, and in
the case of Newhouse and TWE, an assumption of indebtedness by New PRIMESTAR,
(ii) shares of New PRIMESTAR Class A Common Stock and (iii) shares of New
PRIMESTAR Class C Common Stock, in each case in such amounts as are determined
in accordance with the methodology set forth in the Restructuring Agreement.
See "--Consideration to be Received in the Restructuring Transaction."
The PRIMESTAR Assets of any party include (i) each PRIMESTAR(R) subscriber
of such party's PRIMESTAR(R) distribution business as of the Closing Date
(whether or not such PRIMESTAR(R) subscriber is counted as a PRIMESTAR
Customer (as defined below under "--Consideration to be Received in the
Restructuring Transaction") under the Restructuring Agreement), together with
any subscription contract, equipment rental contract or other agreement with
such subscriber relating to such party's PRIMESTAR(R) Assets and all rights,
claims and causes of action thereunder (other than all accounts receivable of
such party and its subsidiaries relating to the distribution of PRIMESTAR(R)
on or prior to the Closing Date, including rental and sales fees
(collectively, "Excluded Accounts Receivable")); (ii) all leases, contracts
and other agreements relating exclusively to such party's PRIMESTAR(R)
distribution business and all rights, claims and causes of action thereunder
(other than Excluded Accounts Receivable); (iii) all of such party's IRDs, low
noise block converters ("LNBs"), dishes and PrimeFinder(TM) remote controls
held for use in such party's PRIMESTAR(R) distribution business, or, in the
case of PrimeFinder(TM) remote controls, installed in the home of any
PRIMESTAR(R) subscriber of such party ("PRIMESTAR Inventory"); (iv) all IRDs,
LNBs and dishes installed in the home of any PRIMESTAR(R) subscriber of such
party; (v) all of such party's IRDs, LNBs, dishes and PrimeFinder(TM) remote
controls that are installed in the home of any disconnected PRIMESTAR(R)
subscriber of such party (collectively, "Unrecovered Inventory"); (vi) all of
such party's equipment and drop-materials (other than IRDs, LNBs, dishes and
PrimeFinder(TM) remote controls), used in the reception of PRIMESTAR(R) and
either held for use in such party's PRIMESTAR(R) distribution business at
specified offices of such party or installed in the home of any current or
disconnected PRIMESTAR(R) subscriber of such party ("Customer Premises
Equipment"); (vii) all rights, claims and causes of action, including under
warranties, of such party in respect of (A) such party's PRIMESTAR Inventory,
(B) such party's Unrecovered Inventory, (C) outstanding purchase orders of
such party in respect of IRDs, LNBs, dishes and PrimeFinder(TM) remote
controls, (D) such party's Customer Premises Equipment and (E) supply
agreements to which such party is a party (or beneficiary) for IRDs, LNBs,
dishes and PrimeFinder(TM) remote controls; (viii) all PRIMESTAR(R) subscriber
lists, billing records, subscriber and supplier correspondence used or held
for use in such party's PRIMESTAR(R) distribution business, other than any of
the foregoing directly relating to such party's Excluded Accounts Receivable
or Excluded Liabilities (as defined below); and (ix) all office equipment,
furniture, tools and vehicles located at specified offices of such party and
exclusively used to support such party's PRIMESTAR(R) distribution business
(subject to certain limitations) (collectively, "Field Assets").
The PRIMESTAR Liabilities of any party include all obligations and
liabilities of such party of any nature, whether known or unknown, absolute,
accrued, contingent or otherwise, and whether due or to become due, arising
out of, relating to, or otherwise in respect of, (i) such party's PRIMESTAR(R)
distribution business, PRIMESTAR Assets or Partnership Interest, (ii) the
operation by such party or any of its subsidiaries or affiliates of the
digital satellite business, (iii) in the case of Comcast, Newhouse, TWE and GE
Americom, such party's
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PRIMESTAR Debt (as defined below), together with all arrangement fees,
commitment fees and any other fees or expenses charged by the lenders and/or
arrangers of any such indebtedness that becomes interim financing debt to fund
the cash consideration to be paid to (or the assumption of indebtedness of)
the Restructuring Parties (or their respective affiliates) in the
Restructuring Transaction and (iv) such party's Assumed Employment Liabilities
(as defined in the Restructuring Agreement), other than, in any such case, (a)
indebtedness for borrowed money of such party and its subsidiaries incurred on
or prior to the Closing Date, other than PRIMESTAR Debt, (b) accounts payable
incurred on or prior to the Closing Date in respect of such party's
PRIMESTAR(R) distribution business, (c) all taxes, other than transfer taxes
applicable to the conveyance and transfer of PRIMESTAR Assets and PRIMESTAR
Liabilities pursuant to any Asset Transfer Agreement ("Covered Taxes")
attributable to the operation or ownership of such party's PRIMESTAR Assets
and Partnership Interest during any 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") and (d) Retained Employment Liabilities (as defined in the
Restructuring Agreement) of such party (collectively, "Excluded Liabilities").
"PRIMESTAR Debt" of any party means the amount of indebtedness of such party
to be assumed by New PRIMESTAR, as determined in accordance with the
methodology set forth in the Restructuring Agreement, if any. See "--
Consideration to be Received in the Restructuring Transaction."
Charter and Bylaws. The Restructuring Agreement provides that the New
PRIMESTAR Charter and the New PRIMESTAR Bylaws will be in the form attached
hereto as Appendices E and F, respectively. The Restructuring Agreement
further provides that concurrently with the consummation of the TSAT Asset
Transfer, the New PRIMESTAR Charter will be filed with the Delaware Secretary
of State in accordance with the DGCL and the New PRIMESTAR Charter and the New
PRIMESTAR Bylaws will become effective. Pursuant to each of the Merger
Agreements, New PRIMESTAR will be the surviving corporation in each such
Merger and (i) the New PRIMESTAR Charter will be the certificate of
incorporation of the surviving corporation in each such Merger until
thereafter changed or amended as provided therein or by applicable law, and
(ii) the New PRIMESTAR Bylaws will be the bylaws of the surviving corporation
in each such Merger until thereafter changed or amended as provided therein or
by applicable law.
Directors and Officers. Each of the Merger Agreements provides that the
directors and officers of New PRIMESTAR immediately prior to the effective
time of the applicable Merger will be the directors and officers of the
surviving corporation in such Merger. The Merger Agreements further provide
that all such directors and officers will hold office until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified.
CONSIDERATION TO BE RECEIVED IN THE RESTRUCTURING TRANSACTION
TSAT ASSET TRANSFER
Pursuant to the Restructuring Agreement and the TSAT Asset Transfer
Agreement, at the Effective Time, TSAT will receive from New PRIMESTAR such
number of shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class
B Common Stock, respectively, as equals the number of shares of TSAT Series A
Common Stock and TSAT Series B Common Stock, respectively, issued and
outstanding or deemed to be issued and outstanding on the Closing Date, in
accordance with the Restructuring Agreement and the TSAT Asset Transfer
Agreement. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK." In addition, New
PRIMESTAR will assume all of TSAT's indebtedness on the Closing Date. If the
Restructuring Transaction had occurred on September 30, 1997, New PRIMESTAR
would have assumed approximately $366 million of debt in respect of TSAT and
outstanding letters of credit issued under the Bank Credit Facility for TSAT's
account, in the aggregate amount of $30 million.
At the Effective Time, it is estimated that TSAT will hold approximately 36%
of the aggregate number of outstanding shares of New PRIMESTAR Class A Common
Stock and 100% of the aggregate number of outstanding shares of New PRIMESTAR
Class B Common Stock, representing approximately 37% of the aggregate voting
power of the outstanding New PRIMESTAR Common Stock. The foregoing ownership
and voting percentages assume the Restructuring Transaction had occurred on
September 30, 1997 and are subject to
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adjustments based on closing subscriber counts and other factors. The actual
ownership and voting interests of TSAT will be dependent upon a variety of
factors and may vary from the estimated percentages set forth above. See "--
Mergers and Other Asset Transfers."
MERGERS AND OTHER ASSET TRANSFERS
Pursuant to the Restructuring Agreement and the applicable Merger Agreements
and Asset Transfer Agreements, each Class C Stockholder and GEAS will receive
(i) in the case of Cox and MediaOne, an amount of cash, and in the case of
Newhouse, TWE, Comcast and GEAS, an assumption of indebtedness by New
PRIMESTAR, (ii) an amount of New PRIMESTAR Class A Common Stock and (iii)
except in the case of GEAS, an amount of New PRIMESTAR Class C Common Stock,
determined in accordance with the methodology set forth in Exhibit A to the
Restructuring Agreement (the "Methodology").
Pursuant to the Methodology, the amount of cash to be paid to, or the amount
of debt to be assumed in respect of, each applicable Class C Stockholder will
be equal to the product of (x) TSAT Debt Per Sub (as defined below) and (y)
the number of PRIMESTAR Customers (as defined below) of such Class C
Stockholder on the Closing Date. "TSAT Debt Per Sub" means the amount
determined by dividing:
(A) (x) TSAT Debt (as defined in the Restructuring Agreement) on the
Closing Date minus (y) the product of (I) $750 and (II) TSAT's net
PRIMESTAR Customers added between March 31, 1997 and the Closing Date minus
(z) the aggregate net proceeds payable to TSAT upon the exercise of the
Included Options (as defined below); by
(B) the number of PRIMESTAR Customers of TSAT as of March 31, 1997.
The foregoing amount calculated for each Class C Stockholder shall be such
Class C Stockholder's "Adjusted Total Cash."
Pursuant to the Methodology, based on subscriber counts and TSAT Debt Per
Sub at September 30, 1997, the Adjusted Total Cash payable to each of TWE and
Newhouse (collectively), Comcast, Cox and MediaOne would be approximately $242
million, $72 million, $66 million and $70 million, respectively, subject to
closing adjustments.
Pursuant to the Methodology, the amount of debt to be assumed in respect of
GEAS will be equal to $14,025,000. The foregoing amount shall be GEAS's
"Adjusted Total Cash."
TSAT's "Adjusted Total Cash" means the amount determined by adding:
(i)the product of (x) TSAT Debt Per Sub and (y) the number of PRIMESTAR
Customers of TSAT as of March 31, 1997; and
(ii)the product of (X) $750 and (Y) TSAT's net PRIMESTAR Customers added
between March 31, 1997 and the Closing Date.
"PRIMESTAR Customer" means, as to any party as of any date of determination,
each PRIMESTAR(R) subscriber of such party's PRIMESTAR(R) distribution
business having an "active" account on such date, determined in accordance
with the subscriber's receivable status on such date as follows: (i) a
subscriber who has a receivable balance of not more than 60 days from the
first day of the service period to which such receivable balance relates
(without giving effect to older minimal balances) will count as one full
PRIMESTAR Customer; (ii) a subscriber who has a receivable balance of at least
61 but not more than 90 days from the first day of the service period to which
such receivable balance relates (without giving effect to older minimal
balances) will count as one half of a PRIMESTAR Customer; and (iii) a
subscriber who has a receivable balance of 91 days or more from the first day
of the service period to which such receivable balance relates will not be
counted as a PRIMESTAR Customer. "Active" accounts for this purpose may
include some accounts that have been remotely de-authorized for late payment,
but do not include complimentary, demonstration or certain other free
accounts, voluntary disconnects or former subscribers physically disconnected
from the system.
Pursuant to the Methodology, the total amount of New PRIMESTAR Voting Common
Stock to be issued in the Restructuring Transaction will be equal to the
number of shares of TSAT Common Stock (other than
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treasury shares) outstanding on the Closing Date, plus the number of shares
issuable upon the exercise of the Included Options, divided by TSAT's
Percentage (as defined below). Each Class C Stockholder and GEAS will receive
an amount of New PRIMESTAR Class A Common Stock and (except for GEAS) New
PRIMESTAR Class C Common Stock in the Restructuring Transaction equal to such
party's Percentage of such total amount of New PRIMESTAR Voting Common Stock.
The proportion of New PRIMESTAR Class C Common Stock to New PRIMESTAR Class A
Common Stock to be issued to the Class C Stockholders in the Restructuring
Transaction shall be the same as the proportion of TSAT Series B Common Stock
to TSAT Series A Common Stock as of the Effective Time."Percentage" of any
party means the ratio of (x) such party's Adjusted Total Equity (as defined
below) to (y) the sum of each party's Adjusted Total Equity. "Adjusted Total
Equity" of any party means such party's Adjusted Aggregate Value (as defined
below) minus such party's Adjusted Total Cash. "Adjusted Aggregate Value" of :
(a) each Class C Stockholder and TSAT, shall be equal to the sum of (A)
the value of such party's Partnership Interest (as set forth on Exhibit A
to the Restructuring Agreement) and (B) the product of (x) $1,100 and (y)
the number of PRIMESTAR Customers of such party on the Closing Date; and
(b) GEAS, shall be equal to $84,232,000.
"Included Options" means (i) approximately 4,447,000 shares of TSAT Series A
Common Stock that may be purchased by TCI from time to time at an exercise
price of $1.00 per share, to meet TCI's obligations under the conversion
features of certain convertible securities of TCI, as such conversion features
were adjusted as a result of the TSAT Spin-Off (see "BUSINESS OF TSAT--Certain
Arrangements Between TSAT and TCI--Reorganization Agreement"); (ii)
approximately 2,324,000 shares of TSAT Series A Common Stock that may be
purchased in the aggregate by certain present or former executives of TCI
(including Gary S. Howard, Chief Executive Officer and a director of TSAT, and
David P. Beddow, a director of TSAT) from time to time at an exercise price of
$8.86 per share, pursuant to certain options granted to such persons in
connection with the TSAT Spin-Off (see "BUSINESS OF TSAT--Certain Arrangements
Between TSAT and TCI--Other Arrangements"); (iii) 810,000 shares of TSAT
Series A Common Stock that may be issued in the aggregate from time to time in
accordance with the terms of outstanding TSAT Options (or related TSAT SARs)
having an exercise price of $8.00 per share; (iv) 325,000 shares of TSAT
Series A Common Stock subject to TSAT Restricted Stock Awards; and (v) 250,000
shares of TSAT Series A Common Stock that may be purchased, subject to
approval of the TSAT Nonemployee Director Plan Proposal, upon the exercise of
options issued to nonemployee directors of TSAT, at an exercise price of $8.00
per share with respect to 200,000 of such shares and $6.50 per share with
respect to 50,000 of such shares (see "PROPOSAL TO APPROVE THE TSAT
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN," and "THE ROLL-UP PLAN--Interests of
Certain Persons in the Roll-up Plan--Treatment of TSAT Options, Stock
Appreciation Rights and Restricted Stock Awards"). As indicated above, the
Methodology treats as outstanding an aggregate of approximately 8,156,000
shares of TSAT Series A Common Stock issuable as of December 31, 1997, upon
the exercise of the Included Options, without regard to the vesting provisions
thereunder, and assumes that TSAT would have received, and applied against
outstanding indebtedness, an aggregate of approximately $33,447,000 in
connection with such exercises.
The obligations of TSAT under the Included Options will not be affected by
the Restructuring Transaction, except that all outstanding TSAT Options and
TSAT SARs will be amended to provide that service as an employee of, or
consultant to, New PRIMESTAR following the Closing Date will be deemed to
constitute service as an employee of, or consultant to, TSAT, for all purposes
of such awards and the TSAT 1996 Plan. At the TSAT Effective Time, TSAT's
obligations under the Included Options then outstanding will be assumed by New
PRIMESTAR, and each outstanding Included Option will be amended to constitute
an option to acquire, on the same terms and conditions as were applicable
under such Included Option, the same number of shares of New PRIMESTAR Class A
Common Stock as the holder of such Included Option would have been entitled to
receive pursuant to the TSAT Merger had such holder exercised such Included
Option in full immediately prior to the TSAT Effective Time, at a price per
share equal to the exercise price for the shares of TSAT Series A Common Stock
otherwise purchasable pursuant to such Included Option. See "THE ROLL-UP
PLAN--Interests
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of Certain Persons in the Roll-up Plan--Treatment of TSAT Options, Stock
Appreciation Rights and Restricted Stock Awards".
As a result in part of the treatment of Included Options under the
Methodology, if the Restructuring Transaction, but not the TSAT Merger, had
been consummated on September 30, 1997, TSAT would have received approximately
74,810,000 shares of New PRIMESTAR Common Stock, representing approximately
36% of the total common equity and approximately 37% of the total voting power
of New PRIMESTAR.
However, shares of New PRIMESTAR Class A Common Stock will not be issued in
the TSAT Merger in respect of the Included Options. Rather, such options will
be assumed by New PRIMESTAR as options to purchase shares of New PRIMESTAR
Class A Common Stock. Accordingly, if both the Restructuring Transaction and
the TSAT Merger had been consummated on September 30, 1997, the former
stockholders of TSAT would have received in the TSAT Merger, in the aggregate,
approximately 66,702,000 shares of New PRIMESTAR Common Stock, representing
approximately 34% of the total common equity and approximately 36% of the
total voting power of New PRIMESTAR.
REPRESENTATIONS AND WARRANTIES
The Restructuring Agreement contains certain representations and warranties
of TSAT relating to, among other things, (1) the due organization, valid
existence and good standing of TSAT and each of its subsidiaries and the power
to carry on their respective businesses as presently being conducted and
certain similar corporate matters; (2) the absence of any liabilities or
obligations on the part of New PRIMESTAR, other than those under the
Restructuring Agreement, the TSAT Asset Transfer Agreement, the Merger
Agreements, the Asset Transfer Agreements, the TSAT Merger Agreement, the TSAT
Tempo Agreement and the TSAT Stockholders Agreement; (3) the assets and
liabilities of Tempo; (4) the capitalization of TSAT and New PRIMESTAR; (5)
the corporate power and authority of TSAT and New PRIMESTAR to enter into its
Relevant Agreements (as defined below) and, subject to the requisite TSAT
stockholder approval of the Roll-up Plan, to consummate the transactions
contemplated by each of its Relevant Agreements; (6) the execution and
delivery and the validity and enforceability against each of TSAT and New
PRIMESTAR of its Relevant Agreements, and the non-contravention thereby of (i)
the charter and bylaws of TSAT or any of its subsidiaries, (ii) subject to
certain exceptions, any loan, credit agreement or certain other documents
applicable to TSAT or any of its subsidiaries, other than those contraventions
that, individually or in the aggregate, would not have a Material Adverse
Effect (as defined below) on TSAT, or (iii) subject to certain required
governmental filings and other matters, any judgment, order, statute, law or
regulation applicable to TSAT or any of its subsidiaries; (7) the receipt of
all requisite governmental approvals and the making of all necessary
governmental filings by TSAT or any of its subsidiaries, other than those
specified in the Restructuring Agreement; (8) TSAT's compliance with the
requirements of the Securities Act and the Exchange Act, and the compliance of
TSAT's financial statements with applicable accounting requirements and SEC
rules and regulations; (9) the accuracy and completeness of certain
information supplied by TSAT or any of its subsidiaries for inclusion in the
Registration Statement and this Proxy Statement/Prospectus, and the absence of
certain material changes in respect of TSAT since its latest SEC filing; (10)
the absence of any undisclosed material litigation; (11) certain employee,
pension benefit plan and welfare benefit plan matters; (12) certain tax
matters; (13) the absence of excess parachute payments to any employee,
officer or director of TSAT or any of its affiliates as a result of the
Restructuring Transaction, other than payments that may be made to certain
specified TSAT executives; (14) voting requirements of TSAT stockholders to
approve the Roll-up Plan; (15) the receipt of TSAT Board approval effective to
render inapplicable Section 203 of the DGCL to the Roll-up Plan; (16) the
absence of any brokers' or similar fees in connection with the Restructuring
Transaction, the TSAT Merger and the Tempo Sale, based upon arrangements made
by or on behalf of TSAT, other than such fees due to Merrill Lynch; and (17)
the receipt by TSAT of the Merrill Lynch Opinion.
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The Restructuring Agreement contains certain representations and warranties
of each of Comcast, Cox, GE Americom, MediaOne, TWE and Newhouse, severally
and not jointly, relating to, among other things, (1) the due organization,
valid existence and, in the case of a corporation, good standing of such party
and each of its PRIMESTAR Subs (as defined below), if any, and the power to
carry on its business as presently being conducted and certain similar
corporate matters; (2) the capital stock, assets, liabilities and employees of
each of such party's PRIMESTAR Subs, if any; (3) the corporate power and
authority of such party and each of its PRIMESTAR Subs, if any, to enter into
its Relevant Agreements and to consummate the transactions contemplated by
each of its Relevant Agreements; (4) the execution and delivery and the
validity and enforceability against such party and each of its PRIMESTAR Subs,
if any, of its Relevant Agreements, and the non-contravention thereby of (i)
the charter or bylaws or partnership agreement, as applicable, of such party
or its PRIMESTAR Sub, (ii) any loan, credit agreement or certain other
documents applicable to such party or its PRIMESTAR Sub, other than those
contraventions that, individually or in the aggregate, would not have a
Material Adverse Effect on such party, or (iii) subject to certain required
governmental filings and other matters, any judgment, order, statute, law or
regulation applicable to such party or its PRIMESTAR Sub; (5) the receipt of
all requisite governmental approvals and the making of all necessary
governmental filings by such party or any of its subsidiaries, other than
those specified in the Restructuring Agreement; (6) the accuracy and
completeness of certain information supplied by such party or any of its
subsidiaries for inclusion in the Registration Statement and this Proxy
Statement/Prospectus, the compliance of the financial statements of such
party's PRIMESTAR(R) distribution business included in the Registration
Statement and this Proxy Statement/Prospectus with applicable accounting
requirements and SEC rules and regulations, and the absence of certain
material changes in respect of such party's PRIMESTAR(R) distribution business
since June 11, 1997; (7) the absence of any undisclosed material litigation;
(8) certain tax matters; and (9) certain employee and employee benefit plan
matters.
"Relevant Agreements" means, (a) with respect to TSAT, the Restructuring
Agreement, the TSAT Asset Transfer Agreement, the TSAT Stockholders Agreement,
the TSAT Merger Agreement, the TSAT Tempo Agreement, and any agreement or
instrument to be delivered by TSAT under any of the foregoing agreements, (b)
with respect to New PRIMESTAR, the Restructuring Agreement, the TSAT Asset
Transfer Agreement, each of the other Asset Transfer Agreements, each of the
Merger Agreements, the TSAT Stockholders Agreement, the TSAT Merger Agreement,
the TSAT Tempo Agreement, and any agreement or instrument to be delivered by
New PRIMESTAR under any of the foregoing agreements; and (c) with respect to
any other person or entity, the Restructuring Agreement, any Asset Transfer
Agreement, any Merger Agreement, and any agreement or instrument to be
delivered by such person or entity under any of the foregoing agreements, in
each case to the extent such person or entity is named as a party thereto.
"Material Adverse Effect" means (A) with respect to TSAT or New PRIMESTAR, any
change or effect (or any development that, insofar as can reasonably be
foreseen, is likely to result in any change or effect) that (i) is materially
adverse to the business, properties, assets, condition (financial or
otherwise) or results of operations or prospects of TSAT or New PRIMESTAR, as
applicable, and its subsidiaries taken as a whole or (ii) would impair the
ability of TSAT or New PRIMESTAR to perform its obligations under any of its
Relevant Agreements or (iii) would prevent the consummation of all or any part
of the Restructuring Transaction, the TSAT Merger or the Tempo Sale, and (B)
with respect to any Class C Stockholder or GE Americom, any change or effect
(or any development that, insofar as can reasonably be foreseen, is likely to
result in any change or effect) that (i) is materially adverse to the
business, properties, assets, condition (financial or otherwise) or results of
operations or prospects of, in the case of a Class C Stockholder, such Class C
Stockholder's PRIMESTAR(R) distribution business or (ii) would impair the
ability of such Class C Stockholder or its PRIMESTAR Sub, if any, or GE
Americom or GEAS, as applicable, to perform its obligations under any of its
Relevant Agreements or (iii) would prevent the consummation of all or any part
of the Restructuring Transaction, the TSAT Merger or the Tempo Sale; provided,
that a change or effect (or any development that, insofar as can be foreseen,
is likely to result in a change or effect) that affects the business of
distributing the PRIMESTAR(R) service in general will not constitute a
Material Adverse Effect. "PRIMESTAR Sub" means (i) with respect to Comcast,
Comcast DBS and Comcast SCI, (ii) with respect to Cox, Cox SI, (iii) with
respect to GE Americom, GEAS and (iv) with respect to MediaOne, each
subsidiary of MediaOne that is a party to an Asset Transfer Agreement.
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The Restructuring Agreement also contains certain additional representations
and warranties, including (1) Comcast's representation and warranty that
Comcast DBS and Comcast SCI, together, hold all of the PRIMESTAR Assets and
Partnership Interests of Comcast's PRIMESTAR(R) distribution business; (2)
Cox's representation and warranty that Cox SI holds all of the PRIMESTAR
Assets and Partnership Interests of Cox's PRIMESTAR(R) distribution business;
(3) MediaOne's representation and warranty that MediaOne and the subsidiaries
of MediaOne that are parties to an Asset Transfer Agreement, together, hold
all of the PRIMESTAR Assets and Partnership Interests of US West's
PRIMESTAR(R) distribution business; (4) TWE's and Newhouse's joint and several
representation and warranty that TWE and Newhouse together hold all of the
PRIMESTAR Assets and Partnership Interests of TWE's and Newhouse's
PRIMESTAR(R) distribution business (subject to certain specified exceptions);
and (5) GE Americom's representation and warranty that GEAS holds all of the
Partnership Interests of GE Americom.
CONDITIONS TO THE RESTRUCTURING TRANSACTION
The rights and obligations of each Restructuring Party to consummate the
Restructuring Transaction are subject to the satisfaction or waiver on or
prior to the Closing Date of the following conditions: (a) approval of a five-
year strategic plan of New PRIMESTAR by a Super-majority Vote (as defined in
the Partnership Agreement) of the Partnership's Partners Committee; (b)
approval of the Roll-up Proposal by the requisite vote of the TSAT
stockholders; (c) receipt of all FCC orders and approvals required in
connection with the consummation of the Restructuring Transaction, if any; (d)
expiration or termination of the waiting period (and any extension thereof)
applicable to the Restructuring Transaction under the HSR Act; (e) the absence
of any temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing consummation of the Restructuring
Transaction; (f) receipt of approval for listing on the NASDAQ/NM of the
shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common
Stock issuable to the stockholders of TSAT pursuant to the TSAT Merger
Agreement, subject to official notice of issuance; (g) effectiveness of the
Registration Statement under the Securities Act and the absence of any stop
order or proceedings seeking a stop order with respect to the Registration
Statement; and (h) receipt of certain certificates from the Secretary or
Assistant Secretary of each other Restructuring Party (and any PRIMESTAR Sub
of any such Restructuring Party that is a party to an Asset Transfer Agreement
or Merger Agreement). TSAT and the other parties to the Roll-up Plan filed
Notification and Report Forms under the HSR Act in July 1997, and the waiting
periods under the HSR Act with respect to the transactions described in such
filings, which effectively included both the Restructuring Transaction and the
TSAT Merger, have since expired.
The obligations of each Class C Stockholder and GE Americom to consummate
the Restructuring Transaction are also subject to the following conditions:
(a) the accuracy of the representations and warranties of each other
Restructuring Party set forth in the Restructuring Agreement (and of John C.
Malone set forth in the Letter Agreement) that are qualified as to
materiality, and the material accuracy of the representations and warranties
of each other Restructuring Party set forth in the Restructuring Agreement
(and of John C. Malone set forth in the Letter Agreement) that are not so
qualified, in each case as of the date of the Restructuring Agreement and as
of the Closing Date, and the receipt by such Restructuring Party of
certificates of each such other Restructuring Party (and from Dr. Malone) to
such effect; (b) performance by each other Restructuring Party (including any
PRIMESTAR Sub of such other Restructuring Party) and New PRIMESTAR (and Dr.
Malone) in all material respects of all obligations required to be performed
by it under each of its Relevant Agreements (and under the Letter Agreement)
at or prior to the Closing Date, and the receipt by such Restructuring Party
of a certificate signed on behalf of each such other Restructuring Party (and
PRIMESTAR Sub) and New PRIMESTAR (and from Dr. Malone) to such effect; (c)
compliance of all financing arrangements of New PRIMESTAR (including those of
TSAT to be assumed by New PRIMESTAR or to remain in effect after the Effective
Time) with the approved five-year strategic plan of New PRIMESTAR; (d) the
sufficiency of New PRIMESTAR's credit lines and borrowing capacity to pay the
cash and assume the indebtedness contemplated to be paid and assumed by New
PRIMESTAR in the Restructuring Transaction; (e) the effectiveness of the
PRIMESTAR Letters of Credit of TCI and each other Restructuring Party (or
their respective affiliates, as applicable), and the agreement of TCI to
extend the maturity of its PRIMESTAR Letters of Credit to June 30, 1999, with
the consideration payable to TCI in respect thereof being the same as that for
the other
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Restructuring Parties as set forth in the Restructuring Agreement; (f) the
absence of any pending or threatened suit, action or proceeding by any
governmental entity that has a reasonable likelihood of success, (i)
challenging the acquisition by such Restructuring Party of any shares of New
PRIMESTAR capital stock, seeking to restrain or prohibit the consummation of
the Restructuring Transaction or seeking to obtain from such Restructuring
Party or New PRIMESTAR any damages that are material in relation to New
PRIMESTAR and its subsidiaries taken as a whole, (ii) seeking to prohibit or
limit the ownership or operation by New PRIMESTAR or such Restructuring Party
or any of their respective subsidiaries or affiliates of any portion of the
business or assets of New PRIMESTAR, such Restructuring Party or any of their
respective subsidiaries or affiliates, or to compel New PRIMESTAR, such
Restructuring Party or any of their respective subsidiaries or affiliates to
dispose of or hold separate any portion of the business or assets of New
PRIMESTAR, such Restructuring Party or any of their respective subsidiaries or
affiliates, as a result of the Restructuring Transaction, (iii) seeking to
impose limitations on the ability of such Restructuring Party to acquire or
hold, or exercise full rights of ownership of, any shares of capital stock of
New PRIMESTAR, including the right to vote the capital stock of New PRIMESTAR
acquired by it on all matters properly presented to the stockholders of New
PRIMESTAR, (iv) seeking to prohibit New PRIMESTAR, such Restructuring Party or
any of their respective subsidiaries or affiliates from effectively
controlling in any material respect the business or operations of New
PRIMESTAR, such Restructuring Party or any of their respective subsidiaries or
affiliates, (v) seeking to change in any respect the governance of New
PRIMESTAR from that set forth in the New PRIMESTAR Charter and New PRIMESTAR
Bylaws, or to change such Restructuring Party's rights under the Stockholders
Agreement or the TWE/Newhouse Voting Agreement, or seeking to impose
limitations on the ability of such Restructuring Party to exercise any such
rights or (vi) which otherwise is reasonably likely to have a Material Adverse
Effect on New PRIMESTAR; (g) the taking by TSAT and the TSAT Board of all
requisite actions to render inapplicable to the Roll-up Plan, any state
takeover statute or similar statute or regulation that would otherwise apply
or purport to apply to such transactions and agreements; and (h) the delivery
by each other Restructuring Party of a tax representation letter, dated the
Closing Date.
The obligations of TSAT to consummate the Restructuring Transaction are also
subject to the following conditions: (a) the accuracy of the representations
and warranties of each other Restructuring Party set forth in the
Restructuring Agreement that are qualified as to materiality, and the material
accuracy of the representations and warranties of each other Restructuring
Party set forth in the Restructuring Agreement that are not so qualified, in
each case as of the date of the Restructuring Agreement and as of the Closing
Date, except as otherwise contemplated by the Restructuring Agreement, and the
receipt by TSAT of certificates of each such other Restructuring Party to such
effect; (b) performance by each other Restructuring Party (including any
PRIMESTAR Sub of such other Restructuring Party) in all material respects of
all obligations required to be performed by it under each of its Relevant
Agreements at or prior to the Closing Date, and the receipt by TSAT of a
certificate signed on behalf of each such other Restructuring Party (and
PRIMESTAR Sub) to such effect; (c) the effectiveness of the PRIMESTAR Letters
of Credit of each other Restructuring Party (or their respective affiliates,
as applicable); (d) the absence of any pending or threatened suit, action or
proceeding by any governmental entity that has a reasonable likelihood of
success, (i) seeking to restrain or prohibit the consummation of the
Restructuring Transaction or seeking to obtain from TSAT or New PRIMESTAR any
damages that are material in relation to New PRIMESTAR and its subsidiaries
taken as a whole, (ii) seeking to prohibit or limit the ownership or operation
by New PRIMESTAR or TSAT or any of their respective subsidiaries or affiliates
of any portion of the business or assets of New PRIMESTAR, TSAT or any of
their respective affiliates, or to compel New PRIMESTAR, TSAT or any of their
respective affiliates to dispose of or hold separate any portion of the
business or assets of New PRIMESTAR, TSAT or any of their respective
affiliates, as a result of the Restructuring Transaction, (iii) seeking to
prohibit New PRIMESTAR or any of its subsidiaries from effectively controlling
in any material respect the business or operations of New PRIMESTAR or its
subsidiaries, (iv) seeking to impose limitations on the ability of TSAT or any
person or entity that (as of the date of the Restructuring Agreement) holds 5%
or more of the TSAT Series A Common Stock or TSAT Series B Common Stock to
acquire or hold, or exercise full rights of ownership of, any shares of
capital stock of New PRIMESTAR, including the right to vote all capital stock
of New PRIMESTAR acquired by such person or entity pursuant to the
Restructuring Transaction on all matters properly presented to the
stockholders of New
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PRIMESTAR, (v) seeking to change in any respect the governance of New
PRIMESTAR from that set forth in the New PRIMESTAR Charter and New PRIMESTAR
Bylaws, or to change TSAT's rights under the Stockholders Agreement, or
seeking to impose limitations on the ability of TSAT to exercise any such
rights or (vi) which otherwise is reasonably likely to have a Material Adverse
Effect on New PRIMESTAR; and (e) the delivery by each other Restructuring
Party of a tax representation letter, dated the Closing Date.
COVENANTS RELATING TO BUSINESS
Alternative Transactions. TSAT has agreed that, prior to the Closing Date,
neither it nor any of its subsidiaries will, nor will it or any of its
subsidiaries permit their respective officers, directors, employees, agents
and representatives, to initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including without limitation any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
that would impede, interfere with, delay, postpone, discourage or adversely
affect the transactions contemplated in the Restructuring Agreement, or that
could reasonably be expected to have such effect. TSAT has also agreed that,
prior to the Closing Date, neither the TSAT Board nor any committee thereof
will approve or recommend, or propose to approve or recommend, any alternative
transaction of the type described in the preceding sentence.
In addition, each of TSAT, Comcast, Cox, GE Americom, MediaOne, TWE and
Newhouse, severally and not jointly, has agreed that prior to the Closing
Date, it will not, and it will not permit any of its subsidiaries to, sell, or
agree to sell, all or any part of its PRIMESTAR Assets or Partnership
Interests to any other person or entity, except for sales of PRIMESTAR
Inventory in the ordinary course of business consistent with past practice;
provided, that the foregoing will not apply to any transfers between TWE and
Newhouse and their affiliates; and provided, further, that the foregoing will
not apply to any indirect transfer resulting from a merger of, a sale of
substantially all the assets of, a spin-off by, or a similar transaction
involving all or any significant part of, any of Comcast, Cox, GE Americom, US
West, TWE, Time Warner or Newhouse (so long as the successor entity that
succeeds to its predecessor(s) obligations under the Restructuring Agreement,
after giving effect to such transaction, continues to (x) be bound by the
provisions of the Restructuring Agreement to the same extent as such
predecessor(s) and (y) hold, directly or indirectly, substantially all the
cable systems that such predecessor(s) held prior to consummation of such
transaction).
Interim Operations of TSAT. For the period from June 11, 1997 until the
Closing Date, TSAT has agreed (1) not to, and to cause each of its
subsidiaries not to, take any action that would result in any representation
or warranty of TSAT or New PRIMESTAR being untrue in any material respect (2)
to, and to cause each of its subsidiaries to, conduct its business and
operations according to its ordinary course of business consistent with past
practice; (3) to use its commercially reasonable efforts to preserve intact
its and its subsidiaries' business organization; (4) to use its commercially
reasonable efforts to keep available the services of its and its subsidiaries'
officers and employees; (5) except for the amendments to the New PRIMESTAR
Charter and the New PRIMESTAR Bylaws as contemplated by the Restructuring
Agreement, not to, and to cause each of its subsidiaries not to, amend its
charter or bylaws; (6) not to, and to cause each of its subsidiaries not to,
authorize for issuance, issue, sell, deliver, pledge or otherwise encumber any
shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than (i) shares
issued upon exercise of any rights, warrants or options outstanding as of June
11, 1997 or, in the case of employee benefit plans existing as of June 11,
1997, any rights, warrants or options authorized under such existing plans and
shares issued upon exercise thereof and (ii) employee stock options issued to
directors, officers or other employees of TSAT in the ordinary course of
business and consistent with past practice); (7) not to, and to cause each of
its subsidiaries not to, (i) split, combine or reclassify any shares of its
capital stock, (ii) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or any
other ownership interests (whether in stock or property or a combination
thereof) or (iii) purchase, redeem or otherwise acquire, directly or
indirectly, any shares of, or options or warrants or rights relating to, its
capital stock or that of any of its subsidiaries, or make any commitment for
any such action; (8) not to, and to cause each of its subsidiaries not to, (i)
create, incur, assume, maintain or permit to exist any long-term debt or
short-term debt for borrowed money (other than (x) under lines of credit and
other credit facilities of TSAT existing on the date of the Restructuring
Agreement and debt securities outstanding on the date of the Restructuring
Agreement and in
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respect of capitalized lease obligations not to exceed $525 million in the
aggregate, and (y) interim financing debt incurred to fund the payment of cash
consideration to (or the assumption of indebtedness of) the other
Restructuring Parties (or their respective affiliate) pursuant to the
Restructuring Agreement (including the fees and expenses relating thereto),
(ii) issue or sell any debt securities (other than borrowings under existing
lines of credit in the ordinary course of businesses), (iii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
or entity except the Partnership and/or TSAT's wholly-owned subsidiaries, or
(iv) make any loans, advances or capital contributions to or investments in
any other person or entity other than in the ordinary course of business and
consistent with past practice; (9) not to make any change to its (or any of
its subsidiaries') accounting (including tax accounting) methods, principles,
practices, or policies, other than those required by U.S. generally accepted
accounting principles and except, in the case of tax accounting methods,
principles or practices, in the ordinary course of business of TSAT or any of
its subsidiaries; (10) not to make any payment in respect of indebtedness for
borrowed money (other than payments in accordance with the terms of such
indebtedness (as they existed as of June 11, 1997, if incurred prior to such
date)); (11) not to, and to cause each of its subsidiaries not to, sell,
lease, transfer, mortgage, subject to any lien or otherwise dispose of, any of
its properties or assets except in the ordinary course of business; (12) not
to, and to cause each of its subsidiaries not to, acquire or agree to acquire
(i) by merging or consolidating with, or by purchasing a substantial portion
of the assets of, or by any other manner, any business or any corporation,
partnership, joint venture, association or other business organization or
division thereof or (ii) any assets that are material, individually or in the
aggregate, to TSAT and its subsidiaries taken as a whole, except purchases of
inventory in the ordinary course of business consistent with past practice;
(13) not to, and to cause each of its subsidiaries not to, purchase or acquire
any property or assets from or otherwise engage in any transactions with, any
person or entity that is affiliated with (i) TSAT, (ii) John C. Malone or
(iii) TCI, other than in the ordinary course of business and consistent with
past practice and on terms and conditions not less favorable to TSAT than
could be obtained on an arm's length basis from unrelated third parties; (14)
not to, and to cause New PRIMESTAR not to, amend, modify or deliver any
consent under or terminate any provision of the TSAT Stockholders Agreement,
the TSAT Merger Agreement or the TSAT Tempo Agreement (or agree to do any of
the foregoing), unless each other party to the Restructuring Agreement shall
have consented thereto; (15) to comply, and to cause New PRIMESTAR to comply,
with its respective obligations under the TSAT Stockholders Agreement, the
TSAT Merger Agreement and the TSAT Tempo Agreement; (16) to cause New
PRIMESTAR not to waive any defaults under the TSAT Stockholders Agreement, the
TSAT Merger Agreement or the TSAT Tempo Agreement, unless each other party to
the Restructuring Agreement shall have consented thereto; and (17) not to, and
to cause New PRIMESTAR not to, agree to do any of the foregoing.
Interim Operations of the Class C Stockholders and GE Americom. For the
period from June 11, 1997 until the Closing Date, GE Americom, with respect to
clause (1) below only, and each Class C Stockholder, with respect to its
PRIMESTAR(R) distribution business, PRIMESTAR Assets and its PRIMESTAR Subs,
if any, has agreed, except as may otherwise be provided in agreements
governing transition arrangements between New PRIMESTAR and the Class C
Stockholders (1) not to, and to cause its PRIMESTAR Subs not to, take any
action that would result in any representation or warranty of such Class C
Stockholder or GE Americom being untrue in any material respect; (2) except
for transactions required in connection with consummation of the Restructuring
Transaction, to conduct its PRIMESTAR(R) distribution business according to
its ordinary course of business consistent with past practice; (3) to use its
commercially reasonable efforts to preserve intact the organization of its
PRIMESTAR(R) distribution business; and (4) except for the orderly
transitioning of terminated employees, to use its commercially reasonable
efforts to keep available the services of the officers and employees of its
PRIMESTAR(R) distribution business, to the extent failure to do so would have
a Material Adverse Effect on such Class C Stockholder.
Other Actions. Each of TSAT and each Class C Stockholder and GE Americom,
has agreed to take no action that would reasonably be expected to cause (1)
the failure of any such party to perform and comply in all material respects
with all agreements, obligations and conditions required by the Restructuring
Agreement to be performed or complied with by such party on or prior to the
Closing Date; (2) the failure of any such party to obtain all necessary
approvals or appropriate consents of any U.S. federal or state governmental
entity or any
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other third party in connection with the consummation of the transactions
contemplated by the Restructuring Agreement, including approvals and consents
under the HSR Act and applicable FCC rules and regulations; or (3) the
institution of any suit, action or proceeding challenging, seeking to
restrain, prohibiting or adversely affecting in any material respect the
consummation of the transactions contemplated by the Restructuring Agreement.
In addition, each of TSAT and each Class C Stockholder has agreed to take no
action that would reasonably be expected to cause any Material Adverse Effect,
in the case of TSAT, on TSAT and in the case of each Class C Stockholder, on
such Class C Stockholder.
ADDITIONAL COVENANTS
Preparation of Registration Statement and Proxy Statement/Prospectus; TSAT
Stockholders Meeting. The Restructuring Agreement contains certain covenants
and agreements of each of the Restructuring Parties that relate to, among
other things: (1) the cooperation of each Restructuring Party in the
preparation of the Registration Statement and this Proxy Statement/Prospectus;
(2) New PRIMESTAR's preparation and filing with the SEC of the Registration
Statement, in which this Proxy Statement/Prospectus is included as a
prospectus; (3) TSAT and New PRIMESTAR taking any commercially reasonable
action (other than qualifying to do business in any jurisdiction in which TSAT
is not now so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of New PRIMESTAR capital stock
in the Restructuring Transaction; (4) TSAT, as soon as practicable following
the date of the Restructuring Agreement, duly calling and holding the Meeting,
and using its best efforts to cause the requisite stockholder approval of the
Roll-up Proposal to be obtained at the Meeting; and (5) the agreement of each
Restructuring Party to use its commercially reasonable efforts, with certain
limitations, to cause the Closing to occur by March 31, 1998, and to cause the
Meeting to occur sufficiently prior to such date to permit the Closing to
occur by such date.
Listing on NASDAQ/NM. New PRIMESTAR and TSAT have agreed to prepare and
submit to NASDAQ/NM listing applications covering the shares of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B Common Stock issuable by New
PRIMESTAR pursuant to the TSAT Merger, and to use their respective best
efforts to obtain, prior to the Effective Time, approval for the listing of
such stock, subject to official notice of issuance. The obligation of each
Restructuring Party to consummate the Restructuring Transaction is subject to
the authorization for listing on the NASDAQ/NM of such shares, subject to
official notice of issuance. See "--Conditions to the Restructuring
Transaction."
Access to Information; Confidentiality. New PRIMESTAR and TSAT have agreed
to afford to each Class C Stockholder and GE Americom, and each Class C
Stockholder and GE Americom have agreed to afford to TSAT reasonable access
during the period prior to the Effective Time (i) in the case of TSAT and New
PRIMESTAR, all their respective properties, books, contracts, commitments,
personnel and records and (ii) in the case of each Class C Stockholder and GE
Americom, all their respective properties, books, contracts, commitments,
personnel and records in respect of their PRIMESTAR Assets and PRIMESTAR Subs,
if any. Each of the foregoing parties has further agreed to use its best
efforts in good faith to obtain all waivers and consents necessary under any
confidentiality or non-disclosure agreement (other than any such agreement
with a Restructuring Party seeking disclosure under the Restructuring
Agreement, as to which the Restructuring Party seeking disclosure shall be
deemed to have waived such confidentiality or non-disclosure with respect to
itself) to afford reasonable access to the applicable Restructuring Party. In
addition, during such period, each of New PRIMESTAR and TSAT have agreed to,
and to cause each of its respective subsidiaries to, promptly furnish to each
other Restructuring Party (a) a copy of each document filed by it during such
period pursuant to the requirements of federal or state securities laws and
(b) all other information concerning its business, properties and personnel as
such other Restructuring Party may reasonably request.
Each Restructuring Party has further agreed, except as required by law, to
hold, and to cause its respective officers, employees, accountants, counsel,
financial advisors and other representatives and affiliates to hold, any
nonpublic information in confidence until such time as such information
becomes publicly available (otherwise than through the wrongful act of any
such person or entity) and to use its best efforts to ensure that such persons
or entities do not disclose such information to others without the prior
written consent of the applicable Restructuring Party from whom such
information was received. Each Restructuring Party has further agreed, in the
event of the termination of the Restructuring Agreement for any reason, to
promptly return or destroy all documents containing nonpublic information so
obtained from any other Restructuring Party or any of its subsidiaries and any
copies made of such documents.
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Indemnification. Pursuant to the Restructuring Agreement, if the Closing
occurs, New PRIMESTAR and its subsidiaries, jointly and severally, will
indemnify each of TSAT, Comcast, Cox, MediaOne, TWE, Newhouse, GE Americom,
each affiliate of TSAT, Comcast, Cox, MediaOne, TWE, Newhouse 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 PRIMESTAR Liabilities of any of TSAT,
Comcast, Cox, MediaOne, TWE, Newhouse or GE Americom (or any of their
respective affiliates), (ii) any and all losses, liabilities, claims, damages,
costs and expenses arising out of or resulting from the operation by New
PRIMESTAR, its subsidiaries, or any of their respective predecessors of the
PRIMESTAR(R) distribution business or the digital satellite business or the
ownership by New PRIMESTAR, its subsidiaries, or any of their respective
predecessors of the PRIMESTAR Assets or any assets used primarily in the
digital satellite business, 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 New PRIMESTAR and its subsidiaries, whether arising before, on or after the
Closing Date.
The Restructuring Agreement also provides that, if the Closing occurs, each
of Comcast, Cox, MediaOne, TWE, Newhouse and GE Americom, severally and not
jointly, will indemnify New PRIMESTAR, 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) such indemnitor's
Excluded Liabilities, (B)(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 (C) the business, affairs, assets or
liabilities, other than PRIMESTAR Liabilities, of such indemnitor after the
Closing Date.
In addition, the Restructuring Agreement provides that, if the Closing
occurs, each of Comcast, Cox, MediaOne and GE Americom, severally and not
jointly, will indemnify New PRIMESTAR, 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 any of such
indemnitor's representations and warranties relating to the assets and
liabilities of its PRIMESTAR Subs.
Tax Indemnification. Pursuant to the Restructuring Agreement, each of
Comcast, Cox and GE (each, in such capacity, a "Merger Indemnitor") will
indemnify New PRIMESTAR, 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 the Merger
Indemnitor's PRIMESTAR Sub for 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, otherwise 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 New PRIMESTAR failing to qualify under either (I)
Section 351(a) of 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, if and to the extent any
failure to so qualify attributable to any action taken after the Closing by
New 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.
The Restructuring Agreement also provides that each of MediaOne, Newhouse
and TWE (each, in such capacity, a "Contribution Indemnitor") will indemnify
New PRIMESTAR, 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 New 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 New PRIMESTAR by such
Contribution Indemnitor, all liability for Covered Taxes of the
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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, was affiliated with the Contributed Corporation
or with which the Contributed Corporation, prior to the Closing, otherwise
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 will not be required to indemnify and hold harmless New PRIMESTAR
and its affiliates and each of their respective officers, directors,
employees, stockholders, agents and representatives, and New PRIMESTAR will
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
New 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 (the "Post-Closing Tax Period"), (ii)
all liability for Covered Taxes resulting from the merger of the Merger
Indemnitor's PRIMESTAR Sub with and into New PRIMESTAR failing to qualify
under Section 368(a) of the Code if and to the extent such failure is
attributable to any action taken after the Closing by New PRIMESTAR 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.
Other Covenants. Each Restructuring Party has agreed, upon the terms and
subject to the conditions set forth in the Restructuring Agreement, to use its
commercially reasonable efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, and to assist and cooperate with the other
parties in doing, all things necessary, proper or advisable to consummate and
make effective, in the most expeditious manner practicable, the Restructuring
Transaction, the TSAT Merger and (if the TSAT Merger has not first been
consummated) the Tempo Sale; provided, that no Restructuring Party will be
required to agree to any prohibition, limitation or other requirements that
would (i) prohibit or limit the ownership or operation by such Restructuring
Party or any of its subsidiaries or affiliates of any portion of the business
or assets of such Restructuring Party or any of its subsidiaries or
affiliates, or to compel such Restructuring Party or any of its subsidiaries
or affiliates to dispose of or hold separate any portion of the business or
assets of such Restructuring Party or any of its subsidiaries or affiliates,
(ii) impose limitations on the ability of such Restructuring Party to acquire
or hold, or exercise full rights of ownership of, any shares of capital stock
of New PRIMESTAR, including the right to vote the capital stock of New
PRIMESTAR acquired by it on all matters properly presented to the stockholders
of New PRIMESTAR, (iii) prohibit such Restructuring Party or any of its
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of such Restructuring Party or any of its
subsidiaries or affiliates or (iv) change in any respect the governance of New
PRIMESTAR from that set forth in the New PRIMESTAR Charter and New PRIMESTAR
Bylaws, or change such Restructuring Party's rights under the Stockholders
Agreement or the TWE/Newhouse Voting Agreement, or impose limitations on the
ability of such Restructuring Party to exercise any such rights.
Each of TSAT, TWE, Comcast, Cox, MediaOne and Newhouse has agreed not to
engage in any unusual selling or subscriber retention practices prior to the
Closing that are designed to inflate their PRIMESTAR Customer additions or
retentions beyond their normal levels.
The Restructuring Parties have also agreed that their intent and desire is
to close both the Restructuring Transaction and the ASkyB Transaction as
promptly as possible and simultaneously if feasible, and they further agreed
to cooperate with each other in good faith to consummate the ASkyB
Transaction; however, the closing of the Restructuring Transaction is not
contingent on the closing of the ASkyB Transaction.
The parties to the Restructuring Agreement have agreed that New PRIMESTAR
will succeed to and assume the rights and obligations of the Partnership to GE
Americom under the existing agreements between the Partnership and GE Americom
or its affiliates, including, without limitation, the Ku-1 User Agreement
between the Partnership and GE Americom, dated as of February 8, 1990, and the
GE-2 Agreement.
In addition, TSAT has agreed to use its commercially reasonable efforts to
arrange for financing sufficient to enable New PRIMESTAR to pay the cash and
assume the indebtedness contemplated to be paid and assumed
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by New PRIMESTAR in connection with the Restructuring Transaction. TSAT has
also agreed to use its best efforts to ensure that an amendment to the Bank
Credit Facility and supplemental indentures providing for assumption by New
PRIMESTAR on the Closing Date of the Notes are entered into as soon as is
reasonably practicable. Each of Comcast, Cox, MediaOne and TWE, severally and
not jointly, has agreed to maintain each of its PRIMESTAR Letters of Credit as
in existence on the date of the Restructuring Agreement on the respective
terms of such PRIMESTAR Letters of Credit, and in consideration thereof, New
PRIMESTAR has agreed to pay to each such party a fee as set forth in the
Restructuring Agreement. Each of Comcast, Cox, MediaOne and TWE, severally and
not jointly, has also agreed that prior to the expiration of its respective
PRIMESTAR Letters of Credit, such party will extend the maturity of such
PRIMESTAR Letters of Credit to June 30, 1999, and certain fees set forth in
the Restructuring Agreement will be payable to such party in respect thereof.
In addition, New PRIMESTAR has agreed to reimburse each of Comcast, Cox,
MediaOne and TWE for all commitment fees and other costs incurred by such
parties in respect of their PRIMESTAR Letters of Credit, as incurred, but only
to the extent New PRIMESTAR (directly or through TSAT) shall have agreed to
reimburse such amounts to TCI in respect of its PRIMESTAR Letters of Credit.
TSAT has also agreed to cause the Transition Services Agreement between TSAT
and TCI (as described under "BUSINESS OF TSAT--Certain Arrangements Between
TSAT and TCI") to terminate effective on or prior to the Closing Date, and New
PRIMESTAR has agreed that, if the Closing occurs, it will make an offer of
employment to certain of the Class C Stockholders' existing employees who are
presently engaged in PRIMESTAR(R)-related operations.
TSAT has agreed that, prior to the Meeting, TSAT will execute and deliver a
written consent of the sole stockholder of New PRIMESTAR, approving the
Restructuring Agreement, the Merger Agreements, the Asset Transfer Agreements,
the TSAT Merger Agreement and the TSAT Tempo Agreement. In addition, each of
Cox, Comcast and GE Americom, as the sole stockholder of its respective
PRIMESTAR Sub, agreed to execute and deliver a written consent of the sole
stockholder approving the respective Merger Agreements to which such
respective PRIMESTAR Subs are parties.
CLOSING ADJUSTMENTS
PRIMESTAR Inventory. The Restructuring Agreement provides that, based on the
final PRIMESTAR Inventory and final PRIMESTAR Customers of TSAT and each Class
C Stockholder, determined in accordance with the procedures set forth in the
Restructuring Agreement, within a certain time period after the Closing, New
PRIMESTAR will calculate for each Class C Stockholder (A) the product of (x)
the final PRIMESTAR Customers of such Class C Stockholder and (y) the TSAT
Inventory Ratio (as defined below) minus (B) the PRIMESTAR Inventory Valuation
(as defined below) of such Class C Stockholder (the "Inventory Payment").
"TSAT Inventory Ratio" means the ratio of (x) the PRIMESTAR Inventory
Valuation of TSAT to (y) the final PRIMESTAR Customers of TSAT. "PRIMESTAR
Inventory Valuation" means, as to any party, the sum of the amounts determined
by taking the product, for each category of PRIMESTAR Inventory, of (x) such
party's final PRIMESTAR Inventory of such category and (y) the dollar value
set forth in the Restructuring Agreement for such category of PRIMESTAR
Inventory.
If a Class C Stockholder's Inventory Payment is a positive number, such
Class C Stockholder will pay that amount to New PRIMESTAR. If a Class C
Stockholder's Inventory Payment is a negative number, New PRIMESTAR will pay
the absolute value of that amount to such Class C Stockholder.
PRIMESTAR Customers. The Restructuring Agreement provides that, based on the
final PRIMESTAR Customers of each Class C Stockholder, as adjusted for
overstatements (other than overstatements in respect of delinquencies of
Recent PRIMESTAR Subscribers (as defined below)) in accordance with the
procedures set forth in the Restructuring Agreement, at a specified date
following the Closing Date, New PRIMESTAR will determine, for TSAT and each
Class C Stockholder, the number of Recent PRIMESTAR Subscribers which, if
subjected to the delinquency tests set forth in the definition of PRIMESTAR
Customer at such date, would count as less than one full PRIMESTAR Customer.
New PRIMESTAR will then calculate for each Class C Stockholder the product of
(A) $1,100 and (B) an amount equal to (I) the product of (x) the ratio of the
final PRIMESTAR Customers of TSAT, as adjusted for all overstatements,
including in respect of delinquencies of Recent PRIMESTAR Subscribers, to the
PRIMESTAR Customers of TSAT, prior to any adjustment, and (y) the
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PRIMESTAR Customers of such Class C Stockholder, prior to any adjustment,
minus (II) the final PRIMESTAR Customers of such Class C Stockholder, as
adjusted for all overstatements, including in respect of delinquencies of
Recent PRIMESTAR Subscribers (the "Customer Payment"). "Recent PRIMESTAR
Subscriber" of any party means any PRIMESTAR Customer of such party who became
a subscriber of such party's PRIMESTAR(R) distribution business 90 days or
less prior to the Closing Date, or in the case of subscribers receiving one
(or two) initial "free" month(s) for promotional purposes, 120 days or less
(or 150 days or less, as applicable) prior to the Closing Date.
If a Class C Stockholder's Customer Payment is a positive number, such Class
C Stockholder will pay that amount to New PRIMESTAR. If a Class C
Stockholder's Customer Payment is a negative number, New PRIMESTAR will pay
the absolute value of that amount to such Class C Stockholder.
Capital Contributions. Within ten days after the Closing Date, New PRIMESTAR
will reimburse each Class C Stockholder and GE Americom for 100% of any
capital contributions made to the Partnership after March 31, 1997 by such
party, as evidenced by the Partnership's records of such contributions;
provided, that for avoidance of doubt, such reimbursement will not include any
payment in respect of interest on any such amount.
TERMINATION, AMENDMENT AND WAIVER
The Restructuring Agreement may be terminated and the Restructuring
Transaction abandoned at any time prior to the Effective Time, whether before
or after the vote of the TSAT stockholders at the Meeting, by (a) the mutual
written consent of the parties to the Restructuring Agreement; or (b) by any
Restructuring Party if (i) the requisite approval of the TSAT stockholders is
not obtained at the Meeting; or (ii) any judgment, decree, injunction, rule or
order of any governmental entity which prohibits, restricts or delays
consummation of the Restructuring Transaction has become final and
nonappealable; provided, however, that the party seeking termination is not in
breach in any material respect of any of its representations, warranties,
covenants or agreements contained in the Restructuring Agreement.
In the event of termination of the Restructuring Agreement by any
Restructuring Party as provided above, the Restructuring Agreement will become
void and have no effect, and there will be no liability or obligation under
the Restructuring Agreement on the part of any Restructuring Party (other than
as provided in the following sentence, and except to the extent that such
termination results from the willful and material breach by a Restructuring
Party of any of its representations, warranties, covenants or agreements set
forth in the Restructuring Agreement). Except as set forth in the next two
sentences, none of the representations and warranties in the Restructuring
Agreement or in any instrument delivered pursuant to the Restructuring
Agreement will survive the Effective Time, provided, however, that such
nonsurvival will not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time. The
representation and warranty of each of MediaOne, Comcast, Cox and GE Americom
relating to the assets and liabilities of entities to be merged into New
PRIMESTAR or whose stock New PRIMESTAR will acquire in the Restructuring
Transaction will survive for 18 months after the Closing Date. The
representations and warranties of TSAT in the Restructuring Agreement will
survive for purposes of the TSAT Merger Agreement, until the earlier of (i)
the TSAT Closing Date and (ii) termination of the TSAT Merger Agreement.
The Restructuring Parties may amend the Restructuring Agreement, by a
written instrument signed on behalf of each of the Restructuring Parties, at
any time before or after the requisite approval by the TSAT stockholders,
except that after such approval by the TSAT stockholders, no amendment may be
made which by law requires further approval by such stockholders without such
further approval. At any time prior to the Effective Time, any of the
Restructuring Parties, by a written instrument signed on behalf of any such
party, may extend the time for performance of any of the obligations or other
acts of the other Restructuring Parties, waive any inaccuracies in the
representations and warranties contained in the Restructuring Agreement or in
any document delivered pursuant thereto or, subject to the proviso of the
previous sentence, waive compliance with any of the agreements or conditions
contained in the Restructuring Agreement. The failure of any party to the
Restructuring Agreement to assert any of its rights thereunder or otherwise
will not constitute a waiver of such rights.
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RELATED AGREEMENTS
STOCKHOLDERS AGREEMENT
The following is a summary of the material provisions of the Stockholders
Agreement, which New PRIMESTAR, the Class C Stockholders, the Specified Class
B Stockholders and GE Americom have agreed to execute and deliver on the
Closing Date. The following summary does not purport to be complete and is
qualified in its entirety by reference to the complete text of the form of
Stockholders Agreement, which is attached as Appendix G to this Proxy
Statement Prospectus and is incorporated herein by reference.
General. In connection with the Restructuring Transaction, at the Closing,
New PRIMESTAR and each of the Class C Stockholders, the Specified Class B
Stockholders and GE Americom will enter into the Stockholders Agreement, which
will provide for certain provisions relating to the nomination of directors to
the New PRIMESTAR Board and certain voting agreements, transfer restrictions,
conversion restrictions, rights of first refusal and other rights and
obligations of the Class C Stockholders, the Specified Class B Stockholders
and GE Americom in connection with their respective shares of New PRIMESTAR
Common Stock. The term of the Stockholders Agreement will be ten years.
Although immediately following the Closing of the Restructuring Transaction
Dr. Malone will not own directly any shares of New PRIMESTAR Class B Common
Stock (all of which will be owned by TSAT), he will nevertheless execute the
Stockholders Agreement on the Closing Date as a Specified Class B Stockholder
and be entitled to exercise certain rights thereunder, including the rights of
first refusal.
Nomination of Directors. The Stockholders Agreement will provide that each
Class C Stockholder (provided that, for this purpose, TWE and Newhouse,
together with their respective affiliates, will collectively be deemed a
single Class C Stockholder, and Class C Stockholders that are affiliates of
one another will collectively be deemed to be a single Class C Stockholder)
will be entitled to nominate such number of Class C Directors as specified by
the then applicable Individual Class C Stockholder Caps (as hereinafter
defined). See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board
of Directors."
In the event that the aggregate number of Class C Directors permitted to be
nominated pursuant to the New PRIMESTAR Charter is smaller than the aggregate
number of Class C Directors permitted to be elected pursuant to the then
applicable Individual Class C Stockholder Caps, then the Class C Stockholder
that is the record holder of the number of shares of New PRIMESTAR Class C
Common Stock that is closest (in number of shares) to the next lower
Individual Class C Stockholder Cap will be treated as if the number of shares
of New PRIMESTAR Class C Common Stock held of record by such Class C
Stockholder were less than such next lower Individual Class C Stockholder Cap,
and such Class C Stockholder will therefore lose the right to nominate one
Class C Director, so that the aggregate number of Class C Directors permitted
to be nominated under the Stockholders Agreement equals the number of Class C
Directors permitted to be elected pursuant to the New PRIMESTAR Charter. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of
Directors."
The Stockholders Agreement will also provide that each designee for each
position on the New PRIMESTAR Board to be filled by a Class B Director will be
a person duly nominated in any manner provided for in the New PRIMESTAR Bylaws
to serve on the New PRIMESTAR Board as a Class B Director. In addition, the
New PRIMESTAR Charter provides that prior to the Class C Termination Date, the
New PRIMESTAR Board's nominees for election as Common Directors will be
nominated by the affirmative vote of 83% of the Class B Directors and the
Class C Directors then in office. On and after the Class C Termination Date,
the New PRIMESTAR Board's nominees for election as Common Directors will be
nominated by the affirmative vote of a majority of the members of the New
PRIMESTAR Board then in office. Pursuant to the Stockholders Agreement, the
initial Common Directors will be John Goddard and John Connelly. See
"MANAGEMENT OF NEW PRIMESTAR--Directors and Executive Officers."
Removal of Directors; Filling Vacancies. The Stockholders Agreement will
provide that, at the request of any Class C Stockholder with respect to a
Class C Director designated by such Class C Stockholder pursuant to
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the applicable provisions of the Stockholders Agreement, each other Class C
Stockholder will agree to vote or act by written consent with respect to (or
cause to be voted or acted upon by written consent) all shares of New
PRIMESTAR Class C Common Stock held of record or beneficially owned by such
other Class C Stockholder at the time of such vote or action by written
consent or as to which such other Class C Stockholder has voting control at
the time of such vote or action by written consent to remove or cause the
removal from office of such Class C Director at any meeting or action by
written consent of the Class C Stockholders called or taken for the purpose of
determining whether or not such Class C Director will be removed from office
(and otherwise will not vote or act by written consent to remove or cause the
removal of any Class C Director without cause).
The Stockholders Agreement will further provide that, at the request of the
Specified Class B Stockholder or group of Specified Class B Stockholders
holding in the aggregate a majority of the aggregate number of shares of New
PRIMESTAR Class B Common Stock then held of record by the Specified Class B
Stockholders (the "Majority Specified Class B Stockholders") with respect to a
Class B Director designated pursuant to the applicable provisions of the
Stockholders Agreement, each other Specified Class B Stockholder and GE
Americom will vote or act by written consent with respect to (or cause to be
voted or acted upon by written consent) all shares of New PRIMESTAR Class B
Common Stock held of record or beneficially owned by such stockholder at the
time of such vote or action by written consent or as to which such stockholder
has voting control at the time of such vote or action by written consent to
remove or cause the removal from office of such Class B Director at any
meeting or action by written consent of the holders of New PRIMESTAR Class B
Common Stock called or taken for the purpose of determining whether or not
such Class B Director will be removed from office (and otherwise will not vote
or act by written consent to remove or cause the removal of any Class B
Director without cause).
Pursuant to the Stockholders Agreement, any vacancy in the office of a Class
C Director will be filled with a nominee selected by the Class C Stockholder
that nominated the Class C Director whose vacancy is to be filled, and any
vacancy in the office of a Class B Director designated by the Majority
Specified Class B Stockholders pursuant to the applicable provisions of the
Stockholders Agreement will be filled either by (A) a majority of the
remaining Class B Directors or the sole remaining Class B Director, as the
case may be, or (B) with a nominee selected by the Majority Specified Class B
Stockholders. See "--Nomination of Directors." All nominations of individuals
to fill Class C Director, Class B Director or Common Director vacancies on the
New PRIMESTAR Board will be voted upon in accordance with the applicable
provisions of the Stockholders Agreement, as described above. See "--Voting
Agreements."
Voting Agreements. Until the Class C Termination Date, each Class C
Stockholder will agree to vote or act by written consent with respect to (or
cause to be voted or acted upon by written consent) (x) all shares of New
PRIMESTAR Class C Common Stock held of record or owned beneficially by such
Class C Stockholder at the time of such vote or action by written consent and
(y) all shares of New PRIMESTAR Class C Common Stock as to which such Class C
Stockholder at the time of such vote or action by written consent has voting
control, in each case (A) in favor of the election of the persons nominated
pursuant to the applicable provisions of the Stockholders Agreement to serve
on the New PRIMESTAR Board as Class C Directors and (B) against the election
of any other person nominated to be a Class C Director. See "--Nomination of
Directors."
Until the Class C Termination Date, each Specified Class B Stockholder and
each Class C Stockholder will agree to vote or act by written consent with
respect to (or cause to be voted or acted upon by written consent) (x) all
shares of New PRIMESTAR Common Stock held of record or owned beneficially by
such stockholder at the time of such vote or action by written consent and (y)
all shares of New PRIMESTAR Common Stock as to which such stockholder at the
time of such vote or action by written consent has voting control, in each
case (A) in favor of the election of the persons nominated pursuant to the
applicable provisions of the Stockholders Agreement to serve on the New
PRIMESTAR Board as Common Directors and (B) against the election of any other
person nominated to be a Common Director. See "--Nomination of Directors."
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Until the Class C Termination Date, GE Americom will agree to vote or act by
written consent with respect to (or cause to be voted or acted upon by written
consent) all GE Shares (as defined below), in each case (A) in favor of (i)
the election of the persons nominated pursuant to the applicable provisions of
the Stockholders Agreement to serve on the New PRIMESTAR Board as Common
Directors and (ii) the election of the persons nominated pursuant to the
applicable provisions of the Stockholders Agreement to serve on the New
PRIMESTAR Board as Class B Directors, and (B) against the election of any
other person nominated for election to the New PRIMESTAR Board as a Common
Director or a Class B Director. See "--Nomination of Directors." "GE Shares"
means (x) all shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR
Class B Common Stock, record or beneficial ownership of which will be acquired
by GE Americom after the Effective Date pursuant to the rights of first
refusal for New PRIMESTAR Class B Common Stock and New PRIMESTAR Class C
Common Stock as provided in the Stockholders Agreement, (y) any securities of
New PRIMESTAR or any other person or entity issued in exchange for (including
pursuant to a merger, consolidation or other business combination), or as a
dividend on, or pursuant to the split, subdivision, combination,
reclassification or recapitalization of any GE Shares, and (z) any securities
of New PRIMESTAR or any other person or entity that are distributed on any GE
Shares and any securities which shall result from the conversion or exchange
of any such distributed securities; provided, that the term "GE Shares" does
not include securities of New PRIMESTAR acquired by GE Americom after the
Effective Date from any person or entity other than New PRIMESTAR, a Specified
Class B Stockholder, a Class C Stockholder or GE Americom.
In addition, pursuant to the Stockholders Agreement, until the Class C
Termination Date, each of Cox, Comcast and MediaOne will agree that if such
party, together with its affiliates, is the record or beneficial holder of a
smaller number of shares of New PRIMESTAR Class C Common Stock than 80% of the
aggregate number of the outstanding shares of New PRIMESTAR Class C Common
Stock held of record by any two of MediaOne (together with its affiliates),
Cox and Comcast as of the Effective Date, respectively, being the record
holders of the highest and lowest number of outstanding shares of New
PRIMESTAR Class C Common Stock among such parties as of the Effective Date
(the "Cut-Off Amount") (any such party in such capacity being a "Cut-Off
Holder"), then such Cut-Off Holder will not have the right individually to
veto certain specified actions, and each of Cox, Comcast and MediaOne will
agree that if it is a Cut-Off Holder, it will, and will cause its affiliates
to, vote or act by written consent with respect to (or cause to be voted or
acted upon by written consent) (x) all shares of New PRIMESTAR Class C Common
Stock held of record or owned beneficially by such Cut-Off Holder at the time
of such vote and (y) all shares of New PRIMESTAR Class C Common Stock as to
which such Cut-Off Holder has voting control, in each case in favor of any of
such specified actions, unless at least one other Class C Stockholder which
together with such first Cut-Off Holder, on the record date of such vote, is
the record or beneficial owner of a number of shares of New PRIMESTAR Class C
Common Stock greater than or equal to the Cut-Off Amount, has notified such
Cut-Off Holder of its intention to vote against such action, and such notice
has not been revoked as provided in the Stockholders Agreement.
Conversion Restrictions. The Stockholders Agreement will prohibit the Class
C Stockholders, during the term of the Stockholders Agreement, from converting
any of their shares of New PRIMESTAR Class C Common Stock into shares of New
PRIMESTAR Class B Common Stock except upon transfer of such New PRIMESTAR
Class C Common Stock to any person other than a Class C Stockholder after
compliance with the right of first refusal process for New PRIMESTAR Class C
Common Stock. See "--Rights of First Refusal."
Transfer Restrictions. During the term of the Stockholders Agreement, each
Specified Class B Stockholder (and GE Americom, with respect to the GE Shares)
will be prohibited from transferring, and New PRIMESTAR will agree not to
register the transfer of, any Covered Class B Securities (as defined below)
held of record or beneficially owned by such Specified Class B Stockholder (or
GE Americom), except (i) to a Permitted Class B Transferee (as defined below)
of such Specified Class B Stockholder (or GE Americom); (ii) to any person in
compliance with the right of first refusal process for New PRIMESTAR Class B
Common Stock; or (iii) in accordance with the claw back rights described under
"--Claw Back Rights," provided that in the case of a transfer to a Permitted
Class B Transferee, such Permitted Class B Transferee (other than a Permitted
Class B Transferee that is merely the pledgee under a Permitted Pledge (as
defined in the Stockholders Agreement))
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becomes a party to the Stockholders Agreement as a Specified Class B
Stockholder (or, in the case of GE Americom, in the same manner as GE
Americom) in accordance with the applicable provisions of the Stockholders
Agreement. Similarly, during the term of the Stockholders Agreement, each
Class C Stockholder will be prohibited from transferring, and New PRIMESTAR
will agree not to register the transfer of, any Covered Class C Securities (as
defined below) held of record or beneficially owned by such Class C
Stockholder, except (I) to a Permitted Class C Transferee (as defined below)
of such Class C Stockholder; (II) to any person in compliance with the right
of first refusal process for New PRIMESTAR Class C Common Stock; (III) in
accordance with the mandatory transfer provisions of the Stockholders
Agreement described under "--Mandatory Transfers;" (IV) in accordance with the
claw back rights described under "--Claw Back Rights;" or (V) in the case of
TWE, pursuant to a Permitted TWE Transfer (as defined in the Stockholders
Agreement) to Newhouse; provided that, in the case of a transfer to a
Permitted Class C Transferee, such Permitted Class C Transferee (other than a
Permitted Class C Transferee that is merely the pledgee under a Permitted
Pledge) becomes a party to the Stockholders Agreement in accordance with the
applicable provisions of the Stockholders Agreement.
"Covered Class B Securities" means (i) any shares of New PRIMESTAR Class B
Common Stock, evidences of indebtedness, shares of stock or other securities
or obligations that are convertible into or exchangeable for any shares of New
PRIMESTAR Class B Common Stock and any options, warrants or other rights to
acquire any shares of New PRIMESTAR Class B Common Stock or evidences of
indebtedness, shares of stock or other securities or obligations that are
convertible into or exchangeable for any shares of New PRIMESTAR Class B
Common Stock, (b) any shares of New PRIMESTAR Class A Common Stock issued to
any Specified Class B Stockholder upon conversion of shares of New PRIMESTAR
Class B Common Stock which are Covered Class B Securities, (c) any securities
of New PRIMESTAR or any other person or entity issued in exchange for
(including pursuant to a merger, consolidation or other business combination),
or as a dividend on, or pursuant to the split, subdivision, combination,
reclassification or recapitalization of, any Covered Class B Securities, and
(d) any securities of New PRIMESTAR or any other person or entity that are
distributed on any Covered Class B Securities and any securities which shall
result from the conversion or exchange of any such distributed securities;
provided, that the term "Covered Class B Securities" does not include
securities of New PRIMESTAR acquired by a Specified Class B Stockholder after
the Effective Date from any person or entity other than New PRIMESTAR, a
Specified Class B Stockholder, a Class C Stockholder or GE Americom.
"Permitted Class B Transferee" of a Specified Class B Stockholder (or GE
Americom, as applicable) means: (A) with respect to any Specified Class B
Stockholder that is a natural person, (w) the person who is the present or
former spouse of such Specified Class B Stockholder and any lineal descendant
(including adoptees) of such Specified Class B Stockholder or any such spouse,
(x) the trustee of a trust, or a custodian under the Uniform Gift to Minors
Act or similar fiduciary, the primary beneficiaries of which (or primary
income beneficiaries of which, in the case of a charitable remainder or
similar trust) include only such Specified Class B Stockholder or persons
described in clause (w) above (provided that such trust may grant a general or
special power of appointment to such Specified Class B Stockholder or any such
person and may permit trust assets to be used to pay taxes, legacies and other
obligations of the trust or the estate of such Specified Class B Stockholder
or any such person, payable by reason of the death of such Specified Class B
Stockholder or such person, as applicable), (y) the executor, administrator,
guardian or personal representative of the estate of such Specified Class B
Stockholder and (z) in the case of Dr. Malone, a specified family foundation;
(B) if the establishment of a voting trust is required to prevent the loss or
secure the reinstatement of any license or franchise from any governmental
agency held by New PRIMESTAR or any subsidiary thereof to conduct any portion
of the business of New PRIMESTAR or such subsidiary, any voting trust the
trustee of which is acceptable to the holders of at least 66 2/3% of the total
voting power of the then outstanding shares of New PRIMESTAR Class C Common
Stock (subject to certain conditions); (C) with respect to any Specified Class
B Stockholder (or GE Americom, as applicable), any person or entity that is an
affiliate of such Specified Class B Stockholder (which for this purpose will
include, with respect to any Specified Class B Stockholder that is a natural
person, any person or entity in which such Specified Class B Stockholder both
as of the Effective Date and at all times thereafter (x) controls 5% or more
of the voting power and (y) participates in the direction of the
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management and control of such person or entity), for so long as such person
or entity remains an affiliate of such Specified Class B Stockholder (or GE
Americom, as applicable); and (D) any other person or entity that acquires any
Covered Class B Securities from such Specified Class B Stockholder (or GE
Americom, as applicable) pursuant to an Exempt Transfer (as defined in the
Stockholders Agreement).
"Covered Class C Securities" means (a) any shares of New PRIMESTAR Class C
Common Stock, evidences of indebtedness, shares of stock or other securities
or obligations that are convertible into or exchangeable for any shares of New
PRIMESTAR Class C Common Stock and any options, warrants or other rights to
acquire any shares of New PRIMESTAR Class C Common Stock or evidences of
indebtedness, shares of stock or other securities or obligations that are
convertible into or exchangeable for any shares of New PRIMESTAR Class C
Common Stock, (b) any securities of New PRIMESTAR or any other person or
entity issued in exchange for (including pursuant to a merger, consolidation
or other business combination), or as a dividend on, or pursuant to the split,
subdivision, combination, reclassification or recapitalization of, any Covered
Class C Securities, and (c) any securities of New PRIMESTAR or any other
person or entity that are distributed on any Covered Class C Securities and
any securities which shall result from the conversion or exchange of any such
distributed securities; provided, that the term "Covered Class C Securities"
does not include (x) shares of New PRIMESTAR Class B Common Stock (or other
securities of New PRIMESTAR or any other person or entity) issuable on
conversion of shares of New PRIMESTAR Class C Common Stock (so long as such
conversion was not effected in violation of the applicable provisions of the
Stockholders Agreement) or (y) securities of New PRIMESTAR acquired by a Class
C Stockholder after the Effective Date from any person or entity other than
New PRIMESTAR, a Specified Class B Stockholder, a Class C Stockholder or GE
Americom; provided, further, that if securities are issued in exchange for
(including pursuant to a merger, consolidation or other business combination),
or are issued as a dividend on, or are issued pursuant to the split,
subdivision, combination, reclassification or recapitalization of, shares of
New PRIMESTAR Class C Common Stock and such issued securities (the "underlying
securities") are convertible into or exchangeable for other securities (the
"convert securities"), then if the convert securities bear a relationship to
the underlying securities that is akin to the relationship that the New
PRIMESTAR Class B Common Stock bears to the New PRIMESTAR Class C Common
Stock, the convert securities will not be "Covered Class C Securities" (so
long as the conversion of the underlying securities is not effected in
violation of the applicable provisions of the Stockholders Agreement).
"Permitted Class C Transferee" means (A) any person or entity that acquires
beneficial ownership of all or substantially all of the cable assets of such
Class C Stockholder pursuant to a sale, contribution or assignment to a single
person of all or substantially all of such Class C Stockholder's cable systems
(a "Cable Sale"); (B) a Spin-Off Entity (as defined below) that acquires
beneficial ownership of all or substantially all of the cable assets of such
Class C Stockholder pursuant to a Spin-Off (as defined below); (C) if the
establishment of a voting trust is required to prevent the loss or secure the
reinstatement of any license or franchise from any governmental agency held by
New PRIMESTAR or any subsidiary thereof to conduct any portion of the business
of New PRIMESTAR or such subsidiary, any voting trust the trustee of which is
acceptable to the holders of at least a majority of the total voting power of
the then outstanding shares of New PRIMESTAR Class B Common Stock and the
holders of at least 66 2/3% of the total voting power of the then outstanding
shares of New PRIMESTAR Class C Common Stock (subject to certain conditions);
(D) any person or entity that is an affiliate of such Class C Stockholder, for
so long as such person or entity remains an affiliate of such Class C
Stockholder; and (E) any other person or entity that acquires any Covered
Class C Securities from such Class C Stockholder pursuant to an Exempt
Transfer (as defined in the Stockholders Agreement).
"Spin-Off" means, with respect to any Class C Stockholder, any transaction
pursuant to which all ownership interests in a wholly-owned subsidiary (the
"Spin-Off Entity") of such Class C Stockholder (1) are offered or distributed
on a pro rata basis to all or substantially all of the common stockholders
(and any other security holders) of such Class C Stockholder pursuant to a
stock dividend or other distribution, an offering of rights, warrants or
securities or a similar transaction entitling such stockholders to acquire or
subscribe for such ownership interests, a spin-off, a split-up, a split-off,
an exchange offer or similar transaction and/or (2) are offered pursuant to an
initial public offering made on a widely distributed basis.
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Mandatory Transfers. Pursuant to the Stockholders Agreement, in the event of
a Spin-Off with respect to any Class C Stockholder, pursuant to which the
applicable Spin-Off Entity will acquire beneficial ownership of all or
substantially all of the cable assets of such Class C Stockholder, such Class
C Stockholder will agree to sell, contribute or assign to such Spin-Off Entity
(and to cause such Spin-Off Entity to purchase and accept) the record and
beneficial ownership of all Covered Class C Securities held of record or
beneficially owned by such Class C Stockholder concurrently with the
consummation of such Spin-Off (and any such transfer will be exempt from the
rights of first refusal for New PRIMESTAR Class C Common Stock set forth in
the Stockholders Agreement and described under "--Rights of First Refusal" or
any mandatory provisions of the Stockholders Agreement). In the event that a
Class C Stockholder fails to make the foregoing transfer, New PRIMESTAR, or
any of New PRIMESTAR's executive officers, will be appointed as the true and
lawful attorney-in-fact of such Class C Stockholder, such that if such Class C
Stockholder Spins-Off all or substantially all of its cable assets to a Spin-
Off Entity, then such attorneys-in-fact will have full power to transfer all
of such Class C Stockholder's Covered Class C Securities to such Spin-Off
Entity.
In addition, pursuant to the Stockholders Agreement, in the event of a Cable
Sale pursuant to which any Class C Stockholder sells, contributes or assigns
to a single person all or substantially all of such Class C Stockholder's
cable systems, then such Class C Stockholder (the "Cable Seller") will have
the right to sell, contribute or assign to such person all (but not less than
all) of such Cable Seller's Covered Class C Securities (the "Cable Sale
Interest") concurrently with the consummation of such Cable Sale (and any such
transfer will be exempt from the rights of first refusal for New PRIMESTAR
Class C Common Stock set forth in the Stockholders Agreement and described
under "--Rights of First Refusal" or any mandatory conversion provisions of
the Stockholders Agreement). In the event that a Cable Seller fails to make
the foregoing transfer, each other Class C Stockholder (provided that for this
purpose, except in the event of a Cable Sale where TWE or Newhouse is the
Cable Seller, TWE and Newhouse, together with respective affiliates, will
collectively be a single Class C Stockholder) will have a call right (the
"Cable Sale Call Right") to purchase from the Cable Seller (and such Cable
Seller will be required to sell) the Cable Sale Interest in an amount equal to
its pro rata portion (or a smaller amount) of the Cable Sale Interest (based
on the respective holdings of New PRIMESTAR Class C Common Stock of each Class
C Stockholder that exercises such Cable Sale Call Right at the time of the
notice from the Cable Seller of consummation of the Cable Sale, as required by
the Stockholders Agreement). In the event that any Class C Stockholder elects
to acquire a smaller amount than its pro rata portion of the Cable Sale
Interest, then each other exercising Class C Stockholder that previously
stated a willingness to acquire more than its pro rata portion of the Cable
Sale Interest will be allocated the excess (pro rata based on the respective
holdings of New PRIMESTAR Class C Common Stock of each such exercising Class C
Stockholder at the time of the notice from the Cable Seller of consummation of
the Cable Sale, as required by the Stockholders Agreement), in each case up to
the maximum previously specified by such exercising Class C Stockholder. All
Covered Class C Securities transferred pursuant to Cable Sale Call Rights will
be transferred to the Class C Stockholders exercising such right, in
accordance with the applicable provisions of the Stockholders Agreement, at
the Current Market Price (as defined below). "Current Market Price" means, as
to any share of New PRIMESTAR Class B Common Stock or New PRIMESTAR Class C
Common Stock as of any date, (a) prior to an initial public offering of New
PRIMESTAR (or the TSAT Merger), the fair market value on the day in question
as determined by the New PRIMESTAR Board in good faith and (b) following an
initial public offering of New PRIMESTAR (or the TSAT Merger), the per share
average of the daily closing prices for shares of New PRIMESTAR Class B Common
Stock for the 30 consecutive trading days immediately prior to such date.
Notwithstanding the foregoing, Covered Class C Securities will be
transferred to Class C Stockholders as provided above pursuant to a Cable Sale
Call Right only if the Class C Stockholders have agreed to acquire the entire
Cable Sale Interest held of record or beneficially owned by the Cable Seller.
In the event that the Class C Stockholders do not collectively agree to
acquire all the Covered Class C Securities held of record or beneficially
owned by the Cable Seller, then the Cable Seller will be entitled to (i)
transfer to the other Class C Stockholders the portion of the Cable Sale
Interest that they respectively agreed to acquire, allocated as set forth
above, and retain the remainder; or (ii) retain all such Cable Sale Interest;
provided, however, that any Covered Class C Securities retained by the Cable
Seller will remain subject to the Stockholders Agreement in all respects.
Rights of First Refusal. The Stockholders Agreement will provide that,
except with respect to transfers described in clauses (i), (iii), (I), (III),
(IV) or (V), as applicable, under "--Transfer Restrictions," any Class C
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Stockholder or Specified Class B Stockholder (or GE Americom, with respect to
any GE Shares) (each such holder, a "Transferor") who proposes to transfer (i)
in the case of a Class C Stockholder, any Covered Class C Securities which are
held of record or owned beneficially by such Class C Stockholder or (ii) in
the case of a Specified Class B Stockholder, any Covered Class B Securities
(or, in the case of GE Americom, GE Shares) which are held of record or owned
beneficially by such Specified Class B Stockholder (or GE Americom, as
applicable) (any such securities proposed to be transferred being the
"Transferred Interest"), pursuant to (i) a bona fide, fully financed offer
from a transferee that the Transferor is willing to accept or (ii) a Public
Sale (as defined below) or a Tender Offer (as defined below), must provide
written notice of the material terms of the offer (each, a "Transfer Notice")
to each of the other Class C Stockholders, Specified Class B Stockholders, GE
Americom and New PRIMESTAR. "Public Sale" means a sale of a Transferred
Interest pursuant to (i) a registered offering under an already effective
registration statement pursuant to the Securities Act or a registration
statement to be filed pursuant to the exercise of a demand or piggy-back
registration right by the Transferor, or (ii) Rule 144 promulgated under the
Securities Act, in each case provided that such sale is not being undertaken
as a result of an offer to buy, a bid or a request, invitation or solicitation
to sell made by any person (other than an investment banker seeking to act as
an underwriter of a publicly distributed offering of such Transferred
Interest). "Tender Offer" means a tender offer or exchange offer for shares of
any class of New PRIMESTAR Common Stock on Schedule 14d-1 promulgated under
the Exchange Act. For purposes of the foregoing and the following rights of
first refusal, the Stockholders Agreement provides that TWE and Newhouse,
together with their respective affiliates, will collectively be deemed a
single Class C Stockholder and a single acquiring Class C Stockholder (unless
either of them is a Transferor, in which case each will be a separate
Transferor).
Upon receipt of a Transfer Notice relating to Covered Class C Securities of
a Class C Stockholder, each Class C Stockholder (other than the Transferor)
will have the right to acquire its pro rata portion (or a smaller amount) of
the Transferred Interest (based on the respective holdings of New PRIMESTAR
Class C Common Stock of each acquiring Class C Stockholder at the time of the
Transfer Notice), and thereafter, each acquiring Class C Stockholder that
previously stated a willingness to acquire more than its pro rata portion of
such Transferred Interest will be allocated the excess (pro rata based on the
respective holdings of New PRIMESTAR Class C Common Stock of each such
acquiring Class C Stockholder at the time of the Transfer Notice), in each
case up to the maximum previously specified by such acquiring Class C
Stockholder. If all or any portion of the Transferred Interest is not acquired
by the Class C Stockholders as provided in the preceding sentence, each of the
Specified Class B Stockholders will have the right to acquire its pro rata
portion (or a smaller amount) of the remaining portion of such Transferred
Interest (based on the respective holdings of New PRIMESTAR Class B Common
Stock of each acquiring Specified Class B Stockholder at the time of the
Transfer Notice), and thereafter, each acquiring Specified Class B Stockholder
that previously stated a willingness to acquire more than its pro rata portion
of such Transferred Interest will be allocated the excess (pro rata based on
the respective holdings of New PRIMESTAR Class B Common Stock of each such
acquiring Specified Class B Stockholder at the time of the Transfer Notice),
in each case up to the maximum previously specified by such acquiring
Specified Class B Stockholder. Notwithstanding the foregoing, (i) if only one
acquiring Specified Class B Stockholder elects to exercise its right of first
refusal with respect to the Transferred Interest, or (ii) if only one
acquiring Specified Class B Stockholder states a willingness to acquire more
than its pro rata portion of such Transferred Interest, then such acquiring
Specified Class B Stockholder will have the right to acquire up to 100% of
such Transferred Interest, or of such excess, as the case may be, subject to
the maximum specified by such Specified Class B Stockholder, without regard to
the number of shares of New PRIMESTAR Class B Common Stock (if any) held by
such acquiring Specified Class B Stockholder at the time of the applicable
Transfer Notice. If all or any portion of the Transferred Interest is not
acquired by the Class C Stockholders or the Specified Class B Stockholders as
provided above, GE Americom will have the right to acquire the remaining
portion of such Transferred Interest. Notwithstanding the foregoing, in the
event that the Class C Stockholders, the Specified Class B Stockholders and GE
Americom do not collectively agree to acquire all of the Transferred Interest,
the Transferor will be entitled to (i) transfer all but not less than all
(subject to certain exceptions) of the Transferred Interest to the person and
on the terms set forth in the Transfer Notice associated with such Transferred
Interest, (ii) transfer to the acquiring Class C Stockholders, the acquiring
Specified Class B Stockholders and GE Americom, as applicable, the portion of
such Transferred Interest that they respectively agreed to acquire, and
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retain the remainder of the Transferred Interest or (iii) retain such
Transferred Interest. The Stockholders Agreement will further provide that all
shares of New PRIMESTAR Class C Common Stock comprising a Transferred Interest
transferred to any person other than an acquiring Class C Stockholder as
provided above will be converted prior to such transfer into, and will be
transferred as, shares of New PRIMESTAR Class B Common Stock.
In addition, notwithstanding the foregoing, for purposes of the right of
first refusal process for New PRIMESTAR Class C Common Stock, Newhouse will
individually be an acquiring Class C Stockholder in the event that TWE intends
to transfer pursuant to such right of first refusal process any shares of New
PRIMESTAR Class C Common Stock held of record or beneficially owned by TWE and
(i) pursuant to such transfer, TWE, Newhouse and their respective affiliates
will cease to have the right to nominate any Class C Directors as provided in
the applicable provisions of the Stockholders Agreement and (ii) Newhouse will
not have transferred (other than to an affiliate of Newhouse) any of the
shares of New PRIMESTAR Class C Common Stock held of record or beneficially
owned by Newhouse on the Effective Date. In such event, Newhouse will have the
right to acquire prior to any other Class C Stockholder, any Specified Class B
Stockholder or GE Americom up to a number of shares of New PRIMESTAR Class C
Common Stock proposed to be transferred by TWE as will be necessary for
Newhouse to become entitled pursuant to specified provisions of the
Stockholders Agreement to nominate one Class C Director (provided, however,
that Newhouse will not have such right to acquire any additional shares in the
event (x) the aggregate number of Class C Directors permitted to be nominated
pursuant to the New PRIMESTAR Charter is determined by reference to the sum of
the Individual Class C Stockholder Caps (as defined under "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors"), (y) Newhouse is
the record holder of the number of shares of New PRIMESTAR Class C Common
Stock that is closest (in number of shares) to the next lower Individual Class
C Stockholder Cap and, in accordance with the New PRIMESTAR Charter, will be
treated as if the number of shares of New PRIMESTAR Class C Common Stock held
of record by Newhouse were less than such next lower Individual Class C
Stockholder Cap, and (z) Newhouse will therefore lose the right to nominate
one Class C Director). After the acquisition of such shares by Newhouse, any
remaining shares of New PRIMESTAR Class C Common Stock proposed to be
transferred by TWE will be subject to the foregoing provisions. See "--
Nomination of Directors" and "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--
Common Stock--Board of Directors."
Upon receipt of a Transfer Notice relating to Covered Class B Securities of
a Specified Class B Stockholder (or GE Americom, with respect to any GE
Shares), each Specified Class B Stockholder (other than the Transferor) will
have the right to acquire its pro rata portion (or a smaller amount) of the
Transferred Interest (based on the respective holdings of New PRIMESTAR Class
B Common Stock of each acquiring Specified Class B Stockholder at the time of
the Transfer Notice), and thereafter, each acquiring Specified Class B
Stockholder that previously stated a willingness to acquire more than its pro
rata portion of such Transferred Interest will be allocated the excess (pro
rata based on the respective holdings of New PRIMESTAR Class B Common Stock of
each such acquiring Specified Class B Stockholder at the time of the Transfer
Notice), in each case up to the maximum previously specified by such acquiring
Specified Class B Stockholder. Notwithstanding the foregoing, (i) if only one
acquiring Specified Class B Stockholder elects to exercise its right of first
refusal with respect to the Transferred Interest, or (ii) if only one
acquiring Specified Class B Stockholder states a willingness to acquire more
than its pro rata portion of such Transferred Interest, then such acquiring
Specified Class B Stockholder will have the right to acquire up to 100% of
such Transferred Interest, or of such excess, as the case may be, subject to
the maximum specified by such Specified Class B Stockholder, without regard to
the number of shares of New PRIMESTAR Class B Common Stock (if any) held by
such acquiring Specified Class B Stockholder at the time of the applicable
Transfer Notice. If all or any portion of the Transferred Interest is not
acquired by the Specified Class B Stockholders as provided above, each of the
Class C Stockholders will have the right to acquire its pro rata portion (or a
smaller amount) of the remaining portion of such Transferred Interest (based
on the respective holdings of New PRIMESTAR Class C Common Stock of each
acquiring Class C Stockholder at the time of the Transfer Notice), and
thereafter, each acquiring Class C Stockholder that previously stated a
willingness to acquire more than its pro rata portion of such Transferred
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Interest will be allocated the excess (pro rata based on the respective
holdings of New PRIMESTAR Class C Common Stock of each such acquiring Class C
Stockholder at the time of the Transfer Notice), in each case up to the
maximum previously specified by such acquiring Class C Stockholder. If all or
any portion of the Transferred Interest is not acquired by the Specified Class
B Stockholders or the Class C Stockholders as provided above, GE Americom will
have the right to acquire the remaining portion of such Transferred Interest.
Notwithstanding the foregoing, in the event that the Specified Class B
Stockholders, the Class C Stockholders and GE Americom do not collectively
agree to acquire all of the Transferred Interest, the Transferor will be
entitled to (i) transfer all but not less than all (subject to certain
exceptions) of the Transferred Interest to the person and on the terms set
forth in the Transfer Notice associated with such Transferred Interest, (ii)
transfer to the acquiring Specified Class B Stockholders, the acquiring Class
C Stockholders and GE Americom, as applicable, the portion of such Transferred
Interest that they respectively agreed to acquire, and retain the remainder of
the Transferred Interest or (iii) retain such Transferred Interest. In
addition, the Stockholders Agreement will provide that any such Transferor can
require that any shares of New PRIMESTAR Class B Common Stock comprising a
Transferred Interest be converted prior to transfer into, and transferred as,
New PRIMESTAR Class A Common Stock; provided that such conversion was
irrevocably elected in the applicable Transfer Notice.
Claw Back Rights. The Stockholders Agreement will provide that in the event
that any Specified Class B Stockholder or any Class C Stockholder (provided
that for this purpose, TWE and Newhouse, together with their respective
affiliates, will collectively be a single Class C Stockholder) will at any
time hold record or beneficial ownership of, or the direct or indirect right
to vote, any shares of capital stock of New PRIMESTAR which, together with all
shares of capital stock of New PRIMESTAR held of record or beneficially owned
by all affiliates of such Specified Class B Stockholder or Class C
Stockholder, as applicable, will entitle such Specified Class B Stockholder or
Class C Stockholder and its affiliates to hold the record or beneficial
ownership of, or vote or direct the vote of, shares of capital stock of New
PRIMESTAR with aggregate voting power in excess of 49% of the total
outstanding voting power with respect to the election of Common Directors (the
"Common Director Voting Power"), such Specified Class B Stockholder or Class C
Stockholder, as applicable, will be required to offer, and will cause its
affiliates (if applicable and necessary) to offer to each other Specified
Class B Stockholder and Class C Stockholder (pro rata based on the percentage
of the total Common Director Voting Power that they respectively control as of
the date of such offer) such number of shares of New PRIMESTAR Class B Common
Stock or New PRIMESTAR Class C Common Stock as would be necessary (assuming
conversion of all such shares to New PRIMESTAR Class A Common Stock
immediately after such transfer) to reduce the aggregate Common Director
Voting Power of such Specified Class B Stockholder or Class C Stockholder and
its affiliates to 49% or less, as well as their pro rata portion of any such
shares of the offered interest not acquired by any such other Specified Class
B Stockholder or Class C Stockholders pursuant to the foregoing. Any shares of
New PRIMESTAR Class B Common Stock or New PRIMESTAR Class C Common Stock
required to be offered pursuant to the foregoing claw back provisions but not
acquired after compliance with the applicable provisions of the Stockholders
Agreement will cease to be subject to such claw back provisions. Any New
PRIMESTAR Class B Common Stock or New PRIMESTAR Class C Common Stock
transferred pursuant to the foregoing claw back provisions will be converted
into New PRIMESTAR Class A Common Stock prior to the acquisition thereof and
will be transferred at its Current Market Price.
Events of Default and Remedies. Pursuant to the Stockholders Agreement, (i)
a material breach by any Specified Class B Stockholder, any Class C
Stockholder or GE Americom of its respective representations and warranties,
or (ii) any breach or default in the performance by any Specified Class B
Stockholder, any Class C Stockholder or GE Americom of any material provision
of the Stockholders Agreement will constitute an event of default. Upon the
occurrence and continuance of an event of default with respect to any such
party for 15 days after notice thereof and failure to cure, (i) each such
party that is not a defaulting party will be entitled to any remedies that may
be available to such party with respect to such event of default at law or in
equity, including seeking to enjoin such event of default or seeking to obtain
specific performance of a defaulting party's obligations and (ii) each such
party that is not a defaulting party will be entitled to, so long as such
event of default continues, (x) take any action as will be necessary or
appropriate to cause the removal from the New
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PRIMESTAR Board of each director nominated or designated by the defaulting
party in accordance with the Stockholders Agreement, and (y) deliver notice to
the defaulting party stating that such non-defaulting party is exercising its
right pursuant to the Stockholders Agreement, and upon receipt of such a
notice, the defaulting party will immediately cease to have any rights under
the Stockholders Agreement; provided that such rights will be automatically
reinstated at such time as such event of default is cured; provided, however,
that in all other respects the defaulting party will continue to have the
obligations set forth in the Stockholders Agreement.
Ancillary Investments of New PRIMESTAR. Pursuant to the Stockholders
Agreement, New PRIMESTAR will agree that until the earlier to occur of (x) the
fifth anniversary of the Effective Date and (y) the Series C Termination Date,
any Ancillary Investment (as defined below) in excess of $50 million will not
be effected by New PRIMESTAR without the affirmative vote of (i) a simple
majority of the New PRIMESTAR Board, (ii) a simple majority of the Class B
Directors and (iii) a simple majority of the Class C Directors. "Ancillary
Investment" means any investment or activity related to (A) video, audio,
information and other programming services and (B) the development, design,
manufacture and/or sale of electronics equipment and components related to
activities and investments contemplated in clause (A) and contemplated in any
business activity that principally uses communications satellites to provide
video and audio programming, information services, entertainment or other
communications services to the antennas or other reception equipment of
customers or subscribers of such business activity or to multiple dwelling or
commercial units comprising such customers or subscribers.
Business of New PRIMESTAR. Pursuant to the Stockholders Agreement, New
PRIMESTAR will agree that until the Class C Termination Date, it will not
engage in any business other than the Satellite Television Business (as
defined below), except for (x) any engagement resulting from the acquisition
of a business or division at least a majority of the consolidated annual
revenues of which (as of the date of the applicable acquisition agreement)
were derived from the Satellite Television Business, if the portion of the
acquired business or division which is not engaged in or useful to the
Satellite Television Business has a fair market value of $100 million or less
or (y) any engagement for which New PRIMESTAR obtains the prior written
consent of either (A) any two of Comcast, Cox and MediaOne or (B) the holders
of at least 83% of the total voting power of the then outstanding shares of
New PRIMESTAR Class C Common Stock and the holders of at least a majority of
the total voting power of the then outstanding shares of New PRIMESTAR Class B
Common Stock.
"Satellite Television Business" means (i) any business activity that
principally uses communications satellites to provide video and audio
programming, information services, entertainment or other communications
services to the antennas or other reception equipment of customers or
subscribers of such business activity or to multiple dwelling or commercial
units comprising such customers or subscribers, (ii) investments and
activities related to video, audio, information and other programming
services, (iii) investments and activities related to the development, design,
manufacture and/or sale of electronics equipment and components related to
activities and investments contemplated in clauses (i) and (ii) above and (iv)
any other operations, services or activities related or ancillary to any of
the foregoing.
REGISTRATION RIGHTS AGREEMENT
The following summary of the material provisions of the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the form of Registration Rights Agreement, which is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part.
Pursuant to the Restructuring Agreement, at the Closing, the Registration
Rights Agreement will be entered into among New PRIMESTAR, and each of the
Class C Stockholders, TSAT, GE Americom and John C. Malone (collectively, and
together with certain specified entities to whom the Registrable Shares (as
defined below) may be transferred as permitted by the Registration Rights
Agreement, the "Registration Rights Holders"). Until the earlier to occur of
(i) such time as all Registrable Shares have been sold pursuant to a
registered offering as provided in the Registration Rights Agreement and (ii)
such time as no Registrable Shares remain outstanding, each Registration
Rights Holder will have the right (a "Demand Registration"), by written
notice, to require
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New PRIMESTAR, on four separate occasions, to register under the Securities
Act all or any portion of the Registrable Shares designated by such
Registration Rights Holder. Each Demand Registration must include Registrable
Shares with an aggregate market value of at least $30 million (unless a
smaller amount represents all remaining shares of New PRIMESTAR Class A Common
Stock or New PRIMESTAR Class B Common Stock owned by such Registration Rights
Holder and its affiliates). In addition, among other limitations, New
PRIMESTAR will not be required to effect more than one Demand Registration
within a six month period, and will not be required to effect any Demand
Registration prior to the earliest to occur of (x) 180 calendar days after the
TSAT Effective Time, (y) 180 calendar days after the closing of an initial
public offering of New PRIMESTAR Common Stock and (z) the first anniversary of
the Effective Date.
After the earlier of (x) the TSAT Effective Time and (y) the closing of an
initial public offering of New PRIMESTAR Common Stock, if New PRIMESTAR
proposes to file a registration statement under the Securities Act with
respect to an offering by New PRIMESTAR or any Registration Rights Holder of
New PRIMESTAR securities (other than in connection with the registration of
New PRIMESTAR securities issuable pursuant to an employee stock option, stock
purchase or similar plan or pursuant to a merger, exchange offer or a
transaction of the type specified in Rule 145(a) under the Securities Act),
then New PRIMESTAR will be required to offer the Registration Rights Holders
the opportunity, subject to certain conditions and limitations, to include in
such registration statement such number of Registrable Shares as such
Registration Rights Holder may request.
New PRIMESTAR will be required to pay all fees and expenses incident to its
performance of or compliance with the provisions of the Registration Rights
Agreement, including, without limitation, the reasonable fees of one legal
counsel for all Registration Rights Holders (but excluding any underwriting
discounts, underwriting commissions and transfer taxes), relating to the
disposition of Registrable Shares by a Registration Rights Holder.
"Registrable Shares" means (i) shares of New PRIMESTAR Class A Common Stock
issued to the Class C Stockholders, the Specified Class B Stockholders and GE
Americom pursuant to the Restructuring Transaction or upon conversion of any
New PRIMESTAR Class B Common Stock described in clause (ii) below or acquired
by any Class C Stockholder, or any Specified Class B Stockholder pursuant to
the claw back provisions of the Stockholders Agreement, (ii) shares of New
PRIMESTAR Class B Common Stock issued to the Specified Class B Stockholders
pursuant to the Restructuring Transaction or to the Class C Stockholders upon
conversion of any shares of New PRIMESTAR Class C Common Stock or acquired by
the Class C Stockholders, the Specified Class B Stockholders or GE Americom
pursuant to the right of first refusal provisions of the Stockholders
Agreement and (iii) any other securities issued to the Class C Stockholders,
the Specified Class B Stockholders or GE Americom in respect of any shares of
New PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common Stock or New
PRIMESTAR Class C Common Stock upon any stock split, stock dividend,
subdivision, combination, reclassification, recapitalization, merger,
consolidation or similar event.
AGENCY AGREEMENTS
The following is a summary of the material provisions of the agency
agreements that each of the Class C Stockholders and TCI (or their respective
affiliates) will have the right, pursuant to the Restructuring Agreement, to
enter into with New PRIMESTAR.
At the Closing, New PRIMESTAR will enter into a Transition Period Agency
Agreement with each Class C Stockholder (or their respective affiliates),
pursuant to which each such party will provide installation, maintenance and
customer service functions with respect to New PRIMESTAR's medium power
PRIMESTAR(R) subscribers, as requested by New PRIMESTAR, in assigned non-
exclusive territories, for a period of up to six months following the Closing.
In addition, each Class C Stockholder and TCI (or their respective
affiliates) will have the right to enter into an HP Agency Agreement with New
PRIMESTAR, pursuant to which such party will act as a non-exclusive retail
sales and servicing agent of any stand-alone retail high power PRIMESTAR(R)
programming service.
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Each Class C Stockholder and TCI (or their respective affiliates) will also
have the non-exclusive right, exercisable upon 90 days written notice to New
PRIMESTAR, to act as a non-exclusive retail sales agent in designated New
PRIMESTAR sales territories, with respect to (i) the PRIMESTAR(R) medium power
programming service, or (ii) at any time that such party is not a party to an
HP Agency Agreement, any stand-alone retail high power PRIMESTAR(R)
programming service, subject to executing a Sales Agency Agreement. New
PRIMESTAR will negotiate in good faith with respect to the terms and
conditions of any Sales Agency Agreement, upon receipt of such written notice.
Each Class C Stockholder and TCI (or their respective affiliates) entering
into a Sales Agency Agreement will be entitled to "most favored nations"
rights (without regard to sales volume) with respect to each other Class C
Stockholder or TCI (or affiliate) entering into such an agreement.
Each Class C Stockholder and TCI (or their respective affiliates) will also
have the non-exclusive right, subject to any existing contract with New
PRIMESTAR, to act as a non-exclusive sales and servicing agent with respect to
the PRIMESTAR(R) medium power programming service, in designated New PRIMESTAR
sales territories. Such right will be exercisable at any time upon 90 days'
prior written notice to New PRIMESTAR. New PRIMESTAR will negotiate in good
faith with respect to the terms and conditions of any such sales and servicing
arrangement upon receipt of such written notice. If an existing agreement
between New PRIMESTAR and any other service provider exists in such territory,
then New PRIMESTAR will notify the requesting party of the contract end date.
Each Class C Stockholder and TCI (or their respective affiliates) entering
into an agreement as provided in this paragraph will be entitled to "most
favored nations" rights (without regard to sales volume) with respect to each
other Class C Stockholder or TCI (or affiliate) entering into such an
agreement.
TWE/NEWHOUSE VOTING AGREEMENT
The following summary of the material provisions of the TWE/Newhouse Voting
Agreement does not purport to be complete and is qualified in its entirety by
reference to the form of TWE/Newhouse Voting Agreement, which is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part.
In accordance with the Restructuring Agreement, at the Closing, the
TWE/Newhouse Voting Agreement will be entered into between TWE and Newhouse
with respect to all shares of New PRIMESTAR Class C Common Stock issued to
Newhouse pursuant to the Restructuring Transaction, any shares of New
PRIMESTAR Class C Common Stock or New PRIMESTAR Class B Common Stock acquired
in accordance with specified provisions of the Stockholders Agreement and any
securities of New PRIMESTAR or any other entity that may be issued to Newhouse
in respect of such shares. The TWE/Newhouse Voting Agreement will provide,
among other things, that during the TWE/Newhouse Voting Period, Newhouse will
vote or act by written consent with respect to (or cause to be voted or acted
upon by written consent) (x) all such shares and securities held of record or
beneficially owned by Newhouse at the time of such vote or action by written
consent and (y) all such shares and securities as to which Newhouse at the
time of such vote or action by written consent has voting control, in each
case, as directed by TWE in its sole and absolute discretion, including,
without limitation, all matters requiring or permitting the voting of any such
shares and securities or the granting of a consent, proxy or approval in
respect of any such shares and securities, including, without limitation,
ordinary or extraordinary corporate actions and all matters submitted to
stockholder vote at general or special stockholder meetings of New PRIMESTAR,
subject in each case to applicable provisions in the Stockholders Agreement.
The TWE/Newhouse Voting Agreement will further provide that Newhouse will not
enter into any other agreement or transaction that is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or adversely affect Newhouse's obligations to vote such shares and securities
as provided in the TWE/Newhouse Voting Agreement, and will not enter into any
other voting agreement or voting trust or grant any proxy, consent or approval
or otherwise transfer, directly or indirectly, voting power with respect to
any such shares and securities, in each case except as provided in the
TWE/Newhouse Voting Agreement. The term of the TWE/Newhouse Voting Agreement
will be ten years.
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The TWE/Newhouse Voting Agreement will further provide that, during the
TWE/Newhouse Voting Period, so long as (i) TWE has the right pursuant to
applicable provisions of the Stockholders Agreement to nominate at least one
Class C Director to the New PRIMESTAR Board and (ii) Newhouse has not
transferred (other than to any affiliate of Newhouse) any of the shares of New
PRIMESTAR Class C Common Stock that were initially issued to Newhouse at the
Closing of the Restructuring Transaction, TWE will nominate one person chosen
by Newhouse in its sole discretion to serve on the New PRIMESTAR Board as a
Class C Director for the term specified in the New PRIMESTAR Charter and until
his or her successor has been elected and has qualified, in accordance with
the New PRIMESTAR Charter. In addition, for so long as Newhouse will have the
right to nominate one Class C Director as provided in the preceding sentence,
TWE will vote (or cause to be voted) all shares of New PRIMESTAR Class C
Common Stock held of record or beneficially owned by TWE and all securities of
New PRIMESTAR held of record or owned beneficially by Newhouse subject to the
TWE/Newhouse Voting Agreement as to which TWE has voting control in favor of
the election of such Newhouse nominee to the New PRIMESTAR Board.
During the term of the TWE/Newhouse Voting Agreement, Newhouse will not have
the right to transfer any of its shares of New PRIMESTAR Class C Common Stock,
except (i) to an affiliate of Newhouse that remains an affiliate and agrees to
become a party to the TWE/Newhouse Voting Agreement and to be bound by all the
terms thereof with respect to such shares and (ii) subject to (i) above, after
compliance with the rights of first refusal of each other Class C Stockholder
(including TWE) pursuant to the Stockholders Agreement. See "--Stockholders
Agreement--Rights of First Refusal."
Right of First Refusal. Except as provided below, TWE and Newhouse, together
with their respective affiliates, will collectively be a single Class C
Stockholder and a single acquiring Class C Stockholder (unless either of them
is a transferor of its shares of New PRIMESTAR Class C Common Stock, in which
case each will be a separate Class C Stockholder) for purposes of the right of
first refusal provisions for New PRIMESTAR Class B Common Stock and New
PRIMESTAR Class C Common Stock of the Stockholders Agreement, and TWE will
have the exclusive right to exercise the right of first refusal pursuant to
such provisions of the Stockholders Agreement on behalf of TWE and Newhouse;
provided, however, that Newhouse will have the right, at its option, to
acquire record and beneficial ownership of up to its pro rata portion of any
shares of New PRIMESTAR Common Stock which TWE acquires on behalf of TWE and
Newhouse collectively pursuant to such provisions of the Stockholders
Agreement (based, with respect to each class of New PRIMESTAR Common Stock, on
the number of shares of such class held of record by each of Newhouse and TWE
at the time of such acquisition).
In addition, Newhouse will individually be an acquiring Class C Stockholder
for purposes of the following and for purposes of the right of first refusal
provisions for New PRIMESTAR Class C Common Stock of the Stockholders
Agreement in the event that TWE intends to transfer pursuant to such
provisions of the Stockholders Agreement any of its shares of New PRIMESTAR
Class C Common Stock subject to such right of first refusal and (i) pursuant
to such transfer, TWE, Newhouse and their respective affiliates collectively
will cease to have the right to nominate any Class C Directors pursuant to the
applicable provisions of the Stockholders Agreement and (ii) Newhouse will not
have transferred (other than to an affiliate of Newhouse) any of the shares of
New PRIMESTAR Class C Common Stock that were initially issued to Newhouse at
the Closing of the Restructuring Transaction. In such event, Newhouse will
have the right to acquire, in its discretion, prior to any other Class C
Stockholder, any Specified Class B Stockholder or GE Americom, up to a number
of shares of the New PRIMESTAR Class C Common Stock proposed to be transferred
by TWE subject to such right of first refusal, as shall be necessary for
Newhouse to become entitled pursuant to specified provisions of the
Stockholders Agreement to nominate one Class C Director (provided, however,
that Newhouse will not have such right to acquire any additional shares in the
event (x) the aggregate number of Class C Directors permitted to be nominated
pursuant to the New PRIMESTAR Charter is determined by reference to the sum of
the Individual Class C Stockholder Caps (as defined under "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors"), (y) Newhouse is
the record holder of the number of shares of New PRIMESTAR Class C Common
Stock that is closest (in number of shares) to the next lower Individual
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Class C Stockholder Cap and, in accordance with the New PRIMESTAR Charter,
will be treated as if the number of shares of New PRIMESTAR Class C Common
Stock held of record by Newhouse were less than such next lower Individual
Class C Stockholder Cap, and (z) Newhouse will therefore lose the right to
nominate one Class C Director). See "--Stockholders Agreement--Rights of First
Refusal" and "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board
of Directors."
Further, the TWE/Newhouse Voting Agreement will provide that any shares of
New PRIMESTAR Class C Common Stock held of record or beneficially owned by
Newhouse will collectively become subject to the right of first refusal
process for New PRIMESTAR Class C Common Stock of the Stockholders Agreement,
in the event of (i) the bankruptcy of Newhouse; (ii) a change in control with
respect to Newhouse; or (iii) the dissolution of Newhouse.
Allocation of Shares Between TWE and Newhouse. Under the TWE/Newhouse Voting
Agreement, Newhouse will have the right to acquire record and beneficial
ownership of up to its pro rata portion of any shares of any class of common
stock of New PRIMESTAR that TWE acquires on behalf of TWE and Newhouse
collectively pursuant to the TWE/Newhouse Voting Agreement and applicable
provisions of the Stockholders Agreement.
REIMBURSEMENT AGREEMENTS
The following summary of the material provisions of the Reimbursement
Agreements does not purport to be complete and is qualified in its entirety by
reference to the form of the Reimbursement Agreements, which is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
is a part.
Prior to entering into the Restructuring Agreement, affiliates of each of
the Partners (or, in the case of TSAT, affiliates of TCI) other than GEAS
provided the PRIMESTAR Letters of Credit to secure certain obligations of the
Partnership under (i) the GE-2 Agreement, which provides for the Partnership's
use of transponders on GE-2, and (ii) the PRIMESTAR Credit Facility that was
obtained by the Partnership to finance advances to Tempo for payments due in
respect of the construction of the Tempo Satellites. In connection with the
Restructuring Transaction, New PRIMESTAR will enter into a Reimbursement
Agreement with each of TWE, Comcast, Cox and MediaOne, which will provide for,
among other things, the assumption by New PRIMESTAR of all the obligations of
such party under its respective PRIMESTAR Letters of Credit and the existing
reimbursement agreements and/or other existing documentation between such
party and the issuing bank relating to such PRIMESTAR Letters of Credit,
including all existing and future payment obligations of such party
thereunder, and the indemnification by New PRIMESTAR of such party for any and
all losses, claims, damages, liabilities, deficiencies, obligations, costs and
expenses of such party relating thereto.
In addition, pursuant to the TSAT Asset Transfer Agreement, New PRIMESTAR
will assume the rights and obligations of TSAT under the Indemnification
Agreements between TSAT and the affiliates of TCI that issued PRIMESTAR
Letters of Credit, which include reimbursement obligations in favor of such
TCI affiliates with respect to such PRIMESTAR Letters of Credit on
substantially the same terms as the Reimbursement Agreements. Each of TWE,
Comcast, Cox, MediaOne and TCI (or their respective affiliates) will be paid a
fee to be negotiated in consideration of their agreement to maintain such
PRIMESTAR Letters of Credit outstanding for a period of time following the
Closing Date. See "BUSINESS OF TSAT--Certain Arrangements Between TSAT and
TCI--Indemnification Agreements."
GUARANTEE AGREEMENT
The following summary of the material provisions of the Guarantee Agreement
does not purport to be complete and is qualified in its entirety by reference
to the Guarantee Agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus is a part.
In connection with the execution and delivery of the Restructuring Agreement
by the parties thereto, and as an inducement to and a condition of such
parties entering into the Restructuring Agreement, US West entered
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into the Guarantee Agreement for the benefit of such parties. The Guarantee
Agreement provides for, among other things, the absolute, irrevocable and
unconditional guarantee of US West, as principal and not as surety, in respect
of (i) the due and punctual payment of all monetary obligations payable by
MediaOne pursuant to any MediaOne Transaction Document, (ii) the full and
complete performance of all covenants, agreements, duties and obligations of
MediaOne pursuant to each MediaOne Transaction Document, as if US West were
party thereto (in place of MediaOne), and (iii) the accuracy of the
representations and warranties made by MediaOne in each MediaOne Transaction
Document. The Guarantee Agreement further provides that in no event will US
West be subject to any greater (or lesser) liability thereunder than it would
have been subject to under the applicable MediaOne Transaction Document, if US
West were a party thereto in place of MediaOne.
The Guarantee Agreement also contains certain representations and warranties
of US West relating to, among other things, (1) the due organization, valid
existence and good standing of US West; (2) the corporate power and authority
of US West to enter into and perform its obligations under the Guarantee
Agreement; (3) the authority of US West to enter into, execute and deliver the
Guarantee Agreement and to perform its obligations thereunder; (4) the
execution and delivery and the validity and enforceability against US West of
the Guarantee Agreement, and the noncontravention thereby of (i) the charter
of US West, (ii) any instrument, contract or other agreement to which US West
is a party or by or to which it or its assets or properties are bound or
subject, or (iii) any statute or any regulation, order, judgment or decree of
any court or governmental or regulatory body, a conflict, breach or violation
of, or default under, could reasonably be expected to impair materially US
West's ability to perform its obligations under the Guarantee Agreement or to
have a material adverse effect on the business or financial condition of US
West; (5) the absence of any required approval or consent of any governmental
or regulatory body or of any other person or entity in connection with the
execution and delivery by US West of the Guarantee Agreement and the
consummation and performance by US West of the transactions contemplated
thereby; and (6) the absence of any material litigation.
LETTER AGREEMENT
The following summary of the material provisions of the Letter Agreement
does not purport to be complete and is qualified in its entirety by reference
to the Letter Agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus is a part.
In connection with the execution and delivery of the Restructuring Agreement
by the parties thereto, John C. Malone entered into the Letter Agreement for
the benefit of such parties. The Letter Agreement provides for, among other
things, the agreement of Dr. Malone to enter into the Stockholders Agreement
and the Registration Rights Agreement at the Closing of the Restructuring
Transaction, to cooperate in good faith in the preparation of the Registration
Statement and this Proxy Statement/Prospectus, including the provision to TSAT
and New PRIMESTAR of information regarding Dr. Malone required to be included
therein, and to use reasonable efforts to respond to any request for
information relating to the Restructuring Transaction by a governmental
entity.
TSAT VOTING AGREEMENTS
The following is a summary of the material provisions of the TSAT Voting
Agreements, which are attached as Appendix H to this Proxy
Statement/Prospectus and are incorporated herein by reference. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the TSAT Voting Agreements.
Each of John C. Malone, TCI and the Estate of Bob Magness (collectively, the
"TSAT Voting Stockholders") has entered into a TSAT Voting Agreement with
certain of the Restructuring Parties. The TSAT Board unanimously approved the
TSAT Voting Agreements prior to the execution thereof. The TSAT Voting
Agreements provide, among other things, that while the TSAT Voting Agreements
are in effect, in connection with any vote or written consent of TSAT
stockholders to approve the Roll-up Plan, each of the TSAT Voting Stockholders
will vote (or cause to be voted) all shares of TSAT Common Stock which it has
the power to vote
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or direct the vote of, in each case at the time of such stockholder vote or
action by written consent, exclusively in favor of each transaction
contemplated by the Roll-up Plan. In addition, pursuant to the TSAT Voting
Agreements, while the TSAT Voting Agreements are in effect, each of the TSAT
Voting Stockholders has irrevocably appointed each of the other parties to the
applicable TSAT Voting Agreement, with full power of substitution, the proxy
of such TSAT Voting Stockholder with full power and authority, in the event
that such TSAT Voting Stockholder fails to perform its obligations described
in the previous sentence, to vote or act by written consent in respect of all
of such TSAT Voting Stockholder's shares of TSAT Common Stock exclusively in
favor of each transaction contemplated by the Roll-up Plan.
As of the Record Date, the TSAT Voting Stockholders owned, in the aggregate,
9,101,080 shares of TSAT Common Stock, representing approximately 47.6% of the
total voting power of the outstanding shares of TSAT Common Stock.
TSAT TEMPO AGREEMENT
The following is a summary of the material provisions of the TSAT Tempo
Agreement, which is attached as Appendix C to this Proxy Statement/Prospectus
and is incorporated herein by reference. The following summary does not
purport to be complete and is qualified in its entirety by reference to the
TSAT Tempo Agreement.
In connection with the execution and delivery of the Restructuring
Agreement, TSAT and New PRIMESTAR entered into the TSAT Tempo Agreement,
pursuant to which, among other things, TSAT granted to New PRIMESTAR the
exclusive and irrevocable option, exercisable at any time during the term of
the TSAT Tempo Agreement, on the terms and subject to the conditions set forth
in the TSAT Tempo Agreement, to purchase from TSAT (at the Option Holder's
election) either (x) all the issued and outstanding shares of capital stock of
Tempo or (y) all of the rights, title and interests of TSAT in, to and under
the Tempo Assets, in either case for an aggregate purchase price equal to $2.5
million plus, in the case of (y), the assumption by the Option Holder of all
obligations and liabilities of Tempo in respect of the Tempo Assets, other
than those incurred in violation of the TSAT Tempo Agreement.
If the Option Holder exercises the Tempo Sale Option and elects to
consummate the Tempo Sale via clause (y) above, then TSAT will liquidate Tempo
immediately prior to the closing of the Tempo Sale. In such event, the Option
Holder will indemnify TSAT and Tempo, and hold TSAT and Tempo harmless, on an
after-tax basis, from and against any and all tax liability incurred by TSAT
as a result of such Tempo Sale or Tempo or TSAT as a result of such
liquidation. In addition, all transfer taxes applicable to the conveyance and
transfer from TSAT to the Option Holder of the Tempo Assets and any other
transfer or documentary taxes or any filing or recording fees applicable to
such conveyance and transfer will be paid by the Option Holder.
Conditions. Consummation of the Tempo Sale is subject to the satisfaction or
waiver on or prior to the closing of the Tempo Sale of the following
conditions: (a) approval of the Roll-up Proposal by the requisite vote of the
TSAT stockholders; (b) expiration or termination of the waiting period (and
any extension thereof) applicable to the Tempo Sale under the HSR Act; (c) the
absence of any temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing consummation of the Tempo
Sale; (d) the occurrence of either (1) FCC approval of the application for
transfer of control of Tempo or the Tempo Assets, as applicable, to the Option
Holder; or (2) the Tempo Sale being permitted under applicable FCC rules and
regulations without revocation of the FCC Permit (including pursuant to an
agreement to divest the FCC Permit within a specific time period following the
date of the Tempo Sale) (each such event, a "Tempo FCC Event"); and (e) the
receipt by each of TSAT and the Option Holder of certain certificates from the
Secretary or Assistant Secretary of each other party to the TSAT Tempo
Agreement.
Upon any exercise of the Tempo Sale Option, the obligations of the Option
Holder to consummate the Tempo Sale will be further subject to the following
conditions: (a) the performance by TSAT in all material respects of all
obligations required to be performed by it under the TSAT Tempo Agreement, and
the receipt by
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the Option Holder of a certificate signed on behalf of TSAT to such effect;
(b) the absence of any pending or threatened suit, action or proceeding by any
governmental entity that has a reasonable likelihood of success, (i)
challenging the Tempo Sale, seeking to restrain or prohibit the consummation
of the Tempo Sale or seeking to obtain from the Option Holder any damages that
are material in relation to the Option Holder and its subsidiaries taken as a
whole, (ii) seeking to prohibit or limit the ownership or operation by the
Option Holder or any of its subsidiaries or affiliates of any portion of the
business or assets of the Option Holder, Tempo or any of their respective
subsidiaries or affiliates, or to compel the Option Holder, Tempo or any of
their respective subsidiaries or affiliates to dispose of or hold separate any
portion of the business or assets of the Option Holder, Tempo or any of their
respective subsidiaries or affiliates, as a result of the Tempo Sale, (iii)
seeking to prohibit the Option Holder, Tempo or any of their respective
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of the Option Holder, Tempo or any of their
respective subsidiaries or affiliates, (iv) seeking to change in any respect
the governance of New PRIMESTAR from that set forth in the New PRIMESTAR
Charter and the New PRIMESTAR Bylaws, or to change any person's or entity's
rights under the Stockholders Agreement, or seeking to impose limitations on
the ability of any person or entity to exercise any such rights or (v) which
otherwise is reasonably likely to have a Material Adverse Effect on the Option
Holder; and (c) the taking by TSAT and the TSAT Board of all requisite actions
to render inapplicable to the Tempo Sale any state takeover statute or similar
statute or regulation that would otherwise apply or purport to apply to such
transaction.
Upon any exercise of the Tempo Sale Option, the obligations of TSAT to
consummate the Tempo Sale will be further subject to the condition that there
be an absence of any pending or threatened suit, action or proceeding by any
governmental entity that has a reasonable likelihood of success seeking to
impose any prohibition, limitation, requirement or change of the type
described in the preceding paragraph in clauses (b)(i) through (b)(v).
Covenants. TSAT has agreed that, prior to the closing of the Tempo Sale,
neither it nor any of its subsidiaries will, nor will it or any of its
subsidiaries permit their respective officers, directors, employees, agents
and representatives, to initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including any proposal or offer to its stockholders) with respect to a
merger, acquisition, consolidation or similar transaction that would impede,
interfere with, delay, postpone, discourage or adversely affect the rights of
the Option Holder pursuant to the TSAT Tempo Agreement, or could reasonably be
expected to have such effect. TSAT has also agreed that neither the TSAT Board
nor any committee thereof will (i) withdraw or modify, or propose to withdraw
or modify, in a manner adverse to New PRIMESTAR or the Option Holder, the
approval or recommendation by the TSAT Board or any committee thereof of the
Tempo Sale or the TSAT Tempo Agreement or (ii) approve or recommend, or
propose to approve or recommend, any alternative transaction of the type
described in the preceding sentence.
TSAT has also agreed that prior to the closing of the Tempo Sale, among
other things, TSAT (i) will not transfer or encumber any of its shares of
Tempo capital stock, (ii) will not permit Tempo to engage in any businesses or
activities, merge with any other entity, acquire or sell any material assets
or incur any liabilities, except for immaterial liabilities incurred in the
ordinary course of business consistent with past practice and taking into
account the transactions contemplated by the Restructuring Agreement and the
TSAT Tempo Agreement, and in each case except as contemplated by the Tempo
Option (as defined under "BUSINESS OF TSAT--Tempo--Tempo Option") and the TSAT
Tempo Agreement, (iii) will cause Tempo to conduct its business and operations
in the ordinary course consistent with past practice and consistent with
Tempo's obligations under the Tempo Option and TSAT's obligations under the
Tempo Sale Option and the TSAT Tempo Agreement, (iv) will cause Tempo not to
amend its certificate of incorporation or bylaws or issue or otherwise
encumber, split, combine or reclassify, make any distribution or payment with
respect to, or directly or indirectly purchase, redeem or otherwise acquire
any of its equity or debt securities, (v) will cause Tempo not to incur,
maintain or permit to exist any debt for borrowed money (other than to the
Option Holder), issue or sell any debt securities, assume or otherwise become
liable or responsible for the obligations of any other person or entity except
the Partnership, or make any loans, advances or capital contributions to or
investments in any other person
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or entity, (vi) will cause Tempo not to make any payment in respect of
indebtedness for borrowed money (other than to the Partnership or the Option
Holder, or, with the prior written consent of New PRIMESTAR, to TSAT), (vii)
will not, and will cause Tempo not to, sell, lease, transfer, mortgage,
subject to any lien or otherwise dispose of, any of Tempo's properties or
assets (other than to the Option Holder), (viii) will cause Tempo not to
threaten, institute, prosecute, settle or compromise any claim or litigation
without the prior written consent of the Option Holder, and (ix) will cause
Tempo not to purchase or acquire any property or assets from or otherwise
engage in any transactions with, any person or entity that is affiliated with
TSAT, John C. Malone or TCI (other than transactions with New PRIMESTAR or the
Partnership in the ordinary course of business consistent with past practice
or, with the prior written consent of New PRIMESTAR, with TSAT).
Under the TSAT Tempo Agreement, TSAT agreed to use its best efforts to cause
the Tempo Sale and the transactions contemplated by the Tempo Option to be
consummated, in accordance with their terms, together with any modifications
to such terms as shall be required, as a result of legal requirements or
actions of governmental entities or third parties, to fulfill the intent of
the parties in respect thereof. However, TSAT will not be required to agree to
(i) any prohibition, limitation or other requirement that would impose
limitations on the ability of TSAT to acquire or hold, or exercise full rights
of ownership of, any shares of capital stock of New PRIMESTAR (including any
requirement to hold such capital stock in trust), including the right to vote
the capital stock of New PRIMESTAR acquired by it on all matters properly
presented to the stockholders of New PRIMESTAR; (ii) any change in TSAT's or
the other Specified Class B Stockholders' rights in respect of the governance
of New PRIMESTAR from that set forth in the New PRIMESTAR Charter and the New
PRIMESTAR Bylaws, or any change in TSAT's or the other Specified Class B
Stockholders' rights under the Stockholders Agreement, or any prohibition,
limitation or other requirement that would impose limitations on the ability
of TSAT or the other Specified Class B Stockholders to exercise any such
rights; (iii) any prohibition, limitation or other requirement that would
impose limitations on the ability of any person that (on and as of the date of
the TSAT Tempo Agreement) holds 5% or more of the TSAT Series A Common Stock
or TSAT Series B Common Stock to acquire or hold, or exercise full rights of
ownership of, any shares of capital stock of TSAT or New PRIMESTAR (including
any requirement to hold such capital stock in trust), including the right to
vote the capital stock of TSAT or New PRIMESTAR acquired by it on all matters
properly presented to the stockholders of TSAT or New PRIMESTAR, as
applicable; (iv) any change in the governance of TSAT from that set forth in
the TSAT Charter and the TSAT Bylaws as in effect on the date of the TSAT
Tempo Agreement; or (v) take any action that requires the payment of, or the
incurrence of an obligation to pay, any fee, cost or expense in excess of the
amount that would have otherwise been payable by TSAT if it did not have
obligations under the TSAT Tempo Agreement, unless New PRIMESTAR will have
agreed to advance such amount to TSAT.
Termination, Amendment and Waiver. The TSAT Tempo Agreement may be
terminated at any time prior to the closing of the Tempo Sale, whether before
or after the vote of the TSAT stockholders at the Meeting, by (a) the mutual
written consent of the Option Holder and TSAT; (b) the Option Holder at any
time, on ten days prior written notice to TSAT; or (c) by either the Option
Holder or TSAT, on the first anniversary of the first to occur of the Tempo
FCC Events, if the Tempo Sale shall not have been consummated on or before
such date, unless the failure to consummate the Tempo Sale is the result of a
wilful and material breach of the TSAT Tempo Agreement by the party seeking to
terminate the TSAT Tempo Agreement; provided, however, that the passage of
such period shall be tolled for any part thereof during which any party shall
be subject to a non-final order, decree, ruling or action restraining,
enjoining or otherwise prohibiting consummation of the Tempo Sale.
In the event of termination of the TSAT Tempo Agreement by any party as
provided above, the TSAT Tempo Agreement will become void and have no effect,
and there will be no liability or obligation under the TSAT Tempo Agreement on
the part of any party (other than as provided in the TSAT Tempo Agreement, and
except to the extent that such termination results from the wilful and
material breach by a party of any of its representations, warranties,
covenants or agreements set forth in the TSAT Tempo Agreement).
The parties may amend the TSAT Tempo Agreement, by a written instrument
signed on behalf of each of the parties, at any time before or after the
requisite approval by the TSAT stockholders, except that after such
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approval by the TSAT stockholders, no amendment may be made which by law
requires further approval by such stockholders without such further approval.
At any time prior to the closing of the Tempo Sale, each of the parties, by a
written instrument signed on behalf of such party, may extend the time for
performance of any of the obligations or other acts of the other party, waive
any inaccuracies in the representations and warranties contained in the TSAT
Tempo Agreement or in any document delivered pursuant thereto or, subject to
the proviso of the previous sentence, waive compliance with any of the
agreements or conditions contained in the TSAT Tempo Agreement. The failure of
any party to the TSAT Tempo Agreement to assert any of its rights thereunder
or otherwise will not constitute a waiver of such rights.
Assignment. Pursuant to the TSAT Tempo Agreement, the Option Holder, in its
sole discretion, will be entitled to assign the TSAT Tempo Agreement and New
PRIMESTAR's rights, interests and obligations thereunder at any time, in whole
or in part, to any other person or entity, and upon the assumption by such
person or entity of New PRIMESTAR's obligations thereunder, the Option Holder
will be released from all such obligations. However, TSAT will not be entitled
to assign the TSAT Tempo Agreement or its rights, interests or obligations
thereunder, in whole or in part, by operation or law or otherwise without the
prior written consent of the Option Holder, and any purported assignment
without such consent will be void.
TSAT STOCKHOLDERS AGREEMENT
The following is a summary of the material provisions of the TSAT
Stockholders Agreement, which is attached as Appendix D to this Proxy
Statement/Prospectus and is incorporated herein by reference. The following
summary does not purport to be complete and is qualified in its entirety by
reference to the TSAT Stockholders Agreement.
In connection with the execution and delivery of the Restructuring
Agreement, TSAT, John C. Malone and New PRIMESTAR entered into the TSAT
Stockholders Agreement, which provides, among other things, that until the
termination of the TSAT Merger Agreement, each TSAT Stockholder will vote or
act by written consent with respect to (or cause to be voted or acted upon by
written consent) all shares of TSAT Common Stock held of record or
beneficially owned by such TSAT Stockholder and all shares of TSAT Common
Stock as to which such TSAT Stockholder has voting control (1) in favor of the
TSAT Merger Agreement and the transactions contemplated thereby and (2) except
for the transactions contemplated by the TSAT Merger Agreement, against any
merger, acquisition, consolidation or similar transaction that would adversely
affect the transactions contemplated by the TSAT Merger Agreement, or any
amendment of the TSAT Charter or the TSAT Bylaws, without the prior written
consent of New PRIMESTAR. In addition, until the termination of the TSAT
Merger Agreement, each TSAT Stockholder has agreed not to convert any of its
shares of TSAT Series B Common Stock into shares of TSAT Series A Common Stock
or to transfer any of its shares of TSAT Common Stock, except to a permitted
transferee (as specified in the TSAT Stockholders Agreement) of such TSAT
Stockholder that becomes a party to the TSAT Stockholders Agreement as a TSAT
Stockholder and to the Stockholders Agreement as a potential Specified Class B
Stockholder. Each TSAT Stockholder has also agreed, until the earliest to
occur of (i) consummation of the TSAT Merger, (ii) consummation of the
transactions contemplated by the TSAT Tempo Agreement and (iii) termination of
the TSAT Tempo Agreement, to vote or act by written consent with respect to
(or cause to be voted or acted upon by written consent) all shares of TSAT
Common Stock held of record or beneficially owned by such TSAT Stockholder and
all shares of TSAT Common Stock as to which such TSAT Stockholder has voting
control, in favor of the TSAT Tempo Agreement and the transactions
contemplated thereby.
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THE TSAT MERGER AGREEMENT
GENERAL; EFFECTIVE TIME
The TSAT Merger Agreement provides that, upon the terms and subject to the
conditions set forth in the TSAT Merger Agreement, TSAT will merge with and
into New PRIMESTAR in accordance with the DGCL, with New PRIMESTAR as the
surviving corporation. In the TSAT Merger, which will become effective upon
the filing with the Delaware Secretary of State of the certificate of merger
relating to the TSAT Merger or other appropriate documents in accordance with
the applicable provisions of the DGCL or at such subsequent time as is stated
in the certificate of merger, each outstanding share of TSAT Series A Common
Stock will be converted into the right to receive one share of New PRIMESTAR
Class A Common Stock, and each outstanding share of TSAT Series B Common Stock
will be converted into the right to receive one share of New PRIMESTAR Class B
Common Stock. See "--Consideration to be Received in the TSAT Merger." Such
filing is expected to take place on the TSAT Closing Date or as soon as
practicable thereafter. The TSAT Merger will have the effects set forth in
Section 259 of the DGCL.
The TSAT Merger Agreement provides that (i) the New PRIMESTAR Charter and
the New PRIMESTAR Bylaws, as in effect immediately prior to the TSAT Effective
Time, will be the certificate of incorporation and the bylaws of the surviving
corporation in the TSAT Merger until thereafter changed or amended as provided
therein or by applicable law and (ii) the directors and officers of New
PRIMESTAR immediately prior to the TSAT Effective Time will be the directors
and officers of the surviving corporation in the TSAT Merger, until the
earlier of their resignation or removal or until their respective successors
are duly elected and qualified, as the case may be.
CONSIDERATION TO BE RECEIVED IN THE TSAT MERGER
Pursuant to the TSAT Merger Agreement, at the TSAT Effective Time the shares
of TSAT Common Stock (other than any such shares held by TSAT in its treasury,
all of which will be canceled) will be converted in the TSAT Merger as
follows: (i) each outstanding share of TSAT Series A Common Stock will be
converted into the right to receive one share of New PRIMESTAR Class A Common
Stock and (ii) each outstanding share of TSAT Series B Common Stock will be
converted into the right to receive one share of New PRIMESTAR Class B Common
Stock. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK." Each share of New
PRIMESTAR Common Stock then held by TSAT will be canceled.
Investment Company Considerations. Following consummation of the
Restructuring Transaction, TSAT will be a holding company, with no substantial
assets or liabilities other than (i) 100% of the outstanding capital stock of
Tempo, which holds the FCC Permit and other assets and liabilities relating to
a proposed DBS system being constructed by Tempo, (ii) shares of New PRIMESTAR
Class A Common Stock and New PRIMESTAR Class B Common Stock representing
approximately 36% of the outstanding shares of common equity of New PRIMESTAR
on the Closing Date, subject to adjustments based on closing subscriber counts
and other factors, and (iii) its rights and obligations under the agreements
with New PRIMESTAR described in this Proxy Statement/Prospectus. See "THE
RESTRUCTURING AGREEMENT--Consideration to be Received in the Restructuring
Transaction" and "RELATED AGREEMENTS." As a result, TSAT may be deemed an
"investment company" within the meaning of the 1940 Act, which defines an
investment company as one engaged in the business of investing or holding
securities and owning "investment securities" having a value exceeding 40% of
the value of such company's total assets. Generally, an investment company is
required to register as such with the SEC. Registered investment companies are
subject to extensive, restrictive and potentially adverse regulation relating
to, among other things, operating methods, management, capital structure,
dividends and transactions with affiliates. See "RISK FACTORS--Investment
Company Act Considerations."
The TSAT Merger Agreement provides that if the TSAT Merger is not
consummated prior to the expiration of the one year exemption period provided
for "transient investment companies" under Rule 3a-2 promulgated under the
1940 Act, then TSAT may, in consultation with New PRIMESTAR, acquire an
operating business or take such other commercially reasonable actions within
such one year period in order to prevent TSAT from being deemed an investment
company within the meaning of the 1940 Act. If TSAT does acquire an operating
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business or takes such other material commercially reasonable actions under
such circumstances, the TSAT Merger Agreement requires TSAT and New PRIMESTAR
to negotiate in good faith to amend the TSAT Merger Agreement to change the
exchange ratio between TSAT capital stock and New PRIMESTAR capital stock to
reflect the financial effects of such acquisition or actions (and if such an
agreement is reached, TSAT will, as soon as practicable, resubmit the TSAT
Merger Agreement, as amended, to its stockholders for approval and adoption).
See "--Covenants Relating to Business--Investment Company Act Exception" and
"RISK FACTORS--Investment Company Act Considerations." By voting in favor of
the Roll-up Proposal, TSAT stockholders are voting in favor of any revision of
the TSAT Merger Agreement that would not otherwise require stockholder
approval under applicable law, and TSAT will not seek any further approval
from TSAT stockholders in connection with any such revision of the TSAT Merger
Agreement unless applicable law requires TSAT to seek such approval.
Based on the consideration to be received in the TSAT Merger, it is
estimated that at the TSAT Effective Time, former holders of TSAT Common Stock
will hold approximately 34% of the aggregate number of outstanding shares of
New PRIMESTAR Class A Common Stock and 100% of the aggregate number of
outstanding shares of New PRIMESTAR Class B Common Stock, representing
approximately 36% of the aggregate voting power of the outstanding New
PRIMESTAR Common Stock. The foregoing ownership and voting percentages are
based on the assumption that both the Restructuring Transaction and the TSAT
Merger closed on September 30, 1997 and are subject to adjustments based on
closing subscriber counts and other factors. The actual ownership and voting
interests of the former holders of TSAT Common Stock will be dependent upon a
variety of factors and may vary from the estimated percentages set forth
above. See "THE RESTRUCTURING AGREEMENT--Consideration to be Received in the
Restructuring Transaction."
Exchange of Shares. As soon as reasonably practicable after the TSAT
Effective Time, transmittal letters will be mailed to each holder of record of
shares of TSAT Common Stock to be used in forwarding his or her certificates
evidencing such shares for surrender and exchange for certificates evidencing
the shares of New PRIMESTAR Common Stock to which he or she has become
entitled. After receipt of such transmittal letter, each holder of
certificates formerly representing TSAT Common Stock should surrender such
certificates to The Bank of New York, as exchange agent (the "Exchange
Agent"), and each such holder will receive in exchange therefor certificates
representing the number of shares of New PRIMESTAR Common Stock to which he or
she is entitled. Such transmittal letters will be accompanied by instructions
specifying other details of the exchange.
TSAT STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL LETTER.
After the TSAT Effective Time, each certificate evidencing TSAT Common Stock
(other than certificates evidencing any such shares held by TSAT in its
treasury, all of which will be canceled), until so surrendered and exchanged,
will be deemed, for all purposes, to evidence only the right to receive the
number of shares of New PRIMESTAR Common Stock that the holder of such
certificate is entitled to receive. The holder of such unexchanged certificate
will not be entitled to receive any dividends or other distributions payable
by New PRIMESTAR until the certificate is surrendered. Subject to applicable
law, such dividends and distributions, if any, will be accumulated and, at the
time of such surrender, paid without interest.
CONDITIONS TO THE TSAT MERGER
The rights and obligations of TSAT and New PRIMESTAR to consummate the TSAT
Merger are subject to the satisfaction or waiver on or prior to the TSAT
Closing Date of the following conditions: (a) approval of the Roll-up Proposal
by the requisite vote of the TSAT stockholders; (b) expiration or termination
of the waiting period (and any extension thereof) applicable to the TSAT
Merger under the HSR Act; (c) occurrence of one of the FCC Events; (d) the
absence of any temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing consummation of the TSAT
Merger; (e) receipt of approval for listing on the NASDAQ/NM of the shares of
New PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock
issuable to the stockholders of TSAT pursuant to the TSAT Merger Agreement,
subject to official notice of issuance;
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(f) effectiveness of the Registration Statement under the Securities Act and
the absence of any stop order or proceedings seeking a stop order with respect
to the Registration Statement; (g) receipt of certain certificates from the
Secretary or Assistant Secretary of TSAT and of New PRIMESTAR; and (h) receipt
of any necessary approval of the TSAT Merger Agreement by the stockholders of
New PRIMESTAR. TSAT, on behalf of itself and New PRIMESTAR, filed Notification
and Report Forms under the HSR Act in July 1997, and the waiting periods under
the HSR Act with respect to the transactions described in such filings, which
effectively included both the Restructuring Transaction and the TSAT Merger,
have since expired. See, "THE ROLL-UP PLAN--Regulatory Approvals."
The obligations of New PRIMESTAR to consummate the TSAT Merger are also
subject to the following conditions: (a) the accuracy of the representations
and warranties of TSAT set forth in the Restructuring Agreement that are
qualified as to materiality, and the material accuracy of the representations
and warranties of each other Restructuring Party set forth in the
Restructuring Agreement that are not so qualified, in each case as of the date
of the TSAT Merger Agreement and as of the TSAT Closing Date, and the receipt
by New PRIMESTAR of certificates of TSAT to such effect; (b) performance by
TSAT and any subsidiary of TSAT in all material respects of all obligations
required to be performed by it under the TSAT Merger Agreement at or prior to
the TSAT Closing Date, and the receipt by New PRIMESTAR of a certificate
signed on behalf of TSAT to such effect; (c) receipt by New PRIMESTAR of an
agreement from each person identified by TSAT as an "affiliate" of TSAT at the
time of the TSAT Merger Agreement, to the effect that such person will comply
with the provisions of Rule 145 under the Securities Act with respect to the
resale of shares of New PRIMESTAR Class A Common Stock and New PRIMESTAR Class
B Common Stock issued to such person in the TSAT Merger; (d) the absence of
any pending or threatened suit, action or proceeding by any governmental
entity that has a reasonable likelihood of success, (i) challenging the TSAT
Merger, seeking to restrain or prohibit the consummation of the TSAT Merger or
seeking to obtain from TSAT or New PRIMESTAR any damages that are material in
relation to TSAT and its subsidiaries taken as a whole, (ii) seeking to
prohibit or limit the ownership or operation by New PRIMESTAR or TSAT or any
of their respective subsidiaries or affiliates of any portion of the business
or assets of New PRIMESTAR, TSAT or any of their respective subsidiaries or
affiliates, or to compel New PRIMESTAR, TSAT or any of their respective
subsidiaries or affiliates to dispose of or hold separate any portion of the
business or assets of New PRIMESTAR, TSAT or any of their respective
subsidiaries or affiliates, as a result of the TSAT Merger, (iii) seeking to
prohibit New PRIMESTAR, TSAT or any of their respective subsidiaries or
affiliates from effectively controlling in any material respect the business
or operations of New PRIMESTAR, TSAT or any of their respective subsidiaries
or affiliates, (iv) seeking to change in any respect the governance of New
PRIMESTAR from that set forth in the New PRIMESTAR Charter and New PRIMESTAR
Bylaws, or to change any person's or entity's rights under the Stockholders
Agreement, or seeking to impose limitations on the ability of any person or
entity to exercise any such rights or (v) which otherwise is reasonably likely
to have a Material Adverse Effect on New PRIMESTAR; (e) the taking by TSAT and
the TSAT Board of all requisite actions to render inapplicable to the TSAT
Merger any state takeover statute or similar statute or regulation that would
otherwise apply or purport to apply to the TSAT Merger. In addition, New
PRIMESTAR has the right to terminate the TSAT Merger Agreement, and abandon
the TSAT Merger, under certain circumstances. See "--Termination; Amendment
and Waiver."
The obligations of TSAT to consummate the TSAT Merger are also subject to
the following conditions: (a) performance by New PRIMESTAR in all material
respects of all obligations required to be performed by it under the TSAT
Merger Agreement at or prior to the TSAT Closing Date, and the receipt by TSAT
of a certificate signed on behalf of New PRIMESTAR to such effect; and (b) the
absence of any pending or threatened suit, action or proceeding by any
governmental entity that has a reasonable likelihood of success seeking to
impose any prohibition, limitation, requirement or change of the type
described in clauses (d)(i) through (d)(v) above.
COVENANTS RELATING TO BUSINESS
Alternative Transactions. TSAT has agreed that, prior to the TSAT Closing
Date, neither it nor any of its subsidiaries will, nor will it or any of its
subsidiaries permit their respective officers, directors, employees, agents
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and representatives, to initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including without limitation any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
that would impede, interfere with, delay, postpone, discourage or adversely
affect the transactions contemplated in the TSAT Merger Agreement, or that
could reasonably be expected to have such effect. TSAT has also agreed that
neither the TSAT Board nor any committee thereof will approve or recommend, or
propose to approve or recommend, any alternative transaction of the type
described in the preceding sentence.
Interim Operations of TSAT. For the period from the Closing Date until the
TSAT Closing Date, and after giving effect to the Restructuring Transaction,
TSAT has agreed (1) to conduct, and to cause each of its subsidiaries to
conduct, its business and operations in the ordinary course, consistent with
their obligations under the Tempo Option and the TSAT Tempo Agreement; (2) not
to, and to cause each of its subsidiaries not to, amend its charter or bylaws;
(3) not to, and to cause each of its subsidiaries not to, authorize for
issuance, issue, sell, deliver, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities (other than (i) shares issued upon
exercise of any rights, warrants or options outstanding as of June 11, 1997
or, in the case of employee benefit plans existing as of June 11, 1997, any
rights, warrants or options authorized under such existing plans and shares
issued upon exercise thereof, (ii) employee stock options issued to persons
who become independent directors of TSAT after the date of the TSAT Merger
Agreement at an exercise price equal to the fair market value of the TSAT
Series A Common Stock on the date of issuance (and shares issued upon exercise
thereof) in an amount not to exceed 250,000 shares of TSAT Series A Common
Stock, and (iii) to New PRIMESTAR); (4) not to, and to cause each of its
subsidiaries not to, (i) split, combine or reclassify any shares of its
capital stock, (ii) declare, set aside or pay any dividend or make any other
distribution or payment with respect to any shares of its capital stock or any
other ownership interests (whether in stock or property or a combination
thereof) or (iii) purchase, redeem or otherwise acquire, directly or
indirectly, any shares of, or options or warrants or rights relating to, its
capital stock or that of any of its subsidiaries, or make any commitment for
any such action; (5) not to, and to cause each of its subsidiaries not to, (i)
create, incur, assume, maintain or permit to exist any long-term debt or
short-term debt for borrowed money (other than to New PRIMESTAR), (ii) issue
or sell any debt securities, (iii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person or entity except New PRIMESTAR, the
Partnership and/or TSAT's wholly-owned subsidiaries, or (iv) make any loans,
advances or capital contributions to or investments in any other person or;
(6) not to make any change to its (or any of its subsidiaries') accounting
(including tax accounting) methods, principles, practices, or policies, other
than those required by U.S. generally accepted accounting principles and
except, in the case of tax accounting methods, principles or practices, in the
ordinary course of business of TSAT or any of its subsidiaries; (7) not to,
and not to permit any of its subsidiaries to, sell, lease, transfer, mortgage,
subject to any lien or otherwise dispose of, any of its properties or assets
(other than to New PRIMESTAR); (8) not to, and not to permit any of its
subsidiaries to, acquire or agree to acquire (A) (i) by merging or
consolidating with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership, joint
venture, association or other business organization or division thereof or
(ii) any other material assets or (B) incur any liabilities, except for
immaterial liabilities incurred in the ordinary course of business consistent
with past practice and taking into account the transactions contemplated by
the Restructuring Agreement, the TSAT Asset Transfer Agreement and the TSAT
Merger Agreement, and in each case except as contemplated by the TSAT Merger
Agreement, the Tempo Option and the TSAT Tempo Agreement; (9) not to, and not
to permit any of its subsidiaries to, purchase or acquire any property or
assets from or otherwise engage in any transactions with, any person or entity
that is affiliated with (i) TSAT, (ii) any Specified Class B Stockholder or
(iii) TCI, and (10) not to agree to do any of the foregoing.
Investment Company Act Exception. TSAT has agreed to use its best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to cause the Securities and Exchange
Commission to extend (the "Extension") the 12-month period from the date of
the TSAT Merger Agreement after which the exception for "transient investment
companies" under Rule 3a-2 promulgated under
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the 1940 Act will expire so that such expiration date will be concurrent with
any termination of the TSAT Merger Agreement (the date on which such period,
after giving effect to any Extension(s) obtained by TSAT, shall expire being
referred to herein as the "TSAT Expiration Date"). If the TSAT Expiration Date
is not concurrent with or subsequent to any termination of the TSAT Merger
Agreement, then notwithstanding TSAT's covenants described above under "--
Interim Operations of TSAT," TSAT will be entitled to, in consultation with
New PRIMESTAR, (i) acquire an operating business (an "ICA Acquisition"), with
such ICA Acquisition to be consummated no earlier than 30 calendar days prior
to the Expiration Date or (ii) take such other commercially reasonable actions
to cause TSAT not to be subject to regulation under the 1940 Act as an
investment company; provided, that all such actions will be revocable at any
time prior to 30 calendar days prior to the Expiration Date; and provided,
further, that any ICA Acquisition and any such other actions will require the
prior written consent of New PRIMESTAR if it or they would in any way affect
the Tempo Assets, the Tempo Sale, TSAT's obligations under the TSAT Tempo
Agreement or Tempo's obligations under the Tempo Option. In advance of
entering into any agreement or letter of intent in respect of an ICA
Acquisition, TSAT will provide a copy thereof to New PRIMESTAR.
Notwithstanding the foregoing, TSAT has agreed not to enter into any agreement
or letter of intent, engage in negotiations, or take any other actions of the
type specified in clause (ii) above prior to July 1, 1998.
Upon consummation of an ICA Acquisition, or the taking of any material
actions of the type specified in clause (ii) above, TSAT and New PRIMESTAR
will negotiate in good faith to amend the TSAT Merger Agreement to change the
exchange ratio between TSAT capital stock and New PRIMESTAR capital stock to
reflect the financial effects of such acquisition or actions (and if such an
agreement is reached, TSAT will, as soon as practicable, resubmit the TSAT
Merger Agreement, as amended, to its stockholders for approval and adoption).
Other Actions. TSAT has agreed, subject to certain exceptions, to take no
action that would reasonably be expected to cause (1) the failure of TSAT to
perform and comply in all material respects with all agreements, obligations
and conditions required by the TSAT Merger Agreement to be performed or
complied with by TSAT on or prior to the TSAT Closing Date; (2) the failure of
TSAT or New PRIMESTAR to obtain all necessary approvals or appropriate
consents of any U.S. federal or state governmental entity or any other third
party in connection with the consummation of the transactions contemplated by
the TSAT Merger Agreement, including approvals and consents under the HSR Act
and applicable FCC rules and regulations; or (3) the institution of any suit,
action or proceeding challenging, seeking to restrain, prohibiting or
adversely affecting in any material respect the consummation of the
transactions contemplated by the TSAT Merger Agreement; or (4) any Material
Adverse Effect on TSAT.
New PRIMESTAR has agreed, subject to certain exceptions, to take no action
that would reasonably be expected to cause (1) the failure of New PRIMESTAR to
perform and comply in all material respects with all agreements, obligations
and conditions required by the TSAT Merger Agreement, to be performed or
complied with by New PRIMESTAR on or prior to the TSAT Closing Date; or (2)
the failure of TSAT or New PRIMESTAR to obtain all necessary approvals or
appropriate consents of any U.S. federal or state governmental entity in
connection with the consummation of the transactions contemplated in the TSAT
Merger Agreement, including approvals and consents under the HSR Act and
applicable FCC rules and regulations.
ADDITIONAL COVENANTS
Access to Information; Confidentiality. TSAT has agreed to afford to New
PRIMESTAR reasonable access during the period prior to the TSAT Effective Time
to TSAT's properties, books, contracts, commitments, personnel and records.
TSAT has further agreed to use its best efforts in good faith to obtain all
waivers and consents necessary under any confidentiality or non-disclosure
agreement to afford reasonable access to New PRIMESTAR. New PRIMESTAR has
agreed, except as required by law, to hold, and to cause its respective
officers, employees, accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic information in
confidence until such time as such information becomes publicly available
(otherwise than through the wrongful act of any such person or entity) and to
use its best efforts to ensure that such persons
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or entities do not disclose such information to others without the prior
written consent of TSAT. New PRIMESTAR has further agreed, in the event of the
termination of the TSAT Merger Agreement for any reason, to promptly return or
destroy all documents containing nonpublic information so obtained from TSAT
and any copies made of such documents.
Other Covenants. New PRIMESTAR has agreed, upon the terms and subject to the
conditions set forth in the TSAT Merger Agreement, to use its commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with TSAT in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the TSAT Merger; provided, that New PRIMESTAR
will not be required to agree to any prohibition, limitation or other
requirements that would (i) prohibit or limit the ownership or operation by
New PRIMESTAR or any of its subsidiaries or affiliates of any portion of the
business or assets of New PRIMESTAR or any of its subsidiaries or affiliates,
or to compel New PRIMESTAR or any of its subsidiaries or affiliates to dispose
of or hold separate any portion of the business or assets of New PRIMESTAR or
any of its subsidiaries or affiliates, or (ii) prohibit New PRIMESTAR or any
of its subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of New PRIMESTAR or any of its subsidiaries
or affiliates.
TSAT has agreed, upon the terms and subject to the conditions set forth in
the TSAT Merger Agreement, to use its best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the TSAT Merger; provided, that TSAT will not be required to
agree to (i) any prohibition, limitation or other requirement that would
impose limitations on the ability of TSAT to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of New PRIMESTAR
(including any requirement to hold such capital stock in trust), including the
right to vote the capital stock of New PRIMESTAR acquired by it on all matters
properly presented to the stockholders of New PRIMESTAR; (ii) any change in
TSAT's or the other Specified Class B Stockholders' rights in respect of the
governance of New PRIMESTAR from that set forth in the New PRIMESTAR Charter
and the New PRIMESTAR Bylaws, or any change in TSAT's or the other Specified
Class B Stockholders' rights under the Stockholders Agreement, or any
prohibition, limitation or other requirement that would impose limitations on
the ability of TSAT or the other Specified Class B Stockholders to exercise
any such rights; (iii) any prohibition, limitation or other requirement that
would impose limitations on the ability of any person or entity that (on and
as of the date of the TSAT Merger Agreement) holds 5% or more of the TSAT
Series A Common Stock or TSAT Series B Common Stock to acquire or hold, or
exercise full rights of ownership of, any shares of capital stock of TSAT or
New PRIMESTAR (including any requirement to hold such capital stock in trust),
including the right to vote the capital stock of TSAT or New PRIMESTAR
acquired by it on all matters properly presented to the stockholders of TSAT
or New PRIMESTAR, as applicable; (iv) any change in the governance of TSAT
from that set forth in the TSAT Charter and the TSAT Bylaws as in effect on
the date of the TSAT Merger Agreement; or (v) take any action that requires
the payment of, or the incurrence of an obligation to pay, any fee, cost or
expense in excess of the amount that would have otherwise been payable by TSAT
if it did not have obligations under the TSAT Merger Agreement, unless New
PRIMESTAR will have agreed to advance such amount to TSAT.
New PRIMESTAR has agreed that during the term of the TSAT Merger Agreement,
New PRIMESTAR will reimburse TSAT for all reasonable costs and expenses
(including reasonable legal and accounting costs) incurred by TSAT (i) in
preparation of tax returns and other reports of governmental entities, (ii)
for payment of any required taxes, franchise fees, NASDAQ fees and similar
fees, (iii) in compliance with its reporting obligations under the Securities
Act and the Exchange Act and (iv) to maintain directors and officers insurance
on terms reasonably acceptable to New PRIMESTAR.
TERMINATION, AMENDMENT AND WAIVER
The TSAT Merger Agreement may be terminated at any time prior to the TSAT
Effective Time, whether before or after adoption thereof by the stockholders
of TSAT and/or New PRIMESTAR, by (a) the mutual
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written consent of TSAT and New PRIMESTAR; (b) by New PRIMESTAR at any time
after June 30, 1998, on ten days prior written notice to TSAT, if the TSAT
Merger has not been consummated on or before June 30, 1998 and no FCC Event
has occurred on or before the date of such notice, unless the failure to
consummate the TSAT Merger is the result of a wilful and material breach of
the TSAT Merger Agreement by New PRIMESTAR; or (c) by either TSAT or New
PRIMESTAR on or after the earlier of (x) the 180th day following the first to
occur of the FCC Events if the TSAT Merger has not been consummated on or
before the end of such 180-day period, and (y) on the 18 month anniversary of
the Closing Date (unless the failure to consummate the TSAT Merger is the
result of a wilful and material breach of the TSAT Merger Agreement or the
TSAT Stockholders Agreement by the party seeking to terminate the TSAT Merger
Agreement); provided, however, that the passage of either such period shall be
tolled for any part thereof during which either party is subject to a nonfinal
order, decree, ruling or action restraining, enjoining or otherwise
prohibiting consummation of the TSAT Merger.
In the event of termination of the TSAT Merger Agreement by either party as
provided above, the TSAT Merger Agreement will become void and have no effect,
and there will be no liability or obligation under the TSAT Merger Agreement
on the part of either party (except to the extent that such termination
results from the willful and material breach by one of the parties of any of
its covenants or agreements set forth in the TSAT Merger Agreement).
TSAT and New PRIMESTAR may amend the TSAT Merger Agreement by a written
instrument signed on behalf of each of them at any time before or after the
adoption thereof by the stockholders of TSAT and/or New PRIMESTAR, except that
after such approval by such stockholders, no amendment may be made which by
law requires further approval by such stockholders without such further
approval. At any time prior to the TSAT Effective Time, either of the parties,
by a written instrument signed on behalf of any such party, may extend the
time for performance of any of the obligations or other acts of the other
party, waive any inaccuracies in the representations and warranties required
to be true and correct under the TSAT Merger Agreement or any document
delivered pursuant thereto or, subject to the proviso of the previous
sentence, waive compliance with any of the agreements or conditions contained
in the TSAT Merger Agreement. The failure of either party to the TSAT Merger
Agreement to assert any of its rights thereunder or otherwise will not
constitute a waiver of such rights.
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THE ASKYB TRANSACTION
THE ASKYB AGREEMENT
The following summary of the material provisions of the ASkyB Agreement does
not purport to be complete and is qualified in its entirety by reference to
the ASkyB Agreement, which is incorporated by reference herein and a copy of
which (exclusive of certain exhibits and schedules) is filed as an exhibit to
the Registration Statement of which this Proxy Statement/Prospectus is a part.
GENERAL
On June 11, 1997, the Partnership, News Corp., MCI, ASkyB and, for certain
purposes only, each of the Partners entered into the ASkyB Agreement, pursuant
to which the ASkyB Transferors agreed to transfer certain assets relating to
the DBS business, subject to certain liabilities related thereto, to New
PRIMESTAR (or, if the Restructuring Transaction has not been consummated by
March 8, 1998, to the Partnership). See "--Transfer of Assets and Assumption
of Liabilities." If the ASkyB Transaction is consummated, such transfer is
intended to qualify as part of the same tax-free exchange as the Restructuring
Transaction pursuant to Section 351 of the Code (or, if the assets are
transferred to the Partnership, as a tax-free exchange pursuant to Section 721
of the Code).
Subject to the terms and conditions of the ASkyB Agreement, the closing of
the ASkyB Transaction (the "ASkyB Closing") will take place, unless otherwise
agreed among the Partnership and the ASkyB Transferors, on the day (the "ASkyB
Closing Date") which is the later of (i) the Closing of the Restructuring
Transaction and (ii) five days following the date on which the last of the
conditions precedent to the ASkyB Transaction set forth in the ASkyB Agreement
has been satisfied or waived. Among other things, it is a condition precedent
to the closing of the ASkyB Transaction by New PRIMESTAR that, if the TSAT
Merger shall have been consummated, the ASkyB Transaction shall have been
approved by the holders of New PRIMESTAR Voting Common Stock, including the
former holders of TSAT Common Stock, at an annual or special meeting of New
PRIMESTAR. However, no vote of the TSAT stockholders will be taken at the
Meeting regarding approval of the ASkyB Transaction and no proxies are being
solicited in connection therewith.
TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES
Pursuant to the ASkyB Agreement, ASkyB, and each of News Corp. and MCI, on
its own behalf and on ASkyB's behalf, will transfer and assign to New
PRIMESTAR all of its rights, title and interests in and to certain specified
contracts, commitments, agreements, arrangements, leases, licenses, purchase
orders, memoranda of understanding and obligations relating to the DBS
business (collectively, the "ASkyB Contracts"), including without limitation,
all of News Corp.'s, MCI's and ASkyB's rights to work in process under such
ASkyB Contracts. In addition, MCI, on its own behalf and on ASkyB's behalf,
will transfer and assign to New PRIMESTAR all of MCI's rights, title and
interests in, to and under all licenses, permits and other authorizations
granted to MCI by the FCC with respect to the U.S. satellite business (the
"MCI FCC Licenses"), including, without limitation, the authorization to
construct, launch and operate satellites in the DBS service at 110(degrees)
W.L. providing 28 transponder channels of service, together with all other
rights of MCI and its affiliates with respect thereto. Further, to the extent
that the ASkyB Contracts, the MCI FCC Licenses or the 110 Slot subsume any
intellectual property rights, such rights will be conveyed, transferred and
assigned to New PRIMESTAR by each ASkyB Transferor holding any such rights, on
its own behalf and on behalf of ASkyB. The ASkyB Contracts, the MCI FCC
Licenses, the 110 Slot and such intellectual property rights are hereinafter
collectively referred to as the "ASkyB Transferred Assets."
In addition to the consideration set forth below, in consideration for the
transfer of the ASkyB Transferred Assets, at the ASkyB Closing, New PRIMESTAR
will assume the respective obligations of the ASkyB Transferors under the
ASkyB Contracts in accordance with their terms, to the extent that the ASkyB
Transferors are not in default under such obligations at the ASkyB Closing
Date (and would not be in default at the ASkyB Closing, assuming the giving of
any applicable notices and lapse of any applicable waiting periods under such
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ASkyB Contracts) (collectively, the "ASkyB Assumed Liabilities"). Any
liabilities relating to (i) the ASkyB Transferred Assets or the operations of
ASkyB or any other ASkyB Transferor prior to the ASkyB Closing other than the
ASkyB Liabilities or (ii) taxes in respect of the sale of the ASkyB
Transferred Assets under the ASkyB Agreement, will be retained by ASkyB, News
Corp. or MCI, as the case may be, except that any sales or other transfer
taxes resulting from the transfer of the ASkyB Transferred Assets will be
borne equally by ASkyB and New PRIMESTAR (the "ASkyB Retained Liabilities").
CONSIDERATION TO BE RECEIVED IN THE ASKYB TRANSACTION
Aggregate Consideration. In addition to assumption of the ASkyB Assumed
Liabilities, as consideration for the transfer and assignment of the ASkyB
Transferred Assets, New PRIMESTAR will pay to ASkyB, for its benefit and the
benefit of each of the other ASkyB Transferors, by delivery of a combination
of New PRIMESTAR Convertible Preferred Stock and, at New PRIMESTAR's option,
cash and/or New PRIMESTAR Convertible Subordinated Notes, an amount equal to
the ASkyB Valuation (as defined below) (the "Total Consideration"). "ASkyB
Valuation" means the amount equal to (a) the aggregate amount expended by News
Corp., MCI and ASkyB under and in connection with the ASkyB Contracts up to
and including the business day immediately preceding the earlier of the ASkyB
Closing Date and September 30, 1997, plus (b) the costs incurred in connection
with the 110 Slot, which costs include $682.5 million, which was the price
paid for the rights to the 110 Slot at an auction conducted by the FCC, plus
(c) interest, at the rate of 6% per annum, on the amounts set forth in (a) and
(b) from the respective payment dates of such amounts up to and including the
business day immediately preceding the earlier of the ASkyB Closing Date and
September 30, 1997; provided, however, that (i) in no event shall the amount
set forth in (a) with respect to any ASkyB Contract exceed the sum of the
aggregate amounts designated by the ASkyB Transferors with regard to such
ASkyB Contract as "Paid to Date" and "Remaining Commitment," in the ASkyB
Agreement, minus any remaining obligation of the ASkyB Transferors (or New
PRIMESTAR, following the ASkyB Closing) under such ASkyB Contract as of the
business day immediately preceding the earlier of the ASkyB Closing Date and
September 30, 1997, and (ii) in no event shall the costs set forth in (b)
exceed $683.6 million.
At the ASkyB Closing, New PRIMESTAR will issue to ASkyB that number of
shares (the "Consideration Shares") of New PRIMESTAR Convertible Preferred
Stock which, upon conversion, will give ASkyB no more than 20% of the issued
and outstanding capital stock of New PRIMESTAR, immediately after giving
effect to such conversion if converted on the ASkyB Closing Date; provided,
that in no event will the aggregate stated liquidation value of the
Consideration Shares exceed the Total Consideration; and provided, further,
that, if ASkyB is permitted to receive a larger proportion of the Total
Consideration in shares of New PRIMESTAR Convertible Preferred Stock (without
delaying the receipt of any FCC approval required under the ASkyB Agreement),
New PRIMESTAR will have the option of delivering such larger number of shares
as part of the Consideration Shares. The number of shares of New PRIMESTAR
Class A Common Stock issuable upon conversion (the "Conversion Shares") of the
Consideration Shares will be determined in accordance with the first paragraph
under the heading "Calculation of Number of Conversion Shares," below. If the
aggregate stated liquidation value of the Consideration Shares is less than
the Total Consideration, the remainder of the Total Consideration in excess of
the aggregate stated liquidation value of the Consideration Shares will be
paid, at New PRIMESTAR's option, by the payment to ASkyB, at the ASkyB
Closing, of cash or the issuance of the New PRIMESTAR Convertible Subordinated
Notes to ASkyB, having an original principal amount equal to such excess, or
by a combination of the payment of cash and the issuance of New PRIMESTAR
Convertible Subordinated Notes. In addition, New PRIMESTAR will reimburse
ASkyB in cash for (i) any amounts expended by News Corp., MCI and ASkyB under
and in connection with the ASkyB Contracts between September 30, 1997 and the
ASkyB Closing Date, subject to the limitation set forth in the proviso to the
definition of "ASkyB Valuation" set forth above (which for this purpose will
be construed as if all references to the earlier of September 30, 1997 and the
ASkyB Closing Date referred instead to the ASkyB Closing Date), plus (ii)
interest, at the rate of 6% per annum, on the amount set forth in (i) from the
respective dates such amounts were expended by the applicable ASkyB Transferor
to the business day immediately preceding the ASkyB Closing Date. ASkyB
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will accept MCI's proportionate share of the Consideration Shares and the
Total Consideration on MCI's behalf, as its agent.
At the ASkyB Closing, New PRIMESTAR will also issue to ASkyB New PRIMESTAR
Convertible Subordinated Notes having an aggregate original principal amount
equal to the Total Consideration minus the aggregate liquidation value of the
Consideration Shares. The New PRIMESTAR Convertible Subordinated Notes shall
bear interest at 5% per annum, payable in cash or, on or before the fourth
anniversary of the ASkyB Closing, at the option of New PRIMESTAR, in shares of
the non-voting New PRIMESTAR Class D Common Stock.
Calculation of Number of Conversion Shares. At the ASkyB Closing Date, the
aggregate number of Conversion Shares issuable upon the conversion of the
Consideration Shares and the New PRIMESTAR Convertible Subordinated Notes,
without giving effect to any adjustment provisions in the Certificate of
Designation relating to the New PRIMESTAR Convertible Preferred Stock or the
New PRIMESTAR Convertible Subordinated Notes but giving effect to the
Restructuring Transaction on a pro forma basis, will be determined by dividing
(a) the ASkyB Valuation minus the portion of the Total Consideration paid in
cash, if any, by (b) the Conversion Price (as defined below). "Conversion
Price" will mean 120% of the quotient of (x) the PRIMESTAR Valuation (as
defined below) plus all proceeds payable to New PRIMESTAR upon the exercise,
conversion or exchange of outstanding Rights (as defined below), divided by
(y) the number of shares of New PRIMESTAR Class A Common Stock, New PRIMESTAR
Class B Common Stock and New PRIMESTAR Class C Common Stock outstanding on the
ASkyB Closing Date, determined without giving effect to the Conversion Shares
issuable upon conversion of the Consideration Shares and the New PRIMESTAR
Convertible Subordinated Notes, plus the number of shares of New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock and New PRIMESTAR
Class C Common Stock issuable upon exercise of all outstanding options,
warrants and other rights to acquire such common stock, and upon the
conversion or exchange of all outstanding securities convertible into or
exchangeable for such common stock, in each case to the extent then
exercisable and "in the money" (collectively, the "Rights").
"PRIMESTAR Valuation" means the amount equal to (x) the product of the
aggregate number of PRIMESTAR Subscribers (as defined below) as of the ASkyB
Closing Date, not to exceed 1,950,000, multiplied by $1,500, minus (y)
indebtedness of New PRIMESTAR for borrowed money at the ASkyB Closing Date
(including any such indebtedness incurred in connection with the Restructuring
Transaction, but excluding (i) any indebtedness incurred to finance the
construction and/or launch of any satellite or the lease of any satellite
capacity (including indebtedness in respect of letters of credit relating to
any such construction, launch or lease, capitalized interest and any
refinancing of any such indebtedness), (ii) any indebtedness under, or any
indebtedness incurred to finance any obligation of New PRIMESTAR under, any
ASkyB Contract and (iii) an amount equal to the product of the aggregate
number of PRIMESTAR Subscribers as of the ASkyB Closing Date in excess of
1,950,000 multiplied by actual direct costs incurred in connection with the
acquisition of each such subscriber in excess of 1,950,000, which will include
materials, labor and acquisition marketing costs but will not include
overhead, national advertising and incremental programming fees), plus (z) to
the extent not greater than (y) above, cash and cash equivalents of New
PRIMESTAR on hand at the ASkyB Closing Date. "PRIMESTAR Subscriber," as of any
date, means a subscriber to any U.S. satellite business operated by the
Partnership and its affiliates or (following the Restructuring Transaction)
New PRIMESTAR and its affiliates (the "PRIMESTAR DBS Service"), as of such
date who (except as otherwise provided under "--Post-Closing Adjustment") (a)
is no more than 60 days past due in payment (measured from the date the
subscriber's invoice is issued), (b) has received and paid for in full the
PRIMESTAR DBS Service for at least one month following the later of the date
of activation and the conclusion of one or two promotional "free" months, if
any, and (c) became a subscriber as a result of ordinary marketing practices
in the normal course of business. Any subscriber who meets the requirements of
(b) and (c) but is more than 60 days but less than 91 days past due in payment
will be deemed one-half of a PRIMESTAR Subscriber for the purpose of
calculating the PRIMESTAR Valuation.
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Post-Closing Adjustment. At the ASkyB Closing, the PRIMESTAR Valuation used
to determine the number of Consideration Shares issuable to ASkyB will be
based on all PRIMESTAR Subscribers at the ASkyB Closing Date, including,
without limitation, those PRIMESTAR Subscribers who become subscribers 90 days
or less prior to the ASkyB Closing Date, or, in the case of those subscribers
receiving one (or two) initial "free" month(s) for promotional purposes, 120
days or less (or 150 days or less, as applicable) prior to the ASkyB Closing
Date (such subscribers being referred to herein as the "ASkyB Recent PRIMESTAR
Subscribers"); provided that for ASkyB Recent PRIMESTAR Subscribers, the
requirements of clauses (a), (b) and (c) of the definition of PRIMESTAR
Subscriber will not be taken into account. On the 151st day following the
ASkyB Closing Date, the number of PRIMESTAR Subscribers as of the ASkyB
Closing Date will be adjusted to take into account which ASkyB Recent
PRIMESTAR Subscribers will be given full credit, one-half credit or no credit
(based on the definition of PRIMESTAR Subscriber, including clauses (a), (b)
and (c), and based on whether or not, and when, the ASkyB Recent PRIMESTAR
Subscribers have made payment for their subscriptions), and the PRIMESTAR
Valuation will be recomputed accordingly (the "Adjusted PRIMESTAR Valuation").
Following such recomputation, to the extent that the Adjusted PRIMESTAR
Valuation is less than the original PRIMESTAR Valuation then, on such 151st
day following the ASkyB Closing Date, the conversion price on the New
PRIMESTAR Convertible Preferred Stock, and the conversion price under the New
PRIMESTAR Convertible Subordinated Notes (if any) will be appropriately
adjusted, so that (i) the aggregate number of Conversion Shares issuable under
the New PRIMESTAR Convertible Preferred Stock and the New PRIMESTAR
Convertible Subordinated Notes is equal to the number required pursuant to "--
Calculation of Number of Conversion Shares," determined using the Adjusted
PRIMESTAR Valuation for the PRIMESTAR Valuation, and (ii) the aggregate number
of Conversion Shares issuable under the New PRIMESTAR Convertible Preferred
Stock does not exceed 20% of the issued and outstanding capital stock of New
PRIMESTAR.
FAILURE TO CONSUMMATE THE RESTRUCTURING TRANSACTION
In the event that (a) the Closing of the Restructuring Transaction has not
occurred by March 8, 1998, and (b) the conditions precedent to the ASkyB
Transaction have otherwise been satisfied, the ASkyB Transferors will have the
right to cause the ASkyB Transferred Assets to be transferred to the
Partnership and the transactions otherwise contemplated by the ASkyB Agreement
to close. In such event, (i) the ASkyB Transferors and the Partnership will
mutually agree to substitute consideration for the New PRIMESTAR Convertible
Preferred Stock and the New PRIMESTAR Convertible Subordinated Notes which
will, in the aggregate, give the ASkyB Transferors the same value that they
would have received had the ASkyB Transferred Assets been transferred to New
PRIMESTAR, and which substitute consideration will contain appropriate terms
and conditions for adjustment or further substitution in the event that a
roll-up or similar restructuring subsequently occurs, and (ii) all references
to "New PRIMESTAR" in the ASkyB Agreement will be deemed to be references to
"the Partnership" unless the context otherwise requires.
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of the Partnership. The ASkyB Agreement
contains customary representations and warranties of the Partnership
including, without limitation, representations and warranties relating to (1)
required governmental filings; (2) the noncontravention by the ASkyB
Transaction of the Partnership's organizational documents, loan documents and
applicable laws and regulations; (3) the capitalization of New PRIMESTAR; (4)
the Partnership's financial statements; (5) the absence of certain material
adverse changes in the Partnership's business; (6) tax matters; (7)
intellectual property rights; (8) the validity and enforceability of certain
material agreements to which the Partnership is a party; (9) the absence of
any undisclosed material litigation; (10) certain employee matters; (11) the
material compliance by the Partnership with all laws (including environmental
laws); (12) the existence and validity of all requisite material FCC
authorizations for the business and operations of the Partnership as currently
conducted (the "Partnership FCC Licenses"); (13) the compliance with certain
regulatory laws and regulations applicable to the Partnership's U.S. satellite
business, and with the terms and conditions of all applicable Partnership FCC
Licenses; (14) the operation of all satellites used or currently planned to be
used by the Partnership; (15) the validity and enforceability of insurance
policies associated with any satellite or ancillary facility related to a
Partnership FCC
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License; (16) the Partnership's possession of adequate non-FCC governmental
authorizations necessary for the Partnership to conduct its U.S. satellite
business; (17) the receipt of requisite FCC approvals and the making of
necessary FCC filings by the Partnership in connection with the ASkyB
Transaction, except with respect to the transfer of the 110 Slot and the MCI
FCC Licenses; and (18) the absence of any brokers' or similar fees with
respect to the ASkyB Transaction, other than such fees due to Morgan Stanley &
Co. Incorporated.
Representations and Warranties of News Corp., MCI and ASkyB. The ASkyB
Agreement contains customary representations and warranties of each of News
Corp. and ASkyB, jointly and severally (with respect to representations and
warranties relating to News Corp. and ASkyB) and MCI, severally and not
jointly (with respect to representations and warranties relating to MCI),
including, without limitation, representations and warranties relating to (1)
required governmental filings; (2) the absence of any violation by ASkyB of
any provision of its organizational documents; (3) the noncontravention by the
ASkyB Transaction of (i) the organizational documents of News Corp., MCI or
ASkyB, (ii) applicable laws and regulations applicable to News Corp., MCI or
ASkyB, or (iii) any of the ASkyB Transferred Assets or loan documents
applicable to News Corp., MCI or ASkyB; (4) the payment by the ASkyB
Transferors of the amounts designated by them as "Paid to Date" under the
ASkyB Contracts, and the maximum amount on the ASkyB Closing Date of the
remaining commitments under the ASkyB Contracts; (5) the material compliance
by News Corp., MCI and ASkyB with their respective obligations under the ASkyB
Contracts, and the validity and enforceability of the ASkyB Contracts; (6)
intellectual property rights relating to the ASkyB Transferred Assets; (7) the
absence of any undisclosed material litigation; (8) the material compliance by
each of News Corp., MCI, ASkyB and the ASkyB Transferred Assets with all laws
(including environmental laws); (9) the validity of the MCI FCC Licenses;
(10) the material compliance by MCI with certain applicable regulatory laws
and regulations and with the terms and conditions of all applicable MCI FCC
Licenses; (11) the absence of any FCC license held by ASkyB or News Corp. in
connection with the U.S. satellite business; (12) the validity and
enforceability of insurance policies associated with any satellite or other
facility related to the U.S. satellite business contemplated to be operated by
News Corp., MCI and ASkyB; (13) the receipt of requisite FCC approvals and the
making of necessary FCC filings by MCI in connection with the ASkyB
Transaction; (14) MCI's aggregate payments to the United States of $682.5
million with respect to the 110 Slot, which represents the entire auction
price payable to the United States or any department or instrumentality
thereof with respect to the 110 Slot; (15) the absence of any rights with
respect to the 110 Slot on the part of any person other the ASkyB Transferors
and their respective affiliates, and the rights being transferred under the
ASkyB Agreement with regard to the 110 Slot constituting all of the rights
held by the ASkyB Transferors and their respective affiliates with regard to
the 110 Slot; and (16) the absence of any brokers' or similar fees with
respect to the ASkyB Transaction.
CONDITIONS TO THE ASKYB TRANSACTION
Conditions Precedent to Obligations of New PRIMESTAR. The obligations of New
PRIMESTAR to consummate the transactions contemplated by the ASkyB Agreement
are subject to the fulfillment or waiver prior to or at the ASkyB Closing of
certain conditions, including, among others, (a) the accuracy of the
representations and warranties of the ASkyB Transferors; (b) performance by
the ASkyB Transferors of material obligations and covenants; (c) the absence
of any statute, law, judgment, decree, injunction, rule or order of any
governmental entity that prohibits, restricts or delays consummation of the
ASkyB Transaction and the absence of any pending suit, action or proceeding by
any such governmental entity in which the relief sought would (1) have any
such effect, (2) impose any restriction on the right of New PRIMESTAR or the
Partnership to operate the 110 Slot, other than certain general and customary
restrictions and other non-material restrictions, (3) impose any change in the
management or ownership (other than by the ASkyB Transferors) of New PRIMESTAR
or the Partnership, or in any voting or other rights of, or arrangements
among, its equity holders from that set forth in the summary of business terms
relating to the Restructuring Transaction, other than such changes which,
individually or in the aggregate, do not materially affect the management or
ownership rights of any equity holder or partner of New PRIMESTAR or the
Partnership or any affiliate thereof (other than the ASkyB Transferors), or
(4) impose a requirement that New PRIMESTAR or the Partnership dispose of the
medium power satellite business currently operated by the Partnership or any
restriction on the right of New
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PRIMESTAR or the Partnership to operate the medium power satellite business
currently operated by the Partnership, other than certain general and
customary restrictions and other non-material restrictions; (d) the filing or
receipt of all authorizations, consents, orders or approvals of, or
declarations or filings with, or expiration of waiting periods imposed by, any
governmental authority necessary for the consummation of the ASkyB Transaction
(or, if New PRIMESTAR and the ASkyB Transferors determine to implement an
Acceptable Alternative Arrangement as described below, necessary for the
consummation of such Acceptable Alternative Arrangement); (e) receipt by the
ASkyB Transferors of all necessary third party consents for the assignment of
the ASkyB Contracts or, in the absence of any required consent, receipt by New
PRIMESTAR of the benefits of each such ASkyB Contract to the same extent as if
New PRIMESTAR were the contracting party; (f) receipt by New PRIMESTAR of a
copy of certain resolutions adopted by the board of directors of each ASkyB
Transferor, certain certificates of each ASkyB Transferor and certain legal
opinions from counsel to ASkyB and News Corp. and counsel to MCI; (g) receipt
by New PRIMESTAR of reasonably satisfactory executed assignments of the ASkyB
Contracts from the ASkyB Transferors; and (h) the satisfaction or waiver of
all conditions with regard to the consummation of the Restructuring
Transaction by the beneficiary of such conditions, subject to certain
provisions of the ASkyB Agreement, described under "--Failure to Consummate
the Restructuring Transaction."
In addition, the ASkyB Agreement requires New PRIMESTAR to bear certain
risks in connection with the process of obtaining regulatory approval of the
ASkyB Transaction, including the divestiture of all rights of the Partnership
and any of the Partners under Tempo's FCC authorizations with respect to the
11 transponder channels at 119(degrees) W.L., if required as a condition to
such approval.
Conditions Precedent to Obligations of ASkyB Transferors. The obligations of
the ASkyB Transferors to consummate the transactions contemplated by the ASkyB
Agreement are subject to the fulfillment or waiver prior to or at the ASkyB
Closing of certain conditions, including, among others (a) the accuracy of the
representations and warranties of the Partnership to the ASkyB Transferors and
the representations and warranties of New PRIMESTAR contained in an assumption
agreement among the parties to the ASkyB Agreement and New PRIMESTAR, pursuant
to which New PRIMESTAR will assume the rights and obligations of the
Partnership under the ASkyB Agreement (the "New PRIMESTAR Assumption
Agreement"); (b) performance by the Partnership, the Partners and New
PRIMESTAR of material obligations and covenants; (c) the absence of any
statute, law, judgment, decree, injunction, rule or order of any governmental
entity that prohibits, restricts or delays consummation of the ASkyB
Transaction; (d) the filing or receipt of all authorizations, consents orders
or approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any governmental authority necessary for the consummation
of the ASkyB Transaction; (e) receipt by the ASkyB Transferors of a copy of
certain resolutions adopted by the Partners Committee of the Partnership and
the New PRIMESTAR Board, certain certificates of each of the Partnership and
New PRIMESTAR and certain legal opinions from counsel to the Partnership and
New PRIMESTAR; (f) execution and delivery of the New PRIMESTAR Assumption
Agreement to the ASkyB Transferors; (g) New PRIMESTAR having entered into the
ASkyB Registration Rights Agreement (as defined below under "--Registration
Rights"); (h) execution and delivery by New PRIMESTAR to the ASkyB Transferors
of a reasonably satisfactory instrument whereby New PRIMESTAR assumes the
ASkyB Assumed Liabilities; and (i) the satisfaction or waiver of all
conditions with regard to the consummation of the Restructuring Transaction,
subject to certain provisions of the ASkyB Agreement, described under "--
Failure to Consummate the Restructuring Transaction."
ACCEPTABLE ALTERNATIVE ARRANGEMENT
In addition to the conditions described above, the obligations of New
PRIMESTAR to consummate the transactions contemplated by the ASkyB Agreement
are also subject to either (1) the receipt, prior to or at the ASkyB Closing,
of an order adopted by the full FCC which has not been reversed, reconsidered,
stayed, enjoined, set aside, annulled or suspended and the 30 day period for
any such action on the FCC's own motion having expired ("FCC Approval") with
respect to the grant of the license for the 110 Slot to MCI and assignment of
such license to New PRIMESTAR or its designee or (2) the implementation of an
arrangement satisfactory to New PRIMESTAR and its counsel and to the ASkyB
Transferors and their respective counsel to ensure New
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PRIMESTAR's continuous, irrevocable (subject to renewal by the FCC) and
exclusive right to use, and subject to applicable regulatory provisions, to
direct the use of the capacity of the 110 Slot (including, without limitation,
all rights with respect to any successor satellites), at no further cost to
New PRIMESTAR, in excess of the costs that New PRIMESTAR would have incurred
if New PRIMESTAR held the authorizations for the 110 Slot directly, to the
same effect as if New PRIMESTAR were the FCC licensee of (or owner of the FCC
licensee of) the 110 Slot (an "Acceptable Alternative Arrangement"). The
parties to the ASkyB Agreement have agreed that, notwithstanding anything
contained in the ASkyB Agreement to the contrary, to the maximum extent
allowable under the Communications Act, and the published policies, rules and
regulations of the FCC, even if the parties implement an Acceptable
Alternative Arrangement in lieu of transferring the 110 Slot to New PRIMESTAR
or its designee, New PRIMESTAR will have the continuing right and option,
exercisable in its sole discretion and at no further cost to New PRIMESTAR, to
require the ASkyB Transferors to immediately assign (or cause the owner
thereof to assign) the 110 Slot to New PRIMESTAR or any designee of New
PRIMESTAR, upon receipt of FCC Approval with respect to such assignment, in
which case the Acceptable Alternative Arrangement will be canceled
concurrently with the effectiveness of such assignment.
COVENANTS
New PRIMESTAR and MCI have agreed that, following the ASkyB Closing, MCI
will have the non-exclusive right to bundle the PRIMESTAR DBS Service with
MCI's telephony service offerings, on mutually agreeable terms. In addition,
MCI and the Partnership have agreed to expeditiously seek FCC Approval of the
assignment of the 110 Slot to New PRIMESTAR or its designee, and each of the
ASkyB Transferors, the Partnership and New PRIMESTAR have agreed to take all
steps necessary, including the implementation of an Acceptable Alternative
Arrangement, to obtain such FCC Approval; provided, however, that neither New
PRIMESTAR nor the Partnership will be obligated to accept (as a condition to
receipt of such FCC Approval or otherwise) (i) any restriction on the right of
New PRIMESTAR or the Partnership to operate the 110 Slot, including, without
limitation, the right to use all 28 transponder frequencies authorized
thereunder to provide high power DBS services, other than any such
restrictions generally imposed on operators of high power DBS services by
applicable rules, regulations and published policies of the FCC and
restrictions of the types generally and customarily imposed by the FCC on
operators of high power DBS services and such other restrictions which,
individually or in the aggregate, are not material, (ii) any change in the
management or ownership (other than by the ASkyB Transferors) of New PRIMESTAR
or the Partnership, or in any voting or other rights of, or arrangements
among, its equity holders from that set forth in the summary of business terms
relating to the Restructuring Transaction, other than such changes which,
individually or in the aggregate, do not materially affect the management or
ownership rights of any equity holder or partner of New PRIMESTAR or the
Partnership or any affiliate thereof (other than the ASkyB Transferors), or
(iii) a requirement that New PRIMESTAR or the Partnership dispose of the
medium power satellite business currently operated by the Partnership or any
restriction on the right of New PRIMESTAR or the Partnership to operate the
medium power satellite business currently operated by the Partnership, other
than such restrictions generally imposed on operators of medium power
satellite services by applicable rules, regulations and published policies of
the FCC and restrictions of the types generally and customarily imposed by the
FCC on operators of medium power satellite services and such other
restrictions which, individually or in the aggregate, are not material.
In addition, it was agreed that, for the period beginning on the ASkyB
Closing Date and ending on the tenth anniversary of the ASkyB Closing Date,
none of News Corp., ASkyB or any of their respective affiliates will
(i) engage directly or indirectly in any U.S. satellite business; (ii)
directly and actively participate or assist in the conduct of any U.S.
satellite business by any other person or group of persons (other than New
PRIMESTAR) by means of any management, advisory, operating or similar
agreement or arrangement or joint venture, or (iii) have any direct, or
through an affiliate, any indirect ownership interest or other investment in
any person or group of persons (other than New PRIMESTAR) engaged in any U.S.
satellite business, as a security holder, partner, joint venturer or
otherwise; provided, however, that the foregoing will not prohibit News Corp.
or ASkyB or their respective affiliates from (x) acquiring or holding for
investment purposes less than 5% of certain publicly traded securities, even
if the issuer is engaged in the U.S. satellite business, (y) owning a non-
controlling
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interest in EchoStar for a period of five years following the ASkyB Closing
Date, or (z) engaging in a U.S. satellite business which is directed to a non-
English speaking audience and containing programming, 90% of which is
conducted 90% of the time via a language other than English; and provided,
further, that the foregoing will not restrict (a) News Corp. or any of its
affiliates from providing programming of any kind to any U.S. satellite
business or (b) the existing operations of News Corp.'s subsidiaries engaged
in providing digital broadcasting system design and integration services,
conditional access systems, digital compression systems and subscription
management systems. Furthermore, News Corp. and ASkyB agreed that New
PRIMESTAR will have the right to specific performance with respect to the
foregoing non-competition provisions.
Each of the Partnership, the Partners and New PRIMESTAR agreed to
discontinue and, in the case of New PRIMESTAR, to cause its stockholders to
discontinue, with prejudice, as of the ASkyB Closing Date, any actions brought
by any of them, to the extent that any such action directly relates to the 110
Slot. In addition, in connection with the application to the FCC to transfer
the 110 Slot, the Partnership has agreed to advise the FCC in writing that the
concerns raised in its application for review and petition to deny would be
rendered moot by the FCC's approval of the assignment of the license for the
110 Slot to the Partnership.
Each of News Corp., MCI, ASkyB and the Partnership has agreed, with the
cooperation of one another, to use commercially reasonable efforts to obtain
all regulatory approvals, including, without limitation, approvals from the
FCC, the Department of Justice and the FTC, necessary to consummate the ASkyB
Transaction. If any such regulatory approvals are not received, each of News
Corp., MCI, ASkyB and the Partnership has agreed to cooperate in good faith
and take all commercially reasonable steps to restructure the ASkyB
Transaction so that such regulatory approvals are received; provided, that the
economic costs and risks of any such restructuring will be borne 100% by the
ASkyB Transferors. However, neither New PRIMESTAR nor the Partnership will be
obligated to accept (as a condition to receipt of such regulatory approvals or
otherwise) (i) any restriction on the right of New PRIMESTAR or the
Partnership to operate the 110 Slot, including, without limitation, the right
to use all 28 transponder frequencies authorized thereunder to provide high
power DBS services, other than certain general and customary restrictions and
other non-material restrictions, (ii) any change in the management or
ownership (other than by the ASkyB Transferors) of New PRIMESTAR or the
Partnership, or in any voting or other rights of, or arrangements among, its
equity holders from that set forth in the summary of business terms relating
to the Restructuring Transaction, other than such changes which, individually
or in the aggregate, do not materially affect the management or ownership
rights of any equity holder or partner of New PRIMESTAR or the Partnership or
any affiliate thereof (other than the ASkyB Transferors), or (iii) a
requirement that New PRIMESTAR or the Partnership dispose of the medium power
satellite business currently operated by the Partnership or any restriction on
the right of New PRIMESTAR or the Partnership to operate the medium power
satellite business currently operated by the Partnership, other than certain
general and customary restrictions and other non-material restrictions.
In addition to the foregoing covenants and certain additional covenants
contained in the ASkyB Agreement, (1) the parties have agreed that any sales
or other transfer taxes resulting from the transfer of the ASkyB Transferred
Assets will be borne equally by ASkyB and New PRIMESTAR; (2) the Partnership
has agreed to cause New PRIMESTAR to enter into the New PRIMESTAR Assumption
Agreement, whereby New PRIMESTAR will assume the rights and obligations of the
Partnership under the ASkyB Agreement, and the Partnership has further agreed
to cause the execution of such assumption agreement concurrently with the
consummation of the Restructuring Transaction; (3) New PRIMESTAR has agreed,
at the ASkyB Closing, but prior to the issuance of New PRIMESTAR Convertible
Preferred Stock to ASkyB, to transfer its rights to all licenses relating to
the 110 Slot to a subsidiary of New PRIMESTAR upon obtaining FCC Approval for
such transfer; (4) MCI has agreed to take all actions necessary to keep the
MCI FCC Licenses in full force and effect until the ASkyB Closing Date; (5)
the Partnership and News Corp. have agreed to negotiate in good faith to
endeavor to reach agreement on terms of a carriage agreement between New
PRIMESTAR and FX Networks, LLC, Fox News Network, LLC and the Family Channel,
a division of International Family Entertainment, Inc. relating to carriage of
such networks on the PRIMESTAR DBS Service, which agreement will include the
terms described below under "--Carriage Agreement;" (6) the Partnership has
agreed, during the period between the
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execution of the ASkyB Agreement and the ASkyB Closing Date, except to the
extent necessary to effect the Restructuring Transaction, to conduct its
business in a regular manner and use commercially reasonable efforts, in the
ordinary course of business, to preserve its business and the goodwill and
business of the parties having business relations with the Partnership, to
maintain its present employees and to perform and observe all terms, covenants
and conditions required to be performed and observed by it under its contracts
(other than in connection with Tempo's FCC authorizations with respect to the
11 transponder channels at 119(degrees) W.L.); (7) each of the ASkyB
Transferors has agreed to conduct its business with respect to the ASkyB
Transferred Assets in a regular manner and use commercially reasonable
efforts, in the ordinary course of business, to preserve the goodwill of the
parties having business relations with such ASkyB Transferor with respect to
any ASkyB Transferred Assets and to perform and observe all terms, covenants
and conditions required to be performed and observed by it under its ASkyB
Contracts and all FCC and other governmental authorizations with respect to
the ASkyB Transferred Assets; and (8) the Partnership has agreed to bear
certain risks in connection with the process of obtaining regulatory approval
of the ASkyB Transaction, including the divestiture of all rights of the
Partnership and any of the Partners under Tempo's FCC authorizations with
respect to the 11 transponder channels at 119(degrees) W.L., if such
divestiture is required.
INDEMNIFICATION
Pursuant to the ASkyB Agreement, News Corp. and ASkyB, jointly and
severally, and MCI, severally and not jointly, have agreed to indemnify New
PRIMESTAR, the Partnership and their respective partners, shareholders,
officers, directors, employees, agents and affiliates (the "New PRIMESTAR
Indemnified Parties") and hold each of them harmless at all times from and
after the ASkyB Closing Date against and in respect of any and all judgments,
costs, damages, losses, liabilities, taxes and deficiencies and penalties and
interest thereon, including reasonable attorneys' fees (collectively,
"Losses") incurred by the New PRIMESTAR Indemnified Parties as a result of (a)
any breach of a representation, warranty, covenant or agreement of the ASkyB
Transferors made under the ASkyB Agreement and (b) the ASkyB Retained
Liabilities; provided, that "Losses" will not include any amounts which are
indemnifiable under the Indemnification Agreement dated as of June 11, 1997
among News Corp., TSAT, the Partnership, Time Warner, Comcast, Cox, MediaOne,
Newhouse and GE Americom (the "ASkyB Indemnification Agreement"). The ASkyB
Agreement also provides that New PRIMESTAR will indemnify the ASkyB
Transferors and their respective shareholders, officers, directors, employees,
agents and affiliates (the "ASkyB Transferor Indemnified Parties") and hold
each of them harmless at all times from and after the ASkyB Closing Date
against and in respect of any Losses incurred by the ASkyB Transferor
Indemnified Parties as a result of (a) any breach of a representation,
warranty, covenant or agreement of the Partnership or New PRIMESTAR made under
the ASkyB Agreement, or (b) nonfulfillment by New PRIMESTAR of its obligations
with respect to the ASkyB Assumed Liabilities. The parties to the ASkyB
Agreement further agreed that the indemnity rights set forth in the ASkyB
Agreement and in the ASkyB Indemnification Agreement are intended to be their
exclusive monetary remedies in connection with the ASkyB Agreement and the
transactions contemplated thereby; provided that such indemnity rights will
not limit the availability of specific performance, injunctive relief or other
equitable remedies to which a party may otherwise be entitled.
TERMINATION
The ASkyB Agreement is subject to termination at any time prior to the ASkyB
Closing Date by (a) mutual written consent of the parties thereto; (b) either
the Partnership (prior to consummation of the Restructuring Transaction) or
New PRIMESTAR (after consummation of the Restructuring Transaction) or the
ASkyB Transferors (1) if any judgment, decree, injunction, rule or order of
any court, governmental department, commission, agency, instrumentality or
arbitrator which prohibits or materially restricts consummation of the
transactions contemplated by the ASkyB Agreement has been issued and has
become final and nonappealable, or (2) if the waiting period under the HSR Act
has not expired or been terminated on or before June 30, 1998; (c) either the
Partnership (prior to consummation of the Restructuring Transaction) or New
PRIMESTAR (after consummation of the Restructuring Transaction), at any time
after June 30, 1998, if any of the conditions precedent to the obligations of
New PRIMESTAR have become incapable of fulfillment and have not been
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waived by the Partnership or New PRIMESTAR, as applicable; (d) the ASkyB
Transferors, at any time after June 30, 1998, if any of the conditions
precedent to the obligations of the ASkyB Transferors have become incapable of
fulfillment and have not been waived by the ASkyB Transferors; provided,
however, that the party seeking termination pursuant to (b), (c) or (d) above
is not in breach in any material respect of any of its representations,
warranties, covenants or agreements contained in the ASkyB Agreement.
REGULATORY APPROVALS
HSR Act and Antitrust Matters. Under the HSR Act, and the rules promulgated
thereunder by the FTC, the ASkyB Transaction may not be consummated until (i)
applicable Notification and Report Forms have been submitted and certain
information has been furnished to the FTC and the Antitrust Division; and (ii)
required waiting periods have expired or terminated. Each of the Partnership,
on behalf of New PRIMESTAR or, alternatively, on behalf of itself in the event
the Restructuring Transaction is not consummated, Rupert Murdoch, News Corp.
and MCI Communications Corporation have filed Notification and Report Forms
with the FTC and the Antitrust Division. All of such filings were made on July
18, 1997. On August 15, 1997, the Antitrust Division asked for further
information about the ASkyB Transaction. Until all recipients of the Antitrust
Division's request for additional information substantially comply with the
request, the waiting period under the HSR Act is suspended. TSAT has been
advised that all of the recipients of such request for additional information
have certified to the FTC and the Antitrust Division that they are in
substantial compliance with such request. The parties to the ASkyB Transaction
consented to a voluntary tolling of the waiting period under the HSR Act until
February 2, 1998. Each of News Corp., MCI, ASkyB and the Partnership has
agreed, pursuant to the ASkyB Agreement, to use its commercially reasonable
efforts to obtain all approvals from regulatory authorities, including,
without limitation, the FCC, the Department of Justice and the FTC, necessary
to consummate the transactions contemplated by the ASkyB Agreement.
Antitrust authorities, including the Antitrust Division and the FTC, often
scrutinize the legality under the antitrust laws of transactions such as the
ASkyB Transaction. The termination of the HSR Act waiting periods does not
preclude such authorities from challenging the ASkyB Transaction (or any part
thereof) on antitrust grounds. Accordingly, at any time before or after the
consummation of the ASkyB Transaction and notwithstanding the expiration or
termination of the HSR Act waiting periods, any federal or state antitrust
authorities could take action under the antitrust laws as they deem necessary
or desirable in the public interest. Such action could include, among other
things, seeking to enjoin the consummation of the ASkyB Transaction (or any
part thereof). Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
If the waiting period under the HSR Act has not expired or been terminated
on or before June 30, 1998, or if any judgment, decree, injunction, rule or
order of any court, governmental department, commission, agency,
instrumentality or arbitrator which prohibits or materially restricts
consummation of the transactions contemplated by the ASkyB Agreement has been
issued and has become final and nonappealable, either the Partnership (prior
to consummation of the Restructuring Transaction) or New PRIMESTAR (after
consummation of the Restructuring Transaction) or the ASkyB Transferors may
terminate the ASkyB Agreement, pursuant to its terms, provided, however, that
the party seeking termination is not in breach in any material respect of any
of its representations, warranties, covenants or agreements contained in the
ASkyB Agreement.
FCC Approval Process. Consummation of the ASkyB Transaction is subject to
either (i) the receipt of an order adopted by the FCC which has not been
reversed, reconsidered, stayed, enjoined, set aside, annulled or suspended and
the expiration of the 30 day period for any such action on the FCC's own
motion with respect to the grant of the license for the 110 Slot to MCI and
assignment of such license to New PRIMESTAR or its designee or (ii) the
implementation of an Acceptable Alternative Arrangement. On August 15, 1997,
the Partnership and MCI filed the Assignment Application with the FCC for
consent to the assignment to New PRIMESTAR of the high power DBS
authorizations and certain other assets owned by MCI. See "REGULATORY
MATTERS--Required FCC Approvals." The Assignment Application must be approved
by the FCC before the consummation of the ASkyB Transaction. The FCC placed
the Assignment Application on
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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.
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 New
PRIMESTAR holding the 110(degrees) W.L. authorization; (2) opposition to the
Partnership or New PRIMESTAR simultaneously holding authorizations for both
the 110(degrees) W.L. orbital position (28 transponders) and the 119(degrees)
W.L. orbital position (11 transponders), which together represent about 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 satellite delivered
programming to 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. 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
New PRIMESTAR, MCI, ASkyB or News Corp. in connection with its review. See
"RISK FACTORS--Risks of Adverse Government Regulations and Adjudications" and
"REGULATORY MATTERS--Required FCC Approvals."
REGISTRATION RIGHTS
In connection with the ASkyB Transaction, New PRIMESTAR and ASkyB will enter
into a Registration Rights Agreement (the "ASkyB Registration Rights
Agreement") with respect to the shares of New PRIMESTAR Class A Common Stock
(or other securities of New PRIMESTAR) issuable upon the conversion of the New
PRIMESTAR Class D Common Stock issuable upon conversion of (or as dividends or
interest in respect of) (A) the New PRIMESTAR Convertible Subordinated Notes
and (B) shares of New PRIMESTAR Convertible Preferred Stock issued to ASkyB
pursuant to the ASkyB Agreement and any other shares of capital stock of New
PRIMESTAR issued in respect of (or that become issuable upon conversion of the
New PRIMESTAR Class D Common Stock (or other securities in lieu of) such
shares of New PRIMESTAR Class A Common Stock (or other such securities) as a
result of stock splits, stock dividends or other distributions,
reclassifications, recapitalizations, mergers, consolidations, reorganizations
or similar events (collectively, the "ASkyB Registrable Shares"). Any ASkyB
Registrable Share will cease to be an ASkyB Registrable Share when (i) a
registration statement covering such ASkyB Registrable Share has been declared
effective by the SEC and such ASkyB Registrable Share has been disposed of
pursuant to such effective registration statement, or (ii) such ASkyB
Registrable Share may be publicly resold without registration under the
Securities Act (and without limitation as to volume or manner of sale or
both).
Pursuant to the ASkyB Registration Rights Agreement, at any time after the
earlier to occur of (i) the date that is six months after the date of the
ASkyB Registration Rights Agreement and (ii) any date New PRIMESTAR meets the
requirements for use of Form S-3 under the Securities Act, the ASkyB
Stockholders (as defined below) collectively will have the right (an "ASkyB
Demand Registration"), by written notice, to require New PRIMESTAR, on up to
three separate occasions, to register under the Securities Act all or any
portion of the ASkyB Registrable Shares designated by such ASkyB Stockholder.
Each ASkyB Demand Registration must include ASkyB Registrable Shares with an
aggregate market value of at least $150 million (unless the aggregate market
value of the remaining shares is less than $150 million, in which case the
number of ASkyB Registrable Shares to be registered may be equal to or less
than all the remaining shares).
If New PRIMESTAR proposes to register shares of New PRIMESTAR Class A Common
Stock under the Securities Act for cash pursuant to either an underwritten
public offering, broker-dealer transactions, or a combination of the foregoing
(other than in connection with a dividend reinvestment, employee benefit,
stock option or similar plan, a transaction to which Rule 415 under the
Securities Act applies, or an offering of rights,
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warrants or securities directly or indirectly convertible into or exchangeable
or exercisable for New PRIMESTAR Class A Common Stock), then New PRIMESTAR
will be required to offer the ASkyB Stockholders the opportunity, subject to
certain conditions and limitations, to include in such registration statement
such number of ASkyB Registrable Shares as such ASkyB Stockholder may request.
In connection with any registration effected pursuant to the ASkyB
Registration Rights Agreement, the ASkyB Stockholders will be required to pay
all fees and disbursements of their own counsel and advisers, all stock
transfer taxes (including the cost of all transfer tax stamps), all
underwriting or brokerage discounts, commissions and fees and any other
expenses incurred by the ASkyB Stockholders in connection with the
distribution of the Registrable Shares that have not expressly been assumed by
New PRIMESTAR. New PRIMESTAR will be obligated to pay the registration fee
payable under the Securities Act, blue sky fees and expenses, if applicable
(subject to certain limitations), NASD filing fees, listing fees and expenses,
printing, distribution and mailing costs and all fees and disbursements of New
PRIMESTAR's counsel, transfer agent and accountants.
"ASkyB Stockholders" means ASkyB and any direct or indirect transferee of
ASkyB of any or all of the New PRIMESTAR Convertible Subordinated Notes, the
New PRIMESTAR Convertible Preferred Stock or the New PRIMESTAR Class D Common
Stock or the New PRIMESTAR Class A Common Stock (or other securities) issued
upon conversion of the New PRIMESTAR Convertible Subordinated Notes or the New
PRIMESTAR Convertible Preferred Stock in a transaction other than (i) a
transaction requiring registration under the Securities Act or (ii) a
transaction exempt from registration under Rule 144 promulgated under the
Securities Act.
CARRIAGE AGREEMENT
In connection with the ASkyB Transaction, the Partnership agreed to certain
terms of a carriage agreement (the "Carriage Agreement") to be entered into
between New PRIMESTAR and FX Networks, LLC ("FX"), Fox News Network, LLC
("FNC"), Fox Sports Direct, LLC ("Fox Sports") and the Family Channel, a
division of International Family Entertainment, Inc. ("Family Channel" and,
together with FX, FNC and Fox Sports, the "Networks"), relating to the
carriage of such Networks on the PRIMESTAR DBS Service. The Partnership
agreed, among other things, to continue its current carriage of Family Channel
and Fox Sports on the PRIMESTAR(R) medium power service and, at such time as
New PRIMESTAR launches a high power service from the 110(degrees) W.L. orbital
position, effective with such launch, to move Family Channel and Fox Sports to
such service, launch FNC on such service and, upon 90 days notice to commence
carriage, launch FX on such service. It was agreed that (i) in the case of the
existing agreement with Family Channel, the term will continue until the
expiration or termination of the term as provided in such agreement or the
last day of the month following the tenth anniversary of June 11, 1997, (ii)
in the case of the existing agreement with Fox Sports, there will be a five
year renewal at the end of the term for residential distribution, with rates
and other terms consistent with those that have been agreed to for residential
distribution by similarly situated distributors, and with respect to
commercial subscribers, the parties will negotiate in good faith to complete a
distribution arrangement, and (iii) for all other Networks, the term will
begin on the applicable launch date and continue until the last day of the
month following the tenth anniversary of such launch date.
ASKYB INDEMNIFICATION AGREEMENT
In connection with the ASkyB Transaction, News Corp., TSAT, the Partnership,
Time Warner, Comcast, Cox, MediaOne, Newhouse and GE Americom entered into the
ASkyB Indemnification Agreement. The ASkyB Indemnification Agreement provides
that News Corp. will indemnify each PRIMESTAR Indemnitee (as defined below)
against, and hold it harmless from, any loss, liability, claim, (including,
without limitation, any claim allegedly or actually resulting from a
negligently or intentionally tortious act of such PRIMESTAR Indemnitee),
damage, cost or expense, including, without limitation, the amount of any
settlement entered into pursuant to the ASkyB Indemnification Agreement and
all reasonable legal and other fees and expenses incurred in connection with
the investigation, prosecution or defense of any matter indemnified pursuant
to the ASkyB Indemnification
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Agreement (collectively, the "ASkyB Losses"), as incurred to the extent
arising from, relating to or otherwise in respect of (i) the letter agreement
dated February 19, 1997, among EchoStar, Charles W. Ergen and News Corp. or
the transactions contemplated thereby, including without limitation, any claim
of tortious interference, (ii) the breach of certain related representations
or warranties of News Corp. contained in the ASkyB Indemnification Agreement,
or (iii) the enforcement by any PRIMESTAR Indemnitee of any of the rights of
such PRIMESTAR Indemnitee pursuant to the ASkyB Indemnification Agreement,
including, without limitation, any action, suit, proceeding or arbitration
brought by or involving such PRIMESTAR Indemnitee for the purpose of enforcing
any rights of such PRIMESTAR Indemnitee pursuant to the ASkyB Indemnification
Agreement (including, without limitation, the enforcement of any arbitration
decision) to the extent such PRIMESTAR Indemnitee prevails in such enforcement
action); provided, however, that ASkyB Losses will not include lost profits or
the loss of actual or potential economic benefits expected to be realized in
connection with the transactions contemplated by the ASkyB Agreement as a
result of the failure of the transactions contemplated by the ASkyB Agreement
to be consummated due to the breach by News Corp. of its representation and
warranty set forth in (1) of the preceding paragraph. "PRIMESTAR Indemnitee"
means each of TSAT, the Partnership, Time Warner, Comcast, Cox, MediaOne,
Newhouse, GE Americom and New PRIMESTAR and their respective affiliates and
subsidiaries and the respective officers, directors, partners, shareholders,
employees, representatives, agents and trustees of each of TSAT, the
Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse and GE Americom,
each affiliate or subsidiary of TSAT, the Partnership, Time Warner, Comcast,
Cox, MediaOne, Newhouse, GE Americom, New PRIMESTAR and each affiliate or
subsidiary of New PRIMESTAR.
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THE DIGITAL SATELLITE TELEVISION INDUSTRY
INDUSTRY OVERVIEW
Digital satellite television services use communications satellites,
broadcasting at Ku-band or higher frequencies, to transmit multichannel video
programming directly to consumers, who receive such signals on home satellite
dishes or HSDs. Such satellites operate in geosynchronous orbit above the
equator, from orbital positions or "slots" allocated by international
agreement to the U.S. and other national governments and assigned by such
governments in accordance with local law. Orbital slots are designated by
their location East or West of the zero meridian, measured in degrees of
longitude, and comprise both a physical location and an assignment of
broadcast spectrum in the applicable frequency band. The assigned spectrum is
divided into 32 frequency channels, each with a useable bandwidth of 24
megahertz. Such frequency channels are sometimes referred to as "transponders"
because each transponder on a satellite generally transmits on one of such
channels. At standard levels of digital compression technology currently
deployed, each frequency channel can be converted on average into five or more
analog channels of video programming (depending on the video density of the
programming), thereby enabling the digital satellite service operator to offer
a broader variety of programming choices than analog satellite systems.
Advanced compression technologies currently being tested are expected to
result in substantially greater compression ratios. Digital technology enables
subscribers to receive laser-disc-quality image and compact-disc-quality sound
from the satellite.
The operator of a digital satellite television service typically enters into
agreements with programmers, who deliver their programming content to the
digital satellite service operator via commercial satellite, fiber optics or
microwave transmissions. The digital satellite service operator generally
monitors such signals for quality, and may add promotional messages, public
service programming or other system-specific content. The signals are then
digitized, compressed, encrypted and combined with other programming sharing a
given transponder. Each transponder's signal is then uplinked, or transmitted,
to the transponder owned or leased by the service operator on the service's
satellite, which receives and retransmits the signal to HSDs configured and
authorized to receive it.
In order to receive programming, a subscriber requires (i) a properly
installed HSD, which includes a dish- shaped antenna, LNBs and related
equipment, (ii) an IRD (sometimes referred to herein as the "satellite
receiver" or "set-top box"), which receives the data stream from each
broadcasting transponder, separates it into separate digital programming
signals, decrypts and decompresses those signals that the subscriber is
authorized to receive and converts such digital signals into analog radio
frequency signals, and (iii) a television set, to view and listen to the
programming contained in such analog signals. A subscriber's IRD is generally
connected to the digital satellite service operator's authorization center by
telephone, to report the purchase of pay-per-view channels.
The FCC authorizes two types of satellite services for transmission of
television programming: Broadcast Satellite Service ("BSS"), which operates at
high power in the Ku-band, and Fixed Satellite Service ("FSS"), which includes
medium power services transmitting in the Ku-band, as well as low power analog
services transmitting in the C-band. Both high power BSS satellites and medium
power FSS satellites are used for digital satellite television services. High
power signals can generally be received by HSDs of approximately 13 1/2 to 18
inches in diameter (depending on the geographical location of the HSD and
wattage per channel), while medium power signals generally require HSDs of 27
to 39 inches in diameter (depending on the geographical location of the HSD
and wattage per channel). Low power signals require still larger HSDs.
Generally, both high power and medium power digital satellite services
provide the same high video and audio quality. However, in certain situations
medium power services may be more susceptible to interference from adjacent
satellites than high power services. High power services have the benefit of
certain regulatory safeguards instituted by the FCC to protect BSS broadcast
signals from interference from other sources. Under the FCC's current policy,
BSS orbital locations are spaced at greater intervals than FSS orbital
locations. There are 9(degrees) of longitude between adjacent BSS orbital
slots, as compared to 2(degrees) between adjacent FSS locations. The
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smaller interval between FSS orbital locations, together with their lower
power, requires the use of a relatively large HSD to prevent interference.
Newly assigned FSS license holders are required to coordinate their satellite
designs with the satellites previously existing at adjacent orbital locations.
However, such coordination efforts between FSS license holders may not be
sufficient to resolve any interference that may occur, and an FSS license
holder may not have adequate recourse if the FCC assigns an adjacent location
to another user that results in signal interference.
In 1982, the FCC allocated a spectrum within the Ku-band for BSS services.
Eight BSS orbital slots, each with 32 frequencies, have been reserved by the
FCC for use by domestic DBS providers. Three of those orbital slots
(101(degrees) W.L., 110(degrees) W.L. and 119(degrees) W.L.) are considered
the most desirable for national broadcasting because they are the only U.S.
allocated locations for BSS that provide full CONUS visibility (i.e., they
have a view of the entire continental U.S.). DirecTv and USSB are the only
entities licensed for the 101(degrees) W.L. orbital slot with a total of 32
transponders. MCI, in partnership with News Corp., acquired certain FCC
authorizations to build and operate a DBS service at the 110(degrees) W.L.
orbital location, using 28 transponders and, pursuant to the ASkyB Agreement,
has agreed to transfer such authorizations to New PRIMESTAR. EchoStar holds
certain FCC authorizations with respect to one of the remaining four
transponders at 110(degrees) W.L. and USSB holds certain FCC authorizations
with respect to the other three transponders at 110(degrees) W.L. EchoStar's
DBS service uses 21 transponders at the 119(degrees) W.L. orbital location and
Tempo's FCC Permit authorizes it to build a DBS service using the remaining 11
transponders at 119(degrees) W.L.
DIGITAL SATELLITE SERVICES BUSINESS
As of September 30, 1997, the installed base for digital satellite services
consisted of approximately 5.5 million subscribers nationwide. This installed
base represents a 150% increase from the approximately 2.2 million subscribers
as of the end of 1995 and eleven times the approximately 500,000 subscribers
as of the end of 1994. According to industry sources, there are approximately
97 million television households in the U.S. and it is estimated that
approximately 65 million cable subscribers pay an average of approximately $38
per month for multichannel programming services. TSAT believes that those 97
million television households represent the potential consumer universe in the
U.S. for video, audio and data programming services via satellite, and that
those 65 million cable subscribers represent a key potential customer base for
TSAT and New PRIMESTAR. TSAT believes that video, audio and data programming
services via satellite can also be effectively marketed to (i) the
approximately 5 to 6 million households that do not have access to cable
television (not "passed by cable"), (ii) the approximately 21 million
households currently passed by cable television systems with fewer than 40
channels of programming, (iii) other existing cable subscribers who desire a
greater variety of programming, improved video and audio quality, better
customer service and fewer transmission interruptions, (iv) the commercial
marketplace (including hotels, motels, bars, restaurants, MDUs, office
buildings, businesses and schools), and (v) the approximately 2.1 million low
power C-band subscribers who may desire to migrate to digital service.
The Partnership estimates that, based on the number of subscribers
installed, it had approximately 33% of all digital satellite television
subscribers as of September 30, 1997, as compared to approximately 52% for
DirecTv combined with USSB and approximately 15% for EchoStar.
TSAT believes that the following factors will contribute to the growth of
the digital satellite services business:
Demand for More Choice in Television Programming, Reliable Service and
Better Quality Picture and Sound. Prior to the growth of cable television
services, television viewers were offered a relatively limited number of
channels. As the number of channels increased, consumer demand for more
programming choices also increased. As a result, the multichannel video
industry has experienced significant growth, both in terms of the number of
content producers creating programming and the number of channels available to
viewers. TSAT expects that this trend will continue and that consumers will
desire even more programming choices than are available through cable
television and that many more attractive programming services will be
available than
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can be accommodated on cable systems. TSAT believes consumers are also
demanding more reliable service and improved picture quality compared to what
has historically been offered by over-the-air VHF and UHF broadcasters and by
cable. A recent consumer survey of cable and satellite customers by J.D. Power
and Associates found that digital satellite television providers far outranked
cable providers in customer satisfaction. In the survey, PRIMESTAR(R) ranked
number one in customer satisfaction, ahead of both EchoStar and DirecTv.
Large Potential Customer Base. According to industry sources, there are
approximately 97 million television households in the U.S., all of which are
potential subscribers to satellite programming services. In addition, the
approximately 65 million cable subscribers who spend approximately $38 per
month on multichannel programming and, more generally, cable subscribers who
purchase premium or pay-per-view services, represent a particularly lucrative
potential customer base for providers of satellite programming services.
Households Unserved or Underserved by Cable. Approximately 5 to 6 million
households are not passed by cable and approximately 21 million households are
in areas served by cable systems with fewer than 40 channels. Cable systems
with sufficient channel capacity (generally 54 or more channels) and good
quality cable plant will not require costly upgrades to add bandwidth or incur
significant maintenance costs in order to offer digital programming services.
TSAT believes, however, that based on current compression technology, the
number of channels that a cable system would have to remove from its existing
service offerings in order to use them for digital services may, in the case
of cable systems with limited channel capacity, degrade the value of their
analog programming offering and alienate subscribers. Accordingly, pending the
availability of advances in digital compression technology now under
development, such smaller cable systems will be required to incur substantial
costs to upgrade their plant to expand channel capacity before they can
introduce digital services. Due to the substantial capital investment required
for wide scale deployment of fiber-based digital services, several cable
companies have delayed originally-announced deployment schedules. Accordingly,
TSAT believes that households not passed by cable or served by cable systems
with fewer than 40 channels continue to provide an opportunity for subscriber
growth.
Commercial Subscribers. TSAT believes that digital satellite services are
well suited for hotels, motels, bars, MDUs, office buildings, businesses,
schools and other organizations with commercial applications, as well as for
non-residential buildings which are not easily cable accessible. TSAT expects
that some commercial organizations will in the future create increased demand
for educational, foreign language, and other niche video and audio
programming, as well as data services, in addition to PRIMESTAR(R)'s wide
variety of entertainment, sports, news and other general programming.
COMPETITION
The business of providing video programming to consumers is highly
competitive. TSAT and the other PRIMESTAR(R) Distributors face, and New
PRIMESTAR will face, competition from numerous other companies offering video,
audio and data products and services. The existing and potential competitors
of TSAT, the other Distributors and, following the consummation of the
Restructuring Transaction, New PRIMESTAR comprise a broad range of companies
engaged in communications and entertainment, including other digital satellite
program providers, cable operators, wireless cable operators, television
networks and local broadcasters and home video products companies, as well as
companies developing new technologies and other purveyors of news, information
and entertainment. Many of these competitors have greater financial, marketing
and programming resources than TSAT, the other Distributors and, following the
consummation of the Restructuring Transaction, New PRIMESTAR. TSAT expects
that quality and variety of programming, quality of picture and service and
cost will be the key bases of competition. See "RISK FACTORS--Competitive
Nature of Industry."
Advances in communications technology, as well as changes in the marketplace
and the regulatory and legislative environment, are constantly occurring. As a
result, New PRIMESTAR cannot predict the effect that ongoing or future
developments might have on the video programming distribution industry
generally or New PRIMESTAR specifically.
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Other Digital Satellite Service Providers. In addition to PRIMESTAR(R),
several other companies offer, or are expected to offer, digital satellite
services and are, or will be, positioned to compete with PRIMESTAR(R) for home
satellite subscribers.
DirecTv successfully launched its first satellite in December 1993, its
second satellite in August 1994 and a third satellite in June 1995 as an in-
orbit spare. The third satellite may also be operated by DirecTv to provide
additional capacity. DirecTv's satellites, which are high power satellites,
are located at 101(degrees) W.L., one of the three full CONUS orbital slots
allocated to the U.S. for DBS service. DirecTv operates 27 transponders on
each of its existing satellites, enabling it to offer over 175 channels of
digital programming. DirecTv currently has exclusive distribution rights for
out-of-market National Football League telecasts. As of September 30, 1997,
according to trade publications, DirecTv served approximately 2.9 million
subscribers.
DirecTv recently filed an application with the FCC to expand its existing
satellite system and, in connection therewith, requested orbital slots located
at 96.5(degrees) W.L. and 105.5(degrees) W.L. To implement this expansion,
DirecTv must secure additional frequencies that are not currently allocated
domestically for DBS use, and DirecTv has also requested an FCC rulemaking to
secure such allocations. In addition, DirecTv recently entered into an
agreement with PanAmSat Corp., pursuant to which DirecTv acquired additional
Ku-band transponder capacity on PanAmSat's full CONUS Galaxy III-R satellite
located at 95(degrees) W.L. Initially, Galaxy III-R will be used to deliver
six channels of foreign-language programming. Under the agreement, DirecTv
will initially lease four Ku-band transponders and will have the ability to
expand transponder capacity to ultimately offer up to 120 channels dedicated
for special interest programming (such as more ethnic services), niche
programs, future business-to-business applications and high definition
television transmissions.
DirecTv's programming service and equipment are available in numerous retail
outlets nationwide. In addition, affiliates of the National Rural
Telecommunications Cooperative have acquired territories in rural areas of the
U.S. as distributors of DirecTv programming. Furthermore, in order to expand
its sales and service distribution network in the MDU marketplace, DirecTv
recently established regional MDU sales offices in Chicago, Atlanta, Dallas,
New York and Los Angeles. In addition, DirecTv has entered into several
cooperative marketing agreements with private cable and wireless operators to
help expand its sales and service distribution presence in the MDU
marketplace. Such private cable and wireless operators include, among others,
CS Wireless Systems, Inc., R&B Cable of the Roanoke Valley, Jupiter Western
National, Edward Rose & Sons of Kalamazoo, Michigan, Wireless One Inc.,
Heartland Wireless Communications, Inc. and American Telecasting, Inc.
USSB owns and operates five transponders on DirecTv's first satellite and
offers a programming service separate from DirecTv's service, with over 25
channels of premium video programming not available from DirecTv. USSB's
selection of programming services (and its use of transponders on the same
satellite used by DirecTv, which enables subscribers to receive both DirecTv
and USSB signals with a single HSD) allows it to be marketed as complementary
to DirecTv, partially offsetting the competitive handicap caused by its
limited channel capacity. In the second quarter of 1997, USSB and DirecTv
entered into an agreement to combine their marketing efforts to expand the
availability of DBS television services to the MDU marketplace. Pursuant to
such agreement, all new and existing system operators signed by DirecTv are
able to represent USSB as well as DirecTv in the MDU marketplace. As of
September 30, 1997, approximately 65% of DirecTv's 2.9 million subscribers
received USSB programming. In addition, USSB has a construction permit from
the FCC that would allow it to build and launch two high power DBS systems,
one at 110(degrees) W.L. (with three transponders) and one at 148(degrees)
W.L. (with eight transponders). The 110(degrees) W.L. orbital location would
enable USSB to provide a second high power DBS service to the continental
U.S., although with limited channel capacity. The 148(degrees) W.L. slot would
allow USSB to transmit signals to viewers in Alaska and Hawaii and could
provide programming between the U.S. and certain locations on the Pacific Rim.
EchoStar successfully launched its first high power satellite in December
1995 and commenced national transmission of programming channels in March
1996. EchoStar was assigned 11 transponders at 119(degrees) W.L., the same
orbital location as Tempo, and acquired 10 more transponders at such location,
one transponder at 110(degrees) W.L. and 11 transponders at 175(degrees) W.L.
through a merger with DirectSat. Following such merger, DirectSat,
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which became an EchoStar subsidiary, launched EchoStar's second satellite into
the 119(degrees) W.L. orbital location in September 1996. When such satellite
became fully operational in November 1996, it significantly increased the
channel capacity and programming offerings of the EchoStar service. As of
September 30, 1997, EchoStar distributed approximately 120 channels of video
programming and over 30 channels of audio programming to the entire
continental United States, and served approximately 820,000 subscribers. In
addition, EchoStar acquired 24 frequencies at 148(degrees) W.L. for $52.3
million in an FCC auction held in January 1996, and in August 1996, the FCC
approved the prior assignment of Direct Broadcasting Satellite Corporation's
DBS permit for 11 frequencies at 61.5(degrees) W.L. and 11 frequencies at
175(degrees) W.L. to another subsidiary of EchoStar. EchoStar also has an
agreement with Dominion Video Satellite, Inc. ("Dominion") to use 3 of the 8
transponder frequencies assigned by the FCC to Dominion at 61.5(degrees) W.L.
On October 5, 1997, EchoStar launched its third satellite into geosynchronous
orbit at 61.5(degrees) W.L. Such satellite is equipped with 32 transponders
operating at 120 watts per channel. Once such satellite is placed into
EchoStar's 61.5(degrees) W.L. orbital location, such satellite is expected to
include programming complementary to that offered by EchoStar's existing
service on EchoStar's first two satellites, including expanded international,
educational and business programming, and retransmissions of broadcast
television signals. EchoStar has announced that it expects to launch a fourth
satellite in the first quarter of 1998.
In addition, the International Bureau has granted EchoStar a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83(degrees) W.L., immediately adjacent
to that occupied by GE-2. 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 60-90 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. See "RISK FACTORS--Potential Interference with Satellite Signal."
EchoStar has also been granted conditional authorization to construct,
launch and operate a Ku-band domestic fixed satellite at the 121(degrees) W.L.
orbital position and two Ka-band domestic fixed satellites.
In March 1996, AlphaStar, Inc. ("AlphaStar") commenced offering
approximately 100 digital video and audio channels of programming in the
United States via a medium power FSS satellite. However, in August 1997,
AlphaStar ceased transmitting its service, as a result of the ongoing
bankruptcy proceedings of its parent company, Tee-Comm Electronics, Inc. The
AlphaStar service used MPEG 2/DVB digital compression technology, and
AlphaStar subscribers generally were required to use 36 inch satellite dishes,
similar in size to those used by some PRIMESTAR(R) medium power subscribers,
rather than the 18 inch satellite dishes used by customers of the high power
services of DirecTv, USSB and EchoStar. According to the SBCA, approximately
60% of AlphaStar's 51,000 former customers were in areas outside the
continental U.S., mainly in the Caribbean and Canada.
It was recently announced that AlphaStar's U.S.-based operations for digital
home satellite service will be revived by Champion Holding Co. ("Champion").
The U.S. Bankruptcy Court in Delaware overseeing the Tee-Comm Electronics,
Inc. proceeding approved the sale to Champion of substantially all of the
assets of AlphaStar Television Network and its affiliate, Tee-Comm
Distribution, and selective assets of Tee-Comm Electronics Canada. The sale
was completed in mid-December for $4.6 million, although the format and
programming of the service have not yet been determined and no specific date
for re-starting the service has been announced.
Foreign satellite systems also are potential providers of digital satellite
services within the U.S. Canada, Mexico and other countries have been
allocated various DBS orbital locations which are capable of providing service
to part or all of the continental U.S. In general, non-U.S. licensed
satellites are not allowed to provide domestic digital satellite services in
the U.S. However, in April 1996, the United States entered into a bilateral
agreement with Mexico which would allow, subject to certain conditions, the
use of satellites licensed in Mexico to provide digital satellite services to
U.S. consumers. Pursuant to such agreement, in August 1997, the FCC authorized
Televisa International, LLC ("Televisa") to operate one million receive-only
earth stations in the
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U.S., subject to certain conditions, to receive direct-to-home FSS television
services from Solidaridad II, a satellite licensed by the Mexican Government.
Televisa owns and operates television broadcast networks and stations in
Mexico, and exports Spanish language programming to broadcast networks,
broadcast stations and cable systems in the U.S. and other countries. Televisa
is presently engaged in the development of direct-to-home FSS television and
related services in Mexico, Latin America, North America and Europe. Televisa
intends to use the Solidaridad II satellite operating in the Ku-band and
located at 113(degrees) W.L., which provides full CONUS visibility, to provide
an FSS service of entertainment, sports, news, educational and informational
video programming, primarily in the Spanish language, to customers in the U.S.
All of the transmissions to Solidaridad II would originate in Mexico.
The United States has indicated its willingness to enter into similar
agreements with other countries in North, Central and South America. If the
U.S. government moves forward with these initiatives, or if other countries
authorize digital satellite service providers to use their orbital slots to
serve the U.S. and the U.S. approves of such service, additional competition
could be created.
At this time, TSAT is unable to predict the effect of such existing and
future foreign satellite services upon the PRIMESTAR(R) Distributors' and,
following consummation of the Restructuring Transaction, New PRIMESTAR's
operations.
In addition, the FCC has allocated certain additional U.S. licensed DBS
frequencies to DirecTv and other parties. These frequencies could provide
additional capacity for existing digital satellite operators thereby enhancing
their competitive position relative to New PRIMESTAR. Alternatively, such
presently unused frequencies could enable new competitors to enter the digital
satellite services business. Further, other potential competitors may provide
television programming at any time by leasing transponders from an existing
satellite operator. However, the number of transponders available for lease on
any one satellite is generally limited, making it difficult to provide
sufficient channels of programming for a viable system.
To date, the PRIMESTAR(R) medium power service has been competitively
disadvantaged vis-a-vis other satellite programming distributors due to its
relatively larger dish size. TSAT and the other PRIMESTAR(R) Distributors have
sought to mitigate this competitive disadvantage through various programs.
Unlike other current suppliers of digital satellite television, TSAT, as well
as the other PRIMESTAR(R) Distributors, do not require customers to buy
satellite reception equipment. PRIMESTAR(R) is marketed as a service, with
programming, equipment rental, maintenance and customer service included in
the monthly price, which, as of September 30, 1997, ranged from $32.95 to
$62.95 for the three primary PRIMESTAR(R) packages. In addition, each of the
PRIMESTAR(R) programming packages includes a free monthly programming guide.
The up-front costs to new subscribers of PRIMESTAR(R), who are charged only an
installation fee and the first month's programming and equipment rental fees,
are generally lower than the up-front costs to new subscribers of other direct
satellite service providers, who typically must purchase and install an HSD,
IRD and related equipment. Moreover, since TSAT and the other PRIMESTAR(R)
Distributors generally own, service and install all home reception equipment,
TSAT and the other PRIMESTAR(R) Distributors protect their respective
subscribers from the inconvenience of equipment failure, maintenance concerns,
obsolete technology, self- installation and expired warranties. TSAT believes
that when the cost of equipment is factored in, the PRIMESTAR(R) service is
priced competitively, compared to the respective prices of other current
digital satellite service providers. See "BUSINESS OF TSAT," "BUSINESS OF THE
PARTNERSHIP" and "BUSINESS OF OTHER PRIMESTAR(R) DISTRIBUTORS."
C-band Satellite Program Distributors. TSAT and the other PRIMESTAR(R)
Distributors also compete, and New PRIMESTAR will compete, with C-band
satellite program distributors. C-band systems have been popular (mostly in
rural and semi-rural areas) since the late 1970s, and in the aggregate serve
approximately 2.1 million subscribers. However, digital satellite television
systems use Ku-band frequencies that can be received by less expensive systems
with significantly smaller dishes than those used with C-band frequencies. As
a result of the smaller dish size, digital satellite television systems are
more widely accepted by consumers than C-band systems, particularly in urban
and suburban areas.
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Cable Television. Cable television is currently available for purchase by
more than 95% of the approximately 97 million U.S. television households. The
cable television industry is an established provider of multichannel video
programming, serving approximately 65 million subscribers or approximately 67%
of total U.S. television households. Cable systems typically offer 30 to 80
analog channels of video programming at an average monthly subscription price
of approximately $38.
TSAT and the other PRIMESTAR(R) Distributors encounter, and New PRIMESTAR
will encounter, a number of challenges in competing with cable television
providers. First, cable television providers benefit from a strong position in
the domestic consumer marketplace. Second, satellite television systems
generally have not yet found it efficient to provide any local broadcast
programming and, third, the SHVA prohibits the retransmission by a satellite
carrier of a television broadcast signal of a network television station to
households that receive a Grade B intensity over-the-air signal of a
television broadcast station affiliated with such network or that receive (or
within the past 90 days had received) through a cable system the signal of a
television station affiliated with such network. Accordingly, PRIMESTAR(R)
subscribers who are subject to the foregoing SHVA restrictions are unable to
obtain such programming (which is among the most popular and desirable video
programming) from PRIMESTAR(R). Such subscribers must, instead, receive such
programming either through use of a standard television antenna (traditional
rooftop or set-top antenna) or by purchasing that level of cable service which
includes such programming. Furthermore, since reception of digital satellite
signals requires clear line of sight to the satellite, it may not be possible
for some households served by cable to receive PRIMESTAR(R) as a result of
large adjacent structures or other obstacles. In addition to households
lacking a clear line of sight to the satellite, PRIMESTAR(R) is not available
to households in apartment complexes or other MDUs that do not facilitate or
allow the installation of satellite television equipment. Lastly, because IRDs
are currently significantly more expensive than analog cable converters,
existing cable operators are able to offer their subscribers the ability to
have fully functional cable on multiple television sets in a household without
significant additional cost.
While cable companies currently serve a majority of U.S. television
households, TSAT believes many may not be able to provide the quality and
variety of programming offered by digital satellite service providers until
they significantly upgrade their coaxial systems. Many cable television
providers are in the process of upgrading their systems and other cable
operators have announced their intentions to make significant upgrades. Many
proposed upgrades, such as conversion to digital format, fiber optic cabling,
advanced compression technology and other technological improvements, when
fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. In addition, the expanded capacity may be used to provide interactive
and other new services. Many of the largest cable systems in the U.S. have
announced plans to offer access to telephony services through their existing
cable equipment, and have entered into agreements with major telephony
providers to further these efforts. In some cases, certain cable systems have
actually commenced trial offerings of such services. If such trials are
successful, many consumers may find cable service to be more attractive than
digital satellite service for the reception of programming. However, although
cable systems with adequate available bandwidth may offer digital service
without major rebuilds, TSAT believes that, given the limits of current
compression technology, other cable systems with more limited bandwidth will
require major physical plant upgrades to provide digital service, and that
such upgrades will require substantial investments of capital and time to
complete industry-wide. As a result, TSAT believes that there will be a
substantial delay before cable systems can offer programming services
equivalent to digital satellite television providers on a national basis and
that some cable systems may never be upgraded, subject to advances in
compression technology.
Wireless Cable Systems. Other competitors of TSAT and the other PRIMESTAR(R)
Distributors are multi-channel multi-point distribution systems, which deliver
programming services over microwave channels to subscribers with special
antennas, and other so-called "wireless cable" systems. Wireless cable systems
operating in the U.S. currently serve an estimated 1.2 million subscribers,
mostly with limited channel, analog service. Wireless cable systems typically
offer 20 to 40 channels of programming, with inferior image and sound quality
compared to digital satellite services. However, wireless cable systems may
provide their customers with
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local programming, a potential advantage over digital satellite television
systems, and developments in compression technology will significantly
increase the number of channels and video and audio quality of wireless cable
systems. In 1995, several large telephone companies acquired significant
ownership interests in numerous wireless cable companies. This infusion of
money into the wireless cable industry can be expected to accelerate its
growth and its competitive impact. However, while it is expected that most
large wireless operators backed by local telephone companies will upgrade to
digital technology over the next several years, such upgrades will require the
installation of new digital decoders in customers' homes and modifications to
transmission facilities, at a potentially significant cost. Wireless cable
also generally requires direct line of sight from the receiver to the
transmitter tower, which creates the potential for substantial interference
from terrain, buildings and foliage.
Telephone Companies. Certain regional telephone companies and long distance
telephone companies could become significant competitors in the future, as
they have expressed an interest in becoming subscription television and
information providers. Legislation enacted by Congress in 1996 removed
barriers to entry which previously inhibited telephone companies from
competing, or made it more difficult for telephone companies to compete, in
the provision of video programming and information services. Certain telephone
companies have received authorization to test market video and other services
in certain geographic areas using fiber optic cable and digital compression
over existing telephone lines. Estimates for the timing of wide-scale
deployment of such multichannel video service vary, as several telephone
companies have delayed originally announced deployment schedules. In addition,
several large telephone companies have announced plans to acquire or merge
with existing cable and wireless cable systems.
As more telephone companies begin to provide subscription television
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources, and an existing infrastructure and may be able to subsidize the
delivery of programming through their position as the sole source of telephone
service to the home.
VHF/UHF Broadcasters. Most areas of the U.S. are covered by traditional
territorial over-the-air VHF/UHF broadcasts that typically include three to
ten channels in most markets. These stations provide local, network and
syndicated programming free of charge, but each major market is generally
limited in the number of available programming channels. However, the FCC has
recently allocated additional digital spectrum to licensed broadcasters.
During a transition period ending in 2006, each existing television station
will be able to transmit programming on a digital channel that may permit
multiple programming services per channel.
Private Cable. Private cable is a multi-channel subscription television
service where the programming is received by a satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. Private cable generally operates under an
agreement with a private landowner to service a specific MDU, commercial
establishment or hotel. These agreements are often exclusive arrangements with
lengthy (e.g., ten-year) terms, and private cable systems generally are not
subject to substantial federal, state or local regulations. The FCC recently
amended its rules to allow the provision of point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 gigahertz bandwidth. Private cable operators compete with PRIMESTAR(R) for
customers within the general market of consumers of subscription television
services.
Local Multi-Point Distribution Service. In March 1997, the FCC announced its
intention to offer two local multi-point distribution service ("LMDS")
licenses, one for 1150 megahertz and the other for 150 megahertz, in each of
493 Basic Trading Areas pursuant to an auction in the case of mutually
exclusive applications. Incumbent local exchange carriers and cable operators
will not be allowed to obtain in-region licenses for the larger spectrum block
for three years. The LMDS auction is scheduled to occur in February 1998. The
broadband 28 and 31 gigahertz LMDS spectrum allocation may enable LMDS
providers to offer subscribers a wide variety of audio, video and interactive
service options.
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Utilities. In 1996, Congress enacted legislation authorizing utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the Public Utility Holding Company Act. Utilities must
establish separate subsidiaries and must apply to the FCC for operating
authority. Several such utilities have been granted broad authority by the FCC
to engage in activities which could include the provision of video
programming.
Other Providers of News, Information and Entertainment. PRIMESTAR(R) also
competes broadly with other providers of news, information and entertainment
to consumers.
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BUSINESS OF THE PARTNERSHIP
GENERAL
The Partnership owns and operates the PRIMESTAR(R) service, which is the
oldest Ku-band satellite television service in the U.S. and has the second
largest subscriber base of any U.S. digital satellite television service. In
1990, direct or indirect subsidiaries of TCI and several other large cable
operators and GEAS, an indirect subsidiary of GE, formed the Partnership to
acquire, originate and/or provide television programming services for delivery
by satellite to subscribers in the continental U.S. Initially, PRIMESTAR(R)
was an analog service limited to seven broadcast television superstations, TV
Japan and three pay-per-view stations. In 1994, PRIMESTAR(R) was among the
first satellite television services to use digital transmission and
compression technology to offer laser-disc-quality image and compact-disc-
quality sound. Through March 9, 1997, the PRIMESTAR(R) service was transmitted
from Satcom K-2, a medium power satellite that was nearing the end of its
normal operational life, and until April 20, 1997, PRIMESTAR(R) offered 95
channels of entertainment programming throughout the continental U.S. to HSDs
approximately 36 inches in diameter. Since March 10, 1997, the PRIMESTAR(R)
service has been transmitted from GE-2, a medium power satellite that was
launched into the 85(degrees) W.L. orbital position on January 30, 1997, and
accepted as commercially operational as of March 6, 1997. See "--PRIMESTAR(R)
Satellite Signal." On April 20, 1997, using the additional capacity of GE-2,
PRIMESTAR(R) increased its offerings from 95 to 150 channels of programming,
and in August 1997, PRIMESTAR(R) completed its expansion to over 160 channels.
In addition, since April 1997 PRIMESTAR(R) has offered subscribers in the
majority of the U.S. the opportunity to use HSDs of approximately 27 to 29
inches in diameter. See "RISK FACTORS--Risks of Satellite Failure--Risks of
Satellite Defect, Loss or Reduced Performance."
In addition to TSAT, the Partners include (i) Cox SI, a subsidiary of Cox,
(ii) Comcast DBS, a subsidiary of Comcast, (iii) Continental, a subsidiary of
US WEST, Inc., the parent of MediaOne, (iv) New Vision Satellite, a
partnership controlled by Newhouse, which is a subsidiary of Newhouse
Broadcasting, (v) TW Programming Co., a partnership controlled by TWE, which
is a subsidiary of Time Warner, and (vi) GEAS, a subsidiary of GE, the parent
of GE Americom. Each of TSAT (through its subsidiaries) and TW Programming Co.
holds a 20.86% Partnership Interest, each of Cox SI, Comcast DBS, Continental
and New Vision Satellite holds a 10.43% Partnership Interest, and GEAS holds a
16.56% Partnership Interest. Time Warner has substantial interests, through
its subsidiaries and controlled partnerships, in video programming and
distribution, and is one of the two largest operators of cable systems in the
U.S. Cox, Comcast and MediaOne are also among the five largest cable system
operators in the U.S.
The Partnership does not distribute its programming directly, but utilizes
authorized Distributors, and authorized retailers such as Radio Shack and
Nobody Beats the Wiz, to market the PRIMESTAR(R) service and contract with
subscribers. Currently, each of PRIMESTAR(R)'s authorized Distributors is
affiliated with one or more of the Partners, although the Partnership
Agreement does not require that Distributors be so affiliated with the
Partners. None of the Distributors currently has a formal written distribution
agreement with the Partnership, although the Partnership and the Distributors
have attempted to negotiate such an agreement from time to time since 1990.
Currently, all of the Distributors operate in non-exclusive territories
assigned by the Partnership. See "BUSINESS OF TSAT" and "BUSINESS OF OTHER
PRIMESTAR(R) DISTRIBUTORS."
The Distributors set their own retail pricing and are responsible in their
respective territories for authorization of subscribers, installation,
maintenance and retrieval of customer premises equipment, and billing and
collection of monthly and other fees, and the Distributors bear all risks of
loss relating thereto. The Partnership negotiates and enters into agreements
with programmers, arranges for satellite capacity through its agreements with
GE Americom and is responsible, through a Master Digital Transmission
Agreement with National Digital Television Center, Inc., a subsidiary of TCI,
and formerly Western Tele-Communications, Inc. ("NDTC"), for the uplinking and
compression of programming signals. See "--Related Party Transactions." In
addition, the Partnership provides marketing and administrative support,
including national advertising and a national toll-free number, "1-800-
PRIMESTAR," that automatically transfers potential customers to one of the
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Distributors, based on the potential customers' zip codes. For example,
potential customers in TSAT's service areas who call the "1-800" number and
key in their zip codes are transferred automatically to TSAT's national call
center ("National Call Center"). In return for such services, the Partnership
collects from the Distributors a monthly programming fee based on the number
of Authorized Units receiving such programming plus a separate monthly
authorization fee based on each Distributor's total number of Authorized
Units.
PRIMESTAR(R) PROGRAMMING
The PRIMESTAR(R) programming service includes a variety of advertiser-
supported networks (sometimes referred to as "basic cable" channels), a broad
selection of movie services, national and regional sports packages and other
premium services, and multiplexed pay-per-view programming. See "--Programming
Packages." The Partnership secures its rights to transmit such programming via
satellite by entering into non-exclusive affiliation agreements with
programming vendors. In addition to video services, PRIMESTAR(R) includes
digital audio and data services, including Ingenius, which provides access to
news, business news, stock quotes, sports, weather and entertainment
information to subscribers through their personal computers.
In addition to adding 65 new channels, in April 1997, PRIMESTAR(R) became
the first and only television service to reorganize its channel offerings into
easily accessible programming categories: News and Information, Broadcast,
Variety, Family, Music, Living and Learning, Movies, Sports, Spanish language,
PrimeCinema(R) (pay-per-view), and PrimeAudio(R). Also, PRIMESTAR(R)
introduced a new concept in television viewing called "Hyper-SurfingSM." In
that connection, PRIMESTAR(R) developed a color-coded remote control called
the PrimeFinder(TM), featuring a different colored button for each of the
programing categories. The PrimeFinder(TM) allows viewers to jump or "Hyper-
Surf" directly to any programming category with one touch. With this
innovative programming navigation interface, PRIMESTAR(R) enables viewers to
find their favorite programming more easily.
Customer Satisfaction. A recent consumer survey of cable and satellite
customers by J.D. Power and Associates found that digital satellite television
providers far outranked cable providers in customer satisfaction. In the
survey, PRIMESTAR(R) ranked number one in customer satisfaction, ahead of both
EchoStar and DirecTv. The survey found PRIMESTAR(R) to be superior to its
satellite and cable competitors in the areas of corporate image, reception
quality, service representatives and billing.
Programming Packages. As of September 30, 1997, PRIMESTAR(R) offered
consumers three primary programming packages, which provide a wide variety of
programming selections, as detailed in the chart below. The PrimeHitsSM
package generally offers 110 channels of programming with 20 commercial-free
premium movie channels in addition to a selection of other channels. The
PrimeEntertainmentSM package generally offers 98 channels of programming and
gives the customer eight commercial-free movie channels as well as a
combination of a number of popular channels. Lastly, the PrimeValueSM package
generally offers customers 75 channels of expanded programming, including 30
digital music channels. Each of the packages includes a free monthly
programming guide. The Partnership sets a suggested retail price for each of
the programming packages; however, the actual programming and price of each
package varies by Distributor. As of September 30, 1997, the monthly prices
for the PrimeHitsSM package, the PrimeEntertainmentSM package and the
PrimeValueSM package ranged from $49.95 to $52.95, $33.95 to $35.95 and $22.95
to $24.99, respectively, for all PRIMESTAR(R) Distributors. Most PRIMESTAR(R)
customers rent their equipment and pay an additional $10 monthly charge for
equipment rental, which includes free maintenance and customer service.
As of September 30, 1997, PRIMESTAR(R) also offered 16 channels of pay-per-
view movies and events, a 22-channel regional sports tier and other sports
packages that provide expanded coverage of regular-season, out-of-market
sports events, and niche services on an a la carte basis such as east and west
coast feeds of ABC, NBC, CBS and FOX and PBS (to those subscribers unable to
receive such networks through local affiliates), The Golf Channel, TV Japan
and Ingenius.
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At September 30, 1997, PRIMESTAR(R)'s three primary programming packages
consisted generally of the following:
<TABLE>
<CAPTION>
PRIME VALUE(SM) PACKAGE PRIME ENTERTAINMENT(SM) PACKAGE PRIME HITS(SM) PACKAGE
75 CHANNELS* 98 CHANNELS* 110 CHANNELS*
----------------------- ------------------------------- ----------------------
<S> <C> <C>
A&E All Prime Value(SM) All Prime Entertainment(SM)
AMC channels channels
Animal Planet
BET Plus: Plus:
C-SPAN
C-SPAN2 Classic Sports HBO
Cartoon Network CMT HBO-2
Cartoon Network-Spanish CNN-fn HBO-3
CNBC CourtTV HBO-Family
CNN E! HBO-Spanish (4)
CNN-SI Encore
Comedy Central Encore-Mystery Showtime
Discovery Channel Encore-Spanish Showtime-2
Disney Channel (2) Encore-Westerns Showtime-3
DMX Audio Channels (30) ESPN2 Showtime-Spanish
ESPN Game Show Network
Family Channel Home & Garden TV (TSAT generally offers Prime Hits(SM)
Family Channel-Spanish Independent Film customers the option of multiplex
Food Network Channel programming from any two of HBO, Showtime
Headline News Outdoor Life and Cinemax.)
History Channel SCI-FI
Learning Channel Speedvision
Lifetime STARZ! A LA CARTE OFFERINGS
Local Regional Sports STARZ!2 38 CHANNELS
Network STARZ!-Spanish --------------------
MSNBC Sundance Cinemax
MSNBC Weather by Turner Classic Movies Cinemax-2
Intellicast The Weather Channel Cinemax Spanish (2)
MTV WGN
Much Music Ingenius
Nickelodeon/Nick at Nite The Golf Channel
Odyssey TV Japan (2)
Prevue (5)
QVC Regional Sports Tier (21)
Romance Classics
TBN ABC, NBC, CBS, FOX
TBS (east and west coast feeds) (8)
TNN PBS
TNT
TV Land
Univision
USA
VH-1
- -------------------------
</TABLE>
* Plus access to 16 pay-per-view channels
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PRIMESTAR(R) SATELLITE SIGNAL
Since March 10, 1997, the Partnership has transmitted the PRIMESTAR(R)
service from GE-2, a medium power Ku-band satellite owned and operated by GE
Americom. GE-2 was launched into the 85(degrees) W.L. orbital position in the
FSS orbital arc on January 30, 1997, and was declared commercially operational
March 6, 1997. Digital satellite television service requires that subscribers
install HSDs for a clear line of sight to the transmitting satellite. GE-2
provides coverage to the entire continental U.S. with favorable "look" angles,
meaning that the satellite is viewable from the entire continental U.S. at
angle elevations high enough to facilitate installation of HSDs in most areas.
Additionally, GE-2's orbital location over the East coast of the U.S. is
considered favorable because the signal travels a shorter path through the
relatively moist air of the Eastern seaboard, minimizing potential
interference from bad weather. The overall PRIMESTAR(R) system is designed for
high availability and, based on the Partnership's experience with GE-2's
predecessor, Satcom K-2, operates consistently without any significant
interference approximately 99.8% of the time.
As currently in effect, the GE-2 Agreement provides for an initial term of
six years from the availability of GE-2, extendible for the remainder of the
useful life of GE-2 at the option of the Partnership (the "End-of-Life
Option"). Although the term of the End-of-Life Option was originally scheduled
to expire in February 1997, and was subsequently extended by mutual agreement
to December 1997, GE Americom has agreed to extend the term of the End-of-Life
Option for an indeterminate period to permit the Partnership and GE Americom
to discuss the terms of a further formal extension or other modification. In
that connection, GE Americom has agreed that the End-of-Life Option will
remain exercisable until at least 15 days after GE Americom delivers to the
Partnership a written proposal with respect to such further extension or
modification. If the Partnership exercises the End-of-Life Option, the
Partnership will have a further right to negotiate to obtain capacity on any
successor satellite to GE-2 launched by GE Americom at 85(degrees) W.L. Upon
consummation of the Restructuring Transaction, the GE-2 Agreement will be
assumed by New PRIMESTAR.
Pursuant to the GE-2 Agreement, GE Americom provides the Partnership with
service on 24 transponders on GE-2. The Partnership is currently entitled to
non-preemptible service on 18 of the transponders on GE-2 and preemptible
service on six transponders. Preemptible transponders are transponders that
may be reassigned to restore service to protected customers if such protected
customers experience transponder or satellite failure. The Partnership does
not believe that, during the early stages of GE-2's operational life, the use
of preemptible transponders is likely to interfere in any material respect
with the operation of the PRIMESTAR(R) service. The Partnership currently
receives "orbital location protected service" on all 24 of its transponders,
meaning that if there is a failure of GE-2, the Partnership will be entitled
to restore the lost service on another GE Americom medium power satellite, GE-
3 ("GE-3"), which was successfully launched on September 4, 1997 into the same
85(degrees) W.L. orbital position used by GE-2. Even in those circumstances,
the six preemptible transponders, although protected, would remain
preemptible. Upon the successful launch of another GE Americom medium power
satellite, GE-4 ("GE-4"), the Partnership's six preemptible transponders will
become non-preemptible. GE-4 is expected to be launched in the first quarter
of 1999.
If, after exercise of the End-of-Life Option, the Partnership intends to use
more than six of its transponders for uses other than providing the
PRIMESTAR(R) service, GE Americom may reduce service from orbital location
protected service to non-preemptible or preemptible service, as the case may
be.
The Partnership currently uses proprietary authorization, encryption and
digital compression technology developed by an affiliate of GI. The
Partnership believes that the digital compression technology it uses, which is
known as DigiCipher-1(R), produces picture and sound quality comparable to
that of other digital satellite television providers, including those using
compression methods based on the MPEG-2 digital compression architecture.
Uplinking, encoding and compression services are provided by NDTC, a
subsidiary of TCI, under a Master Digital Transmission Agreement between NDTC
and the Partnership. See "--Related Party Transactions." Although the
DigiCipher-1(R) satellite receiver used by PRIMESTAR(R) customers is not
currently compatible with MPEG-2 compression systems, it can be upgraded to be
compatible through equipment provided by GI, the cost of which is projected to
range from $150 to $200 per receiver at commercial volumes.
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PRIMESTAR(R) EQUIPMENT
Unlike other digital satellite television services, PRIMESTAR(R) does not
require consumers to purchase or finance the equipment needed to receive its
programming. Distributors provide the HSD, satellite receiver and remote
control to subscribers for a monthly rental fee ($10 per month at September
30, 1997), which includes ongoing maintenance and service at no additional
charge. The monthly equipment rental fee is normally included in a service
package that includes various levels of basic and premium programming.
Satellite receivers are manufactured by GI, and packaged by GI with remote
controls, and HSDs are manufactured by multiple vendors, under agreements with
the Partnership. Pursuant to such agreements, each Distributor orders and
purchases its inventory of customer premises equipment directly from the
vendor, and is responsible for certain minimum purchases based on forecasts
provided to the vendor through the Partnership.
MARKETING OF PRIMESTAR(R)
The Partnership engages in extensive marketing, advertising and promotional
activities to increase consumer awareness of, and to generate subscriptions
to, the PRIMESTAR(R) service. The Partnership's marketing activities include,
among other things, television commercials aired nationally on numerous
channels, print advertisements promoting the PRIMESTAR(R) service, with
insertions in more than ten national publications, including Sports
Illustrated, People and USA Today, and radio commercials on a variety of radio
shows. As an indication of its successful marketing activities, PRIMESTAR(R)
garnered the highest level of consumer awareness among specific DBS brand
providers in a study released by the SBCA in February 1997. PRIMESTAR(R)'s
awareness level reached 74%, as compared to 66% for DirecTv, 35% for USSB, 27%
for EchoStar and 10% for AlphaStar. The study also indicated that
PRIMESTAR(R)'s awareness level had increased 10% within the six month period
between the first and second waves of the study.
A recent consumer survey of cable and satellite customers by J.D. Power and
Associates found that digital satellite television providers far outranked
cable providers in customer satisfaction. In the survey, PRIMESTAR(R) ranked
number one in customer satisfaction, ahead of both EchoStar and DirecTv. The
survey found PRIMESTAR(R) to be superior to its satellite and cable
competitors in the areas of corporate image, reception quality, service
representatives and billing.
PRIMESTAR(R) is distributed through national and regional consumer
electronics outlets, including Radio Shack and Nobody Beats the Wiz. In
February 1996, the Partnership entered into a national agreement with Radio
Shack, a unit of Tandy Corporation and one of the nation's largest consumer
electronics retailers, under which PRIMESTAR(R) is available on a non-
exclusive basis through more than 6,200 Radio Shack stores nationwide. On
September 30, 1997, the Partnership announced that Nobody Beats the Wiz, a
consumer electronics retailer that operates stores in the northeast, began
distribution of the PRIMESTAR(R) service in its stores. The addition of these
Nobody Beats the Wiz stores, which are located throughout New York, New Jersey
and Connecticut, is expected to enhance PRIMESTAR(R)'s penetration in suburban
areas. However, Nobody Beats the Wiz filed for Chapter 11 bankruptcy
protection in early December 1997 and later announced that it planned to close
17 stores. The Partnership has not ascertained what effect, if any, the
bankruptcy and store closings will have on Nobody Beats the Wiz's distribution
of PRIMESTAR(R). PRIMESTAR(R) is also distributed through the Association of
Video Buyers, a consumer electronics buying cooperative, and The People's
Network, a multi-level marketing company.
The Partnership maintains a national incentive program for satellite
dealers, called the PrimeAgent Program. The PrimeAgent Program is designed to
complement the commissions paid by the PRIMESTAR(R) Distributors, offering
both monetary and gift rewards on sales produced throughout the year above
certain levels. TSAT has also created a unique proprietary dealer network
through the Internet to provide its dealers with sales and service support.
Furthermore, in April 1997, the Partnership launched a new Web site on the
Internet (located at http://www.primestar.com) to serve as an added sales and
brand-building tool and to, among other things, underscore the benefits of
PRIMESTAR(R)'s complete satellite service, including its recent channel
expansion and
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introduction of program categories. The Web site provides information on all
aspects of the PRIMESTAR(R) service, including a competitive analysis which
provides a comparison of buying DBS equipment versus subscribing to a service,
such as PRIMESTAR(R), details on PRIMESTAR(R)'s programming packages and other
programming options, as well as recent PRIMESTAR(R) news announcements and
press coverage.
The Partnership is involved in many charitable activities on both national
and local levels. The Partnership has had an ongoing relationship with the
American Red Cross since 1995, whereby the Partnership donates a percentage of
its sales during the month of June to the national organization and
participates in awareness campaigns on a local level. The Partnership
contributed almost $4 million in donations and promotional support to the Red
Cross in June 1997, and combined with the donations made in 1996, the
Partnership's total donations and promotional support total approximately $9
million. Also, as part of its program, which is called "PRIMESTAR Salutes the
American Red Cross," the Partnership donated $10 for every New PRIMESTAR(R)
subscriber obtained in June 1997. The PRIMESTAR Salutes the American Red Cross
program has expanded from 35 markets nationally in 1996 to more than 45
markets in 1997. The Partnership believes that the PRIMESTAR Salutes the
American Red Cross program emphasizes PRIMESTAR(R)'s positioning as a family
entertainment service. In addition, in March 1997, the Partnership gave the
Public Broadcasting Service a grant worth $2.5 million over a three-year
period, in order to help improve childhood education through television. The
grant makes the Partnership a national underwriter of "The Ready to Learn
Service" on PBS, which is designed to help parents, teachers and other child
care providers use public television programs and services to enhance young
children's learning.
As another sign of its commitment to education, in October 1996, the
Partnership launched "PRIMESTAR Goes to School," a nationwide program which
provides schools that are unwired for cable with free access to PRIMESTAR(R)
equipment and up to 19 channels of commercial-free educational programming for
classroom viewing and instructions, including The Learning Channel, The
Discovery Channel, CNN, Arts and Entertainment, C-SPAN, The Family Channel and
PBS. Teachers are also provided with a free monthly program guide which
highlights programming offerings and provides tips on how to incorporate
educational programming into their curriculum. In addition, to reinforce its
commitment to family programming, the Partnership has been the presenting
sponsor of the Family Film Awards, which honor feature film and television
programs that are popular with, and appropriate for, all family members.
MANAGEMENT OF THE PARTNERSHIP
Pursuant to the Partnership Agreement, the business and affairs of the
Partnership have been managed and controlled by the Partners Committee, which
is composed of representatives of each of the Partners and two independent
members. TSAT has two voting representatives on the Partners Committee, Time
Warner has two voting representatives, and Cox, Comcast, MediaOne, Newhouse
and GE each have one voting representative. Ordinary decisions of the Partners
Committee require the consent of a majority of the members of the Partners
Committee, which majority must include a majority of the representatives of
the Partners. Certain extraordinary decisions of the Partners Committee,
including, without limitation, decisions regarding the dissolution, merger or
sale of substantially all the assets of the Partnership; the admission of
additional partners; calls for capital contributions; the approval of the
annual budget; the appointment or dismissal of Partnership senior management;
the determination of the Partnership's policies with respect to the
distribution of its programming services; the selection of satellites
(including successor satellite capacity, the decision whether the Partnership
should provide services at BSS or higher frequencies and the decision to
exercise the End-of-Life Option); the determination to take any action that
would cause the amount of the letters of credit required to be issued in
connection with the Partnership's obligations under the GE-2 Agreement to
exceed $100,000,000; the decision to effect certain material changes to the
GE-2 Agreement and certain related agreements with respect to the letters of
credit issued in connection with the GE-2 Agreement; and the decision to
provide any optional letters of credit, or pledge, grant a security interest
in or otherwise create a lien on any material assets of the Partnership to
secure the payment of reimbursement obligations of the Partnership with
respect to letters of credit issued in connection with the GE-2 Agreement
require, in addition to a majority vote, the affirmative vote of at least six
of the nine partner representatives on the Partners Committee (assuming that
no partner representative is required to abstain
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in such vote), or such other vote as shall be required by the Partnership
Agreement if one or more partner representatives are required to abstain in
such vote under the terms of the Partnership Agreement because of such
Partner's, or an affiliate's, interest in the outcome thereof.
Pursuant to the Partnership Agreement, if a Partner fails to pay its share
of capital contributions or loans that the Partners agree to require or that
are contemplated by budgets or business plans approved by the Partners, or
that are otherwise necessary in order to satisfy partnership commitments, such
Partner's interest in the Partnership will be diluted and, if such interest is
diluted to less than 5%, its right to vote or exercise certain other rights
may be forfeited.
As a result of the Restructuring Transaction, New PRIMESTAR will own all of
the general and limited partnership interests in the Partnership, and the
Partnership Agreement will be terminated or amended to remove all of its
management provisions.
CERTAIN AGREEMENTS
The Partners, as well as the Distributors, are subject to the provisions of
certain agreements that could limit their ability to engage in, or invest in
entities that engage in, certain businesses, other than through the
Partnership.
Tag-Along Agreement. The Tag-Along Agreement, originally entered into by and
among Cox Enterprises, Comcast, MediaOne and Newhouse Broadcasting
(subsidiaries of each of which are Partners), Tempo, TCIC and TCI Development
Corporation, a subsidiary of TCIC (the "Tag-Along Agreement"), provides that
if any party to the agreement, directly or indirectly through any person
controlled by such party, engages in, or makes an equity investment in any
entity engaging or proposing to engage in, the business of providing
television programming by uplink to BSS or higher frequency domestic satellite
transponders, or otherwise becomes entitled to exercise a management role with
respect to any such entity, at any time that such party or a person controlled
by such party is a Partner, or within one year after it ceases to be a
Partner, then, subject to certain exceptions, such party shall provide the
other parties with a written offer to participate in such investment or other
transaction on terms and conditions comparable to those available to such
party, pro rata in accordance with their respective percentage interests in
the Partnership at the time of such offer. The Tag-Along Agreement further
provides that if a party transfers assets to a person that is not majority
owned or controlled by such party but which person either is the "ultimate
parent" of, or has the same "ultimate parent" as, such party, then such party
must cause such affiliate to become a party to the Tag-Along Agreement. The
term "ultimate parent" as used in the Tag-Along Agreement has the meaning
ascribed to such term in the HSR Act. Generally under the HSR Act, the
"ultimate parent" of a person is an entity that directly or indirectly owns at
least 50% of the voting securities of such person or has the contractual right
to designate 50% or more of a board of directors of such person. The Tag-Along
Agreement will terminate upon the termination or dissolution of the
Partnership, or, if earlier, when the parties to the Tag-Along Agreement and
their affiliates cease to be partners in the Partnership.
Partnership Agreement Provisions Regarding Investments in Similar
Businesses. The Partnership Agreement provides, among other things, that if
any Partner, or an affiliate of a Partner, engages in, or makes an equity
investment in any entity engaging or proposing to engage in, the business of
providing television programming by uplink to FSS, BSS or higher frequency
domestic satellite transponders, directly or indirectly to HSDs, or otherwise
becomes entitled to exercise a management role with respect to any such
entity, then such partner (the "Notifying Partner") shall be required to give
notice of such investment or other transaction to the Partnership and the
other Partners, and the Partnership, by vote of the Partners Committee, with
the Notifying Partner abstaining, shall have the right, but not the
obligation, to elect one of the following courses of action: (i) to remove the
Notifying Partner's representative from the Partners Committee, in which case
the Notifying Partner will no longer be entitled to make capital contributions
to the Partnership or to receive any financial or other information about the
Partnership, other than audited year-end financial statements and tax-related
information; or (ii) to purchase the Notifying Partner's entire interest in
the Partnership for a purchase price equal to the fair market value thereof,
payable in cash or, at the option of the Partnership, for a combination of
cash
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and a three-year promissory note. Notwithstanding the foregoing, the
Partnership will not have the right to exercise either of the foregoing
alternatives if the Notifying Partner, or its affiliate, acquires an equity
interest in an entity that engages in, or proposes to engage in, the business
of uplinking television programming to BSS or higher frequency domestic
satellite transponders, and the Partnership does not then uplink its
programming to BSS or higher frequency transponders and does not, within 120
days thereafter, make a commitment to such transmission method comparable to
the commitment of such other entity. The Partnership will also not have the
right to exercise either of such remedies if the Notifying Partner, or its
affiliate, offers each other partner who did not vote against the Partnership
making a commitment to such transmission method, or its affiliate, an
opportunity to participate with the Notifying Partner or its affiliate in its
equity interest in such BSS business.
If the Restructuring Transaction is consummated, the Tag-Along Agreement and
the provisions of the Partnership Agreement regarding investments in similar
businesses will be terminated.
RELATED PARTY TRANSACTIONS
The Partnership is party to a Master Digital Transmission Agreement (the
"NDTC Transmission Agreement") with NDTC. Pursuant to the NDTC Transmission
Agreement, NDTC provides compression, encryption and uplinking services to the
Partnership, via Ku-band transmission on domestic satellites designated by the
Partnership, for direct-to-home delivery of programming signals by the
Partnership as well as certain ancillary services. NDTC facilitates the
connection of satellite authorization facilities operated by the Partnership
to NDTC's compression encoders and provides advertising, promotional and/or
public service announcement insertion services at additional rates which are
negotiated on an ad hoc basis.
The Partnership pays specified monthly service fees to NDTC for digital and
analog uplinking services, a portion of which is subject to annual consumer
price index adjustments. As part of the consideration for entering the NDTC
Transmission Agreement, the Partnership was required to purchase, at NDTC's
cost plus interest, authorization center computers previously purchased by
NDTC. The NDTC Transmission Agreement also gives NDTC the right to use
Partnership programming signals for the benefit of certain, non-direct-to-home
delivery third parties.
The initial term of the NDTC Transmission Agreement ends in 2001.
Thereafter, the agreement automatically renews for successive one year terms,
unless either party gives prior written notice of its intent to cancel in
accordance with the Agreement. The Partnership may terminate the NDTC
Transmission Agreement prior to the expiration of the initial term (i) by
providing NDTC 90 days prior written notice of its intent to terminate,
accompanied by a termination fee of 60% of the then current monthly service
fees for the remainder of the initial term or (ii) upon dissolution of the
Partnership, as provided in the Partnership Agreement, upon payment of all
monthly service fees due for services rendered and a termination fee equal to
the then current monthly service fees for 12 months or the remainder of the
initial service term, whichever is shorter.
In addition, the Partnership purchases a portion of its programming services
from affiliates of certain Partners.
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BUSINESS OF TSAT
GENERAL
TSAT is a leading distributor of digital satellite-based television services
in the United States. TSAT markets and distributes PRIMESTAR(R), a medium
power digital satellite service, under the brand names "PRIMESTAR(R) By TCI"
and "PRIMESTAR(R) By TSAT" and owns an aggregate 20.86% interest in the
Partnership, which owns and operates the PRIMESTAR(R) service. As of September
30, 1997, TSAT was the largest distributor of PRIMESTAR(R), with an installed
base of approximately 769,000 subscribers, which represented approximately
42.7% of the Partnership's estimated 1.8 million subscribers as of such date.
As of September 30, 1997, TSAT's subscribers were authorized to receive
service on approximately 888,000 Authorized Units. PRIMESTAR(R) offers over
160 channels of digital video and audio programming throughout the continental
U.S., via medium power satellite, to HSDs approximately 27 to 36 inches in
diameter for most subscribers.
TSAT, through its wholly-owned subsidiary, Tempo, holds the FCC Permit,
authorizing construction of a high power DBS system consisting of two or more
satellites delivering DBS service in 11 frequencies at the 119(degrees) W.L.
orbital position and 11 frequencies at the 166(degrees) W.L. orbital position.
The 119(degrees) W.L. orbital position is one of three such orbital positions
allocated to the U.S. for DBS service that provide full CONUS visibility.
Tempo is also a party to the Satellite Construction Agreement, pursuant to
which Tempo has arranged for the construction of the Tempo Satellites and has
an option to purchase up to three additional satellites. Construction of the
Tempo Satellites has been completed. Tempo DBS-1 was launched into TSAT's high
power slot at 119(degrees) W.L. on March 8, 1997. Tempo DBS-2 presently serves
as a ground spare for Tempo DBS-1.
Tempo DBS-1 is currently undergoing extended in-orbit testing under the
Satellite Construction Agreement. Assuming that such in-orbit testing results
in acceptance of the satellite by Tempo under the Satellite Construction
Agreement, Tempo DBS-1 would be available for commercial operations in the
first quarter of 1998. At current levels of digital compression, Tempo
believes that Tempo DBS-1 would be able to deliver approximately 100 channels
of digital video and 20 channels of digital audio programming, as operated
under the FCC Permit. As designed, the Tempo Satellites can be operated in
single transponder mode or paired transponder mode. Under single transponder
mode, such satellites could broadcast on up to 32 transponder channels
simultaneously, at 113 watts per channel, assuming that the operator of such
satellites had authority to use that number of channels. Under paired
transponder mode, such satellites could broadcast on up to 11 transponder
channels simultaneously, at 226 watts per channel, also assuming proper
authorization. The FCC Permit authorizes Tempo to broadcast on 11 transponder
channels from the 119(degrees) W.L. orbital location.
The power levels indicated by paired transponder operations would permit the
use of HSDs of less than 14 inches in diameter to subscribers in the majority
of the U.S. However, Tempo expects to use 18 inch dishes for the proposed high
power service, the same diameter currently used by other high power DBS
providers, in most areas. Tempo currently intends to operate Tempo DBS-1 as a
platform to provide high power digital video and audio programming services to
residential customers, as well as MDUs, commercial customers and resellers.
The availability and utility of Tempo DBS-1, including the power levels
provided by Tempo DBS-1, are subject to risks of satellite defect, loss or
reduced performance. Since the launch of Tempo DBS-1, Loral has notified Tempo
of at least five separate occurrences of power reductions on Tempo DBS-1. No
assurance can be given that further power reductions will not occur in the
future. TSAT does not currently know the extent of such power reductions, and
cannot confirm the precise causes thereof; however, such reductions could
eventually affect the proposed operation of Tempo DBS-1, either alone or
together with other events that may arise during the expected life of the
satellite. See "RISK FACTORS--Risks of Satellite Failure."
Pursuant to the Tempo Option Agreement, Tempo has agreed to sell or lease to
the Partnership 100% of the capacity of any DBS system constructed by Tempo
under the FCC Permit. If the TSAT Merger or the Tempo Sale is consummated, New
PRIMESTAR will operate Tempo's high power DBS service. Otherwise, TSAT
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expects that the Partnership will operate Tempo's high power DBS service
pursuant to the Tempo Option Agreement. See "--Tempo."
TSAT was formed in connection with the TSAT Spin-off to own and operate
TCI's interests in the digital satellite business. The TSAT Spin-off was
effected on December 4, 1996, as a dividend to the holders of record of shares
of Tele-Communications, Inc. Series A TCI Group Common Stock, $1.00 par value
per share ("TCI Group Series A Common Stock"), and to the holders of record of
shares of Tele-Communications, Inc. Series B TCI Group Common Stock, $1.00 par
value per share ("TCI Group Series B Common Stock" and, together with the TCI
Group Series A Common Stock, the "TCI Group Common Stock"), other than certain
subsidiaries of TCI that waived such dividend, at the close of business on
November 12, 1996 (the "TSAT Spin-off Record Date"), on the basis of one share
of TSAT Series A Common Stock for each ten shares of TCI Group Series A Common
Stock, and one share of TSAT Series B Common Stock for each ten shares of TCI
Group Series B Common Stock, held by such holders on the TSAT Spin-off Record
Date.
Since the TSAT Spin-off, TSAT and TCI have operated independently. However,
prior to the TSAT Spin-off, TSAT and TCI entered into a number of intercompany
agreements in connection with the TSAT Spin-off, for purposes of governing
certain ongoing relationships between TSAT and TCI after the TSAT Spin-off,
and to provide mechanisms for an orderly transition, covering, among other
things, such matters as tax sharing, indemnification, services provided by
TCI, the use of the "TCI" name and share purchase rights. See "--Certain
Arrangements Between TSAT and TCI."
TSAT was incorporated in Delaware in November 1996. Prior to the TSAT Spin-
off, TSAT was a wholly-owned subsidiary of TCI, which through various
subsidiaries, was engaged in the business of distributing PRIMESTAR(R) from
December 1990 until the consummation of the TSAT Spin-off. TSAT's predecessor
was incorporated in February 1995 to consolidate TCI's PRIMESTAR(R)
distribution business into one subsidiary, and was merged into TSAT in
connection with the TSAT Spin-off.
PRIMESTAR BY TSAT
General. TSAT markets and distributes the Partnership's equipment and
services to households and businesses in its assigned territories under the
names "PRIMESTAR By TCI" and "PRIMESTAR By TSAT." TSAT's territories as a
PRIMESTAR(R) Distributor comprise communities in the vicinity of TCI's cable
television franchise areas and other areas assigned by the management of the
Partnership, in each case on a non-exclusive basis. TSAT's territories cover
approximately 44% of the geographic area of the U.S., as of September 30,
1997. TSAT estimates that approximately 41% of the country's 97 million
television households reside in TSAT's territories.
As of September 30, 1997, TSAT had an installed base of approximately
888,000 Authorized Units, of which approximately 39% received the
Partnership's premier programming package, PrimeHitsSM. See "BUSINESS OF THE
PARTNERSHIP--PRIMESTAR(R) Programming." Most of TSAT's customers rent their
equipment and pay, in addition to the programming charge, a $10 monthly
equipment rental charge, which includes free maintenance and 24-hour customer
service. Exclusive of installation revenue, TSAT's average monthly revenue per
Authorized Unit was $49 and $44 for the nine months ended September 30, 1997
and the year ended December 31, 1996, respectively. At September 30, 1997,
TSAT had approximately 769,000 subscribers, which represented approximately
42.7% of the Partnership's estimated 1.8 million subscribers.
TSAT contracts with and bills its residential and commercial subscribers
directly for the PRIMESTAR(R) service. Most residential subscribers may
terminate their service at any time upon notice to TSAT. Commercial
subscribers' service contracts automatically renew for successive terms unless
the commercial subscribers provide 90 days' prior written notice to TSAT of
their intent to terminate their service at the end of the current term. In
addition, a commercial customer can terminate the contract prior to the
expiration of the contractual term by paying 75% of the remaining amount due.
Satellite reception equipment reclaimed from terminating subscribers is
tested, refurbished as necessary and placed back into service.
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Distribution. TSAT distributes PRIMESTAR(R) services through multiple
distribution channels. TSAT's Master Agent Program, direct sales force,
National Call Center for orders, information and customer service and the
Partnership's agreement with Radio Shack, one of the nation's largest consumer
electronics retailers, form a wide-reaching distribution network. TSAT has
engaged four master sales agents, Metron Digital Services, Inc., CVS Systems,
Inc., Resource Electronics, Inc. and Recreation Sports and Imports, Inc.
(collectively, the "Master Agents"), each of which has extensive experience
distributing C-band direct-to-home satellite equipment. Master Agents
generally do not sell directly to customers, but recruit, train and maintain a
network of sub-agents comprised generally of full service independent
satellite retailers in TSAT's target markets, including rural and other areas
that are not served or are underserved by cable television. The sub-agents
sell PRIMESTAR(R) services on behalf of TSAT and install, service and maintain
customer premises equipment for TSAT's subscribers. Authorization of new
customers is provided by the National Call Center. At September 30, 1997,
TSAT's Master Agents had over 1,300 active sub-agents, and in the nine months
ended September 30, 1997, the Master Agent Program accounted for approximately
42% of TSAT's new business.
TSAT believes that the Master Agents, who are responsible for the acts of
their sub-agents, are currently able to manage the diverse network of
satellite retailers more effectively than TSAT could do so directly. Master
Agents are responsible for maintaining their sub-agents' inventories of HSDs
and other customer premises equipment, which are provided by TSAT on
consignment. TSAT pays the Master Agents commissions on equipment leased or
sold by their sub-agents, as well as an installation reimbursement to cover
the cost of each new installation and a 10% commission on monthly programming
revenue received from subscribers enrolled through the Master Agent Program,
for a contractually determined period of time (generally five years). Master
Agents are responsible for compensating their sub-agents.
TSAT's direct sales force solicits potential subscribers by making door-to-
door sales calls, setting up booths at special events and otherwise marketing
TSAT's products and services to customers in target markets in its authorized
distribution areas. At September 30, 1997, the direct sales force consisted of
over 450 full- and part-time employees throughout TSAT's service areas
operating out of TSAT's five regional offices and several field offices. To
date, TSAT and the other PRIMESTAR(R) Distributors have been at a competitive
disadvantage vis-a-vis other satellite programming distributors due to the
relatively larger dish size required by PRIMESTAR(R)'s medium power service.
As a result, the main success of TSAT's direct sales force has been rural and
semi-rural communities which are generally underserved for variety, choice and
convenience in audio and video entertainment programming, and in which the
larger dish size is not as great a competitive disadvantage. Direct sales
employees are paid pursuant to a tiered compensation plan with varying
commission arrangements based on productivity. New subscriptions obtained by
the direct sales force are referred to the National Call Center for
authorization, which in turn dispatches the new orders to the nearest third
party contractor for installation.
In order to support its direct sales force, TSAT obtains installation,
maintenance, retrieval, inventory management and other customer fulfillment
services from third party contractors for TSAT customers enrolled by its
direct sales force or National Call Center. From the TSAT Spin-off Date
through December 31, 1997, TCIC provided fulfillment services to customers of
TSAT with respect to the PRIMESTAR(R) medium power service pursuant to a
fulfillment agreement (as amended, the "Fulfillment Agreement"). See "--
Certain Arrangements Between TSAT and TCI--Fulfillment Agreement." The
Fulfillment Agreement, which terminated on December 31, 1997, among other
things, (i) set forth the responsibilities of TCIC with respect to fulfillment
services, including performance standards, (ii) provided for TCIC's
fulfillment sites to be connected to the billing and information systems used
by TSAT, allowing for on-line scheduling and dispatch of installation and
other service calls, and (iii) provided scheduled rates to be charged to TSAT
for the various customer fulfillment services provided by TCIC. TSAT retained
sole control under the Fulfillment Agreement to establish the retail prices
and other terms and conditions on which installation and other services were
provided to TSAT's customers. In September and October 1997, TSAT entered into
agreements with eight regional fulfillment companies (none of which is
affiliated with TSAT or any other party to the Restructuring Transaction) to
perform the services that are no longer performed by TCIC since the
termination of the Fulfillment Agreement. TSAT's management believes that the
terms and conditions of such new third party fulfillment agreements are in the
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aggregate no less favorable to TSAT than the terms and conditions of the
Fulfillment Agreement with TCIC (both as originally executed and as amended).
See "--Certain Arrangements Between TSAT and TCI."
The National Call Center, which, as of September 30, 1997, housed more than
500 employees, takes subscription orders and provides both sales support and
customer service. The National Call Center offers customers round-the-clock
telephone support for sales, installation, authorization and billing, as well
as for repair and customer service, 365 days per year. During the nine months
ended September 30, 1997, the National Call Center handled over 3 million
customer service calls and over 680,000 sales calls. In addition, since March
1997, TCIC has provided TSAT with additional customer support services from
its Boise, Idaho call center (the "Boise Call Center") to assist TSAT in
responding to calls that exceed the capacity of the National Call Center.
Currently, TCIC and TSAT are negotiating for the sale or long-term lease of
the Boise Call Center to TSAT.
In addition to the Master Agent Program, direct sales force and National
Call Center, TSAT distributes its services through certain national consumer
electronics retailers, including Radio Shack. Pursuant to the Partnership's
national agreement with Radio Shack, PRIMESTAR(R) is available on a non-
exclusive basis through more than 6,200 Radio Shack stores nationwide, over
2,400 of which are located in TSAT's authorized distribution territories.
Under this agreement, Radio Shack is compensated based on the number of
installations generated. TSAT's distribution network is further supported by
approximately 1,600 local market retailers, such as hardware stores and
convenience stores, which promote TSAT's services and further assist TSAT in
its distribution efforts.
TSAT believes that its use of a number of different distribution channels
has been an important factor in the success of its sales efforts and will
continue to fuel subscriber growth. During the period from December 1994 to
September 1997, TSAT significantly expanded its points of sale to
approximately 6,400. TSAT intends to continue to target multiple distribution
channels and to expand on its existing satellite retailer distribution network
and presence with both national and regional consumer electronics outlets.
Equipment and Installation. Approximately 98% of TSAT's subscribers
currently elect to rent their equipment from TSAT, and TSAT believes that the
ability to obtain PRIMESTAR(R) without a large initial cash outlay has been a
significant factor in TSAT's early acceptance by consumers. However, TSAT also
offers subscribers the opportunity to purchase their equipment. Subscribers
who would prefer to own their equipment may purchase a single refurbished
satellite receiver for $149 (or a new receiver for $199) plus an installation
charge of $149 (less a $50 customer rebate direct from the Partnership).
Subscribers who wish to purchase two satellite receivers may purchase a
refurbished first receiver for $149 (or a new receiver for $199) and a second
refurbished receiver for $149 (or a new receiver for $199), with the
installation charge of the first receiver set at $149 (less a $50 customer
rebate direct from the Partnership) and the installation price of the second
receiver set at $75.
In addition to monthly fees for programming and the purchase or lease of
equipment, TSAT generally charges new subscribers an installation fee ranging
from $99 to $149. In order to insure that HSDs are properly pointed and
aligned to receive the PRIMESTAR(R) signal, TSAT strongly recommends
professional installation. TSAT, from time to time, offered qualified
subscribers an opportunity to enter into subscription contracts that allowed
for the option of paying their installation fee over time. Certain other
direct satellite service providers offer consumers the option of self-
installation of the HSD and other equipment for their digital satellite
systems, with an installation kit that retails for approximately $70.
Marketing. TSAT engages in extensive local and regional marketing,
advertising and promotional activities to increase consumer awareness of
PRIMESTAR(R), to promote the sale and lease of PRIMESTAR(R) equipment and to
generate subscriptions to PRIMESTAR(R). To complement the national marketing
support received from the Partnership, TSAT operates a central advertising
strategy that also supports regional marketing efforts. See "BUSINESS OF THE
PARTNERSHIP--Marketing of PRIMESTAR(R)." TSAT's advertising strategy focuses
on five important selling points for potential subscribers: (i) program
variety and categorization, (ii) good value, (iii) digital quality picture and
sound, (iv) no equipment to buy, and (v) on-going equipment
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maintenance and service at no extra charge. TSAT also provides its network of
sub-agents and direct sales force with marketing support ranging from
cooperative advertising funds to customized advertising campaigns.
TSAT's current regional and local advertising strategy includes television,
print and radio advertisements, direct mail campaigns, handouts of brochures
and flyers and participation in local events, including the display of
posters, banners and pop-up displays. TSAT engages a media agency to provide
media counsel and services to aid TSAT in planning, placing and measuring
results in regional and local advertising and media programs. TSAT also
engages an advertising agency to develop strategic and creative efforts in
advertising and a marketing fulfillment agency to provide direct mail,
collateral materials and other marketing services.
TSAT, from time to time, promotes subscriptions to its programming service
by offering discounts or free services for a limited period of time. For
example, TSAT has offered a discount for annual subscriptions, whereby
customers, by paying annually, have been entitled to get one month for free.
In addition, TSAT has provided coupons to new customers which offer
programming discounts, providing customers with the opportunity to try many of
TSAT's premium services. Additionally, TSAT has also provided free pay-per-
view movies to new subscribers for a limited period of time.
TSAT engages independent retailers as display representatives who display
promotional materials about TSAT. TSAT uses such display representatives to
promote its service and to attain customer referrals. TSAT pays the display
representative a one time referral fee for each eligible subscriber who
installs the service within sixty days of the referral.
TSAT also participates in joint marketing efforts. In May 1997, TSAT and
DMX, Inc. ("DMX"), a digital audio music service and a subsidiary of TCI,
agreed to jointly offer PRIMESTAR(R) and DMX music services to commercial
customers. The DMX/PRIMESTAR(R) commercial service, which is marketed by DMX
for Business, the commercial arm of DMX, is available to businesses located in
TSAT's territories throughout the U.S., and offers 90 channels of music as
well as up to 60 video channels of PRIMESTAR(R) digital television
programming. The DMX/PRIMESTAR(R) service is the only DBS service that offers
a complete digital audio and video package through a single antenna directly
to businesses. TSAT also engages in two joint marketing efforts with TCI.
First, TSAT, since March 1996, has been distributing Kid Control(TM), a child-
size remote control unit supplied by TCI. The Kid Control(TM) units are
channel selectors designed solely for children and help parents monitor and
control television viewing. They are pre-programmed with the most popular
children's programming to provide a secure lineup of age-appropriate
entertainment. Second, as a sign of its commitment to education, TSAT, along
with TCI, launched the PRIMESTAR Goes To School program which provides schools
not wired for cable with free access to PRIMESTAR(R) equipment and 500 hours
of commercial-free "Cable in the Classroom" programming per month. This
educational package is offered free of charge. The program is designed to
provide educational programming and data services and offer access to training
to inner city, rural and other schools that do not have access to cable and
that are within TSAT's territories. From its inception in November 1995
through September 30, 1997, over 2,300 schools have enrolled in the program.
ResNet Transaction. Effective as of June 4, 1997, TCI Satellite MDU, Inc.
("TSAT-MDU"), a wholly-owned subsidiary of TSAT, and ResNet Communications,
Inc., ("ResNet Corp."), a wholly-owned subsidiary of LodgeNet Entertainment
Corporation ("LodgeNet"), formed ResNet Communications, LLC ("ResNet LLC").
TSAT-MDU acquired a 4.99% ownership interest in ResNet LLC, and ResNet Corp.
acquired a 95.01% ownership interest in ResNet LLC. ResNet LLC was formed to
own and operate the business owned and operated by ResNet Corp. prior to the
formation of ResNet LLC. ResNet Corp. was formed by LodgeNet in February 1996
to engage in the business of operating as a "private cable operator" under
applicable federal law, providing video on demand, basic and premium cable
television programming, and other interactive, multi-media entertainment and
information services to subscribers in MDUs with facilities that do not use
any public right-of-way (the "ResNet Business"). Effective as of October 21,
1996, TSAT-MDU had acquired 4.99% of the issued and outstanding capital stock
of ResNet Corp. In connection with the formation of ResNet LLC, ResNet Corp.
redeemed all of its capital stock previously issued to TSAT-MDU. ResNet LLC
agreed to purchase from TSAT-MDU, at a price that approximates TSAT-MDU's
cost, up to $40 million in satellite reception equipment, to be
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used in connection with the ResNet Business exclusively, 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 million in equipment during the five-year
initial term).
TSAT-MDU also agreed to make a subordinated convertible term loan to ResNet
LLC, the proceeds of which can be used only to purchase such equipment from
TSAT-MDU. 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. TSAT-MDU's only recourse with respect to repayment of
the loan is conversion into ownership interests in ResNet LLC stock or
warrants as described below. Under current interpretations of the FCC rules
and regulations related to restrictions on the provision of cable and
satellite master antenna television services in certain areas, TSAT-MDU 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. TSAT-MDU is required to convert the convertible
loan at such time as conversion would not violate such currently applicable
regulatory restrictions.
In addition, ResNet LLC granted TSAT-MDU an option to acquire an additional
13.01% of the ownership interests in ResNet LLC at the appraised fair market
value of such percentage ownership interests at the time of exercise of the
option. The option is exercisable between December 21, 1999 and the maturity
of the convertible loan. Upon the maturity date of the convertible loan, if
TSAT-MDU has been prevented from converting the loan or exercising the option
in full due to the previously described regulatory restrictions, ResNet LLC
will issue warrants to TSAT-MDU to acquire the ownership interests in ResNet
LLC that have not been issued pursuant to conversion of the loan and the
percentage ownership interests that TSAT-MDU has a right to acquire by
exercise of the option. The exercise price of the warrants to be issued in
respect of the convertible loan will be de minimis, and the exercise price of
the warrants to be issued in respect of the option will be equivalent to the
exercise price under such option. TSAT has agreed to customary standstill
provisions with respect to acquisitions of more than 10% of the outstanding
stock of LodgeNet and any stock of ResNet Corp. if it becomes publicly traded.
TSAT-MDU also entered into a long-term signal availability agreement with
ResNet LLC, pursuant to which TSAT-MDU is committed to transport for a fee to
"private cable systems" owned and operated by ResNet LLC, the satellite signal
used by the Partnership to transmit its programming services (the "PRIMESTAR
Satellite Signal") or the signal of a substantially comparable service.
"Private cable system" means a satellite master antenna television system that
provides television programming services to residential MDUs through cable
plant or other equipment that is located entirely on private property and does
not constitute a direct-to-home distribution system or a franchised cable
system. TSAT-MDU is acting solely to make the PRIMESTAR Satellite Signal
available to ResNet LLC and is not acting as a distributor of any PRIMESTAR(R)
programming services to ResNet LLC. ResNet LLC must obtain its own rights from
the applicable programming networks to receive the programming services and to
distribute them to ResNet LLC's subscribers.
NDTC has the right from the Partnership to use the PRIMESTAR Satellite
Signal for delivery of programming for the benefit of third parties, including
private cable systems (the "simultaneous use rights"). NDTC has agreed with
TSAT that private cable systems designated by TSAT, including the ResNet LLC
private cable systems, will receive the transport of the PRIMESTAR Satellite
Signal by NDTC in exchange for the payment by TSAT of a fee per subscriber per
video program signal. The agreement between TSAT and NDTC is coextensive with
the agreement between NDTC and the Partnership, which expires on March 31,
2001, and there is no assurance that TSAT will continue to have the ability to
make the PRIMESTAR Satellite Signal available after that date.
In its agreement with ResNet LLC, TSAT-MDU has committed to make the
PRIMESTAR Satellite Signal or the signal of a substantially comparable service
available for a term that extends substantially beyond March 31, 2001. If TSAT
were to lose its contractual ability to make the PRIMESTAR Satellite Signal
available and were unable to make the signal of a substantially comparable
service available, TSAT would be obligated to
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reimburse ResNet LLC for its costs in obtaining a digital signal from another
source, including the cost of replacement equipment if the new digital signal
is not compatible with ResNet LLC's equipment. While it is not possible at
this time to quantify the amount that TSAT-MDU would be obligated to pay to
ResNet LLC under the circumstances described above, TSAT-MDU believes that the
costs could be significant, particularly if it were to lose its ability to
make a signal available towards the end of its agreement with ResNet LLC.
Counsel to the Partnership has advised TSAT of the Partnership's position
that there are certain preconditions to NDTC's simultaneous use rights which
have not yet been satisfied and that such rights are not assignable by NDTC to
TSAT or TSAT-MDU. TSAT believes that the transaction between TSAT-MDU and
ResNet LLC and similar transactions are permitted under the agreement between
NDTC and the Partnership. TSAT does not believe that any potential dispute
with the Partnership regarding this issue is likely to have a material adverse
effect on TSAT. In fact, the Partnership and TSAT are engaged in discussions
intended to resolve any disagreement with respect to the ResNet transaction.
The transactions described above between TSAT-MDU and ResNet LLC supersede
in their entirety substantially similar transactions entered into between
TSAT-MDU and ResNet Corp. effective as of October 21, 1996.
The Restructuring Transaction is not expected to have any material effect on
the rights or obligations of TSAT or TSAT-MDU in connection with the above-
described transaction.
Use of PRIMESTAR(R) Name and Marks. TSAT markets and distributes the
Partnership's equipment and services to households and businesses in its
assigned territories under the names PRIMESTAR By TCI and PRIMESTAR By TSAT.
PRIMESTAR(R) is a registered service mark of the Partnership. TSAT believes
that it has the right to use the PRIMESTAR(R) name and certain related
trademarks and service marks as a Distributor, in substantially the same
manner as it has been using such name and marks, pursuant to its existing
understandings with the Partnership. However, TSAT does not have a written
license to use the PRIMESTAR(R) name and marks, and if the Restructuring
Transaction is not consummated, there can be no assurance that TSAT will be
entitled to continue to use the PRIMESTAR(R) name and marks in the future.
TEMPO
TSAT, through Tempo, holds the FCC Permit, authorizing construction of a
high power DBS system consisting of two or more satellites delivering DBS
service in 11 frequencies at the 119(degrees) W.L. orbital position and 11
frequencies at the 166(degrees) W.L. orbital position. The 119(degrees) W.L.
orbital position is generally visible to HSDs throughout the entire
continental U.S.; the 166(degrees) W.L. orbital position is visible only in
the western half of the continental U.S., as well as Alaska and Hawaii. Tempo
is also a party to the Satellite Construction Agreement with Loral, pursuant
to which Tempo has arranged for the construction of the Tempo Satellites and
has an option to purchase up to three additional satellites. As constructed,
each Tempo Satellite can operate in either "single transponder" mode (with 32
transponders broadcasting at 113 watts per channel) or in "paired transponder"
mode (with 16 transponders broadcasting at 226 watts per channel). Either such
configuration can be selected at any time, either before or after launch.
Tempo DBS-1 was outfitted with an antenna designed for operation at the
119(degrees) W.L. orbital location and was launched into geosynchronous orbit
on March 8, 1997 from Cape Canaveral on an Atlas rocket by International
Launch Services on behalf of Lockheed Martin Corporation. The satellite is
currently undergoing extended in-orbit testing under the Satellite
Construction Agreement. Assuming that such in-orbit testing results in
acceptance of the satellite by Tempo under the Satellite Construction
Agreement, Tempo DBS-1 would be available for commercial operations in the
first quarter of 1998. Broadcasting on 11 of the 16 available transponder
pairs in accordance with Tempo's FCC Permit and using available technology for
statistical multiplexing and digital compression, TSAT and the Partnership
believe that Tempo DBS-1 would be able to deliver approximately 100 channels
of digital video and 20 channels of digital audio programming. See "--
General." The power levels indicated by paired transponder operations would
permit the use of HSDs of
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less than 14 inches in diameter to subscribers in the majority of the U.S.
However, Tempo expects to use 18 inch dishes for the proposed high power
service, the same diameter currently used by other high power DBS providers,
in most areas.
Since the launch of Tempo DBS-1, Loral has notified Tempo of at least five
separate occurrences of power reductions on Tempo DBS-1. No assurance can be
given that further power reductions will not occur in the future. TSAT does
not currently know the extent of such power reductions, and cannot confirm the
precise causes thereof; however, such reductions could eventually affect the
proposed operation of Tempo DBS-1, either alone or together with other events
that may arise during the expected life of the satellite. Tempo and Loral are
currently engaged in discussions regarding this matter, including the timing,
extent and methodology of any further tests to be conducted and the terms of
any monetary settlement with respect to the satellite to which Tempo may be
entitled under the Satellite Construction Agreement. See "--Satellite
Launches."
Tempo currently intends to operate Tempo DBS-1 as a platform to provide high
power digital video and audio programming services to residential customers,
as well as MDUs, commercial customers and resellers. If the TSAT Merger or the
Tempo Sale is consummated, New PRIMESTAR will operate Tempo's high power DBS
services. Otherwise, TSAT expects that such services will be provided through
the Partnership, which has exercised its option under the Tempo Option
Agreement to purchase or lease 100% of the capacity of Tempo DBS-1. See "--
Tempo Option" and "RISK FACTORS--Uncertainty Regarding High Power Strategies."
The availability and utility of Tempo DBS-1, including the power levels
provided by Tempo DBS-1, are subject to risks of satellite defect, loss or
reduced performance. See "RISK FACTORS--Risks of Satellite Failure."
In light of the pendency of the Restructuring Transaction, the TSAT Merger,
the Tempo Sale and the ASkyB Transaction, TSAT and the Partnership are
evaluating alternative future plans with respect to Tempo DBS-2, including its
use or disposition. Tempo DBS-2 presently serves as a ground spare for Tempo
DBS-1. See "RISK FACTORS--Uncertainty Regarding High Power Strategies."
Satellite Launches. Pursuant to the Satellite Construction Agreement, Loral
must conduct in-orbit testing following the launch of a satellite. Under the
Satellite Construction Agreement, delivery of a satellite takes place upon
Tempo's acceptance of such satellite after completion of in-orbit testing
("Delivery"). Subject to certain limits, Loral must reimburse Tempo for
Tempo's actual and reasonable expenses directly incurred as a result of any
delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing
confirms that the satellite conforms fully to specifications and the service
life of the satellite will be at least 12 years, Tempo is required to accept
the satellite. If in-orbit testing determines that the satellite does not
fully conform to specifications but at least 50% of its transponders are
functional and the service life of the satellite will be at least six years,
Tempo is required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Tempo Satellites;
however, if the two Tempo Satellites are not delivered in such four attempts,
Tempo may terminate the Satellite Construction Agreement and receive a refund.
Tempo also may terminate the contract in the event of two successive satellite
failures.
As a result of the aforementioned power reductions, in-orbit testing has
been extended and Tempo DBS-1 has not yet been accepted; however, it is
currently expected that such testing will be completed during the first
quarter of 1998. TSAT currently believes that Tempo DBS-1 may not fully comply
with specifications, but has not yet determined the extent of any such non-
compliance. As stated above, Tempo and Loral are currently engaged in
discussions regarding this matter, including the timing, extent and
methodology of any further tests to be conducted and the terms of any monetary
settlement with respect to the satellite to which Tempo may be entitled under
the Satellite Construction Agreement. A defect or damage affecting Tempo DBS-1
could cause a substantial monetary loss to TSAT or, following consummation of
the TSAT Merger or the Tempo Sale, New PRIMESTAR.
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Loral has warranted that, until the satellites are launched, the satellites
will be free from defects in materials or workmanship and will meet the
applicable performance specifications. In addition, Loral has warranted that
all items other than the satellites delivered under the Satellite Construction
Agreement will be free from defects in materials or workmanship for one year
from the date of their acceptance and will perform in accordance with the
applicable performance specifications. Loral bears the risk of loss of the
Tempo Satellites until Delivery. Upon Delivery, title and risk of loss pass to
Tempo. However, Loral is obligated to carry risk insurance on each satellite
covering the period from launch through Delivery. Such risk insurance is
required to cover (i) the cost of any damages due under the Satellite
Construction Agreement; (ii) the cost of delivery of a replacement satellite
in the event of a satellite failure; and (iii) the refund of the fixed
contract price for each undelivered Tempo Satellite if Loral fails to deliver
both Tempo Satellites after four attempts. Loral is also required to obtain
insurance indemnifying Tempo from any third party claims arising out of the
launch of a satellite. Although TSAT is entitled to the benefit of such
warranties and insurance coverage relating to the Tempo Satellites pursuant to
the Satellite Construction Agreement, such warranties and insurance coverage
might not be sufficient to compensate TSAT for all of its losses in the event
of a partial or total satellite failure or casualty, even if such failure or
casualty were a covered loss.
Tempo Option. In February 1990, Tempo entered into the Tempo 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 pursuant to the
FCC Permit. Under the Tempo Option Agreement, upon the exercise of the Tempo
Option, the Partnership was obligated to pay Tempo $1,000,000 (the "Exercise
Fee") and to lease or purchase the entire capacity of the DBS system, with the
purchase price (or aggregate lease payments) for such capacity 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 the
Satellite Construction Agreement, and certain related costs, through advances
by the Partnership to Tempo. The Partnership financed such advances to Tempo
through borrowings under the PRIMESTAR Credit Facility, which was obtained by
the Partnership to finance advances to Tempo for payments due in respect of
the construction of the Tempo Satellites, and which in turn is supported by
letters of credit arranged for by affiliates of the Partners (other than
GEAS). At September 30, 1997, the aggregate funding provided to Tempo by the
Partnership was $463,133,000, and the balance due under the PRIMESTAR Credit
Facility was $555,000,000, including amounts borrowed to pay interest charges.
On February 7, 1997, the Partners Committee adopted a resolution (i)
affirming that the Partnership had unconditionally exercised the Tempo Option,
(ii) approving the proposed launch of Tempo DBS-1 into the 119(degrees) W.L.
orbital position and the use of Tempo DBS-2 as a spare or back-up for Tempo
DBS-1, pending other deployment or disposition as determined by the
Partnership, and (iii) authorizing the payment by the Partnership to Tempo of
the Exercise Fee and other amounts to Tempo in connection with the Tempo
Option and the Tempo Letter Agreements, including funding of substantially all
construction and related costs relating to the Tempo Satellites not previously
funded by the Partnership. Such amounts have been paid to TSAT. See "--Certain
Arrangements Between TSAT and TCI--Reimbursement of Certain Satellite
Expenses."
The Tempo Letter Agreements permit the Partnership to apply its advances to
Tempo against any payments (other than the Exercise Fee) due under the Tempo
Option with respect to its purchase or lease of satellite capacity. Although
TSAT and the Partnership have not entered into an agreement with respect to
the purchase or lease of 100% of the capacity of the proposed Tempo DBS system
pursuant to the Tempo Option, TSAT believes that its obligations to the
Partnership with respect to such advances will be satisfied in connection with
the completion of such purchase or lease. However, if notwithstanding the
exercise of the Tempo Option, such purchase or lease of satellite capacity is
not completed, TSAT believes that alternative courses of action are available
that would allow TSAT to recover its costs of constructing the Tempo
Satellites, whether or not the Restructuring Transaction is consummated.
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CERTAIN ARRANGEMENTS BETWEEN TSAT AND TCI
Since the consummation of the TSAT Spin-off, TSAT and TCI have operated
independently. However, for purposes of governing certain of the ongoing
relationships between TSAT and TCI after the TSAT Spin-off, and to provide
mechanisms for an orderly transition, TSAT and TCI entered into various
agreements, including the "Reorganization Agreement," the "Transition Services
Agreement," an amendment to TCI's existing "Tax Sharing Agreement," the
"Indemnification Agreements," the "Trade Name and Service Mark License
Agreement," and the "Share Purchase Agreement," all of which are described
below. In addition, TCIC has continued to provide installation, maintenance,
retrieval and other customer fulfillment services for certain customers of
TSAT pursuant to the "Fulfillment Agreement," and entered into the "TCIC
Credit Facility" with TSAT, both of which are described below.
John C. Malone is currently the Chairman of the Board and a director of TCI
and is also the Chairman of the Board and a director of TSAT. Dr. Malone is
also a principal stockholder of both TCI and TSAT. See "MANAGEMENT OF TSAT--
Directors and Executive Officers," "SECURITY OWNERSHIP OF TSAT" and "RISK
FACTORS--Potential Conflicts of Interest." In addition, as an officer of TCIC
prior to the TSAT Spin-off, Gary S. Howard, the Chief Executive Officer and a
director of TSAT, had the benefit of certain undertakings of indemnification
from TCI and TCIC, which have survived the TSAT Spin-off. See "--Other
Arrangements." Both Dr. Malone and Mr. Howard will be directors of New
PRIMESTAR upon consummation of the Restructuring Transaction. See "MANAGEMENT
OF NEW PRIMESTAR--Directors and Executive Officers."
Reorganization Agreement. On the TSAT Spin-off Date, TCI, TCIC and a number
of other TCI subsidiaries, including TSAT, entered into a reorganization
agreement (the "Reorganization Agreement"), which provided for, among other
things, the principal corporate transactions required to effect the TSAT Spin-
off, the conditions thereto and certain provisions governing the relationship
between TSAT and TCI with respect to and resulting from the TSAT Spin-off.
Certain of TSAT's assets relating to the digital satellite business were
historically owned by subsidiaries of TCI other than TSAT and its
predecessors. These assets include the capital stock of Tempo and the 20.86%
interests in the Partnership. The Reorganization Agreement provided for, among
other things, the transfer of these assets to TSAT and for the assumption by
TSAT of related liabilities. No consideration was payable by TSAT for these
transfers, except that two subsidiaries of TSAT purchased TCI's interests in
the Partnership for consideration payable by delivery of promissory notes
issued by such subsidiaries, which promissory notes were assumed by TCI on the
TSAT Spin-off Date in the form of a capital contribution to TSAT. The
Reorganization Agreement also provides for certain cross-indemnities designed
to make TSAT financially responsible for all liabilities relating to the
digital satellite business conducted by TCI prior to the TSAT Spin-off, as
well as for all liabilities incurred by TSAT after the TSAT Spin-off, and
makes TCI financially responsible for all potential liabilities of TSAT which
are not related to the digital satellite business, including, for example,
liabilities arising as a result of TSAT's having been a subsidiary of TCI. The
Reorganization Agreement further provides for each of TSAT and TCI to preserve
the confidentiality of all confidential or proprietary information of the
other party, for five years following the TSAT Spin-off, subject to customary
exceptions, including disclosures required by law, court order or government
regulation.
Pursuant to the Reorganization Agreement, on the TSAT Spin-off Date, TSAT
issued to TCIC a promissory note (the "TSAT Note"), in the principal amount of
$250,000,000, representing a portion of TSAT's intercompany balance owed to
TCIC on such date. See "--TCIC Credit Facility" below. On December 31, 1996,
TSAT entered into the Bank Credit Facility and used a portion of the borrowing
availability thereunder to repay in full all principal and interest due to
TCIC pursuant to the TSAT Note. See "DESCRIPTION OF CERTAIN INDEBTEDNESS OF
TSAT--Bank Credit Facility." Pursuant to the Reorganization Agreement, the
remainder of TSAT's intercompany balance owed to TCIC on the TSAT Spin-off
Date (other than certain advances made to TSAT by TCIC in 1996 to fund certain
construction and related costs associated with the Tempo Satellites, as
described below under "--Reimbursement of Certain Satellite Expenses") was
assumed by
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TCI. A portion of such assumption of debt was effected in the form of a
capital contribution to TSAT; the remainder was effected as consideration for
(i) the assumption by TSAT of TCI's obligations under options granted on the
TSAT Spin-off Date to certain key employees of TCI (who are not employees of
TSAT) representing, in the aggregate, 1,660,190 shares of TSAT Series A Common
Stock, and (iii) the granting by TSAT to TCI of an option to purchase up to
4,765,000 shares of TSAT Series A Common Stock (as such number may be adjusted
to reflect stock dividends, stock splits and the like), at an exercise price
of $1.00 per share, as required by TCI from time to time to meet its
obligations under the conversion features of certain convertible securities of
TCI, as such conversion features were adjusted as a result of the TSAT Spin-
off. During the nine months ended September 30, 1997, TSAT issued 256,830
shares of TSAT Series A Common Stock to TCI for aggregate consideration of
$256,830 under this arrangement. Following the TSAT Merger, TCI will have the
right to purchase from New PRIMESTAR, on the same terms as are applicable
under such arrangement, the same number of shares of New PRIMESTAR Class A
Common Stock as TCI would have been entitled to receive pursuant to the TSAT
Merger had TCI exercised in full its rights to purchase shares of TSAT Series
A Common Stock under such arrangement immediately prior to the TSAT Effective
Time, at a price per share equal to the purchase price for the shares of TSAT
Series A Common Stock otherwise purchasable pursuant to such arrangement. See
"--Other Arrangements" and the Condensed Pro Forma Combined Statement of
Operations of TSAT, included elsewhere in this Proxy Statement/Prospectus.
Transition Services Agreement. Pursuant to a transition services agreement
between TCI and TSAT (the "Transition Services Agreement"), TCI is obligated
to provide to TSAT certain services and other benefits, including certain
administrative and other services that were provided by TCI prior to the TSAT
Spin-off. Such services include (i) tax reporting, financial reporting,
payroll, employee benefit administration, workers' compensation
administration, telephone, fleet management, package delivery, management
information systems, billing, lock box, remittance processing and risk
management services, (ii) other services typically performed by TCI's
accounting, finance, treasury, corporate, legal, tax, benefits, insurance,
facilities, purchasing, fleet management and advanced information technology
department personnel, (iii) use of telecommunications and data facilities and
of systems and software developed, acquired or licensed by TCI from time to
time for financial forecasting, budgeting and similar purposes, including
without limitation any such software for use on personal computers, in any
case to the extent available under copyright law or any applicable third-party
contract, (iv) technology support and consulting services, and (v) such other
management, supervisory, strategic planning or other services as TSAT and TCI
may from time to time mutually determine to be necessary or desirable.
Pursuant to the Transition Services Agreement, TCI also agreed to provide
TSAT with certain most- favored-customer rights to programming services that
TCI or a wholly-owned subsidiary of TCI may own in the future and access to
any volume discounts that may be available to TCI for purchase of HSDs,
satellite receivers and other equipment.
As compensation for the services rendered to TSAT and for the benefits made
available to TSAT pursuant to the Transition Services Agreement, TSAT is
required to pay TCI a monthly fee of $1.50 per qualified subscribing household
or other residential or commercial unit (counted as one subscriber regardless
of the number of satellite receivers), up to a maximum of $3 million per
month, and to reimburse TCI quarterly for direct, out-of-pocket expenses
incurred by TCI to third parties in providing the services. During the nine
months ended September 30, 1997, TSAT paid $8,611,000 to TCIC pursuant to the
Transition Services Agreement.
The Transition Services Agreement continues in effect until the close of
business on December 31, 1999 and will be renewed automatically for successive
one-year periods thereafter, unless earlier terminated by (i) either party at
the end of the initial term or the then current renewal term, as applicable,
on not less than 180 days' prior written notice to the other party, (ii) TCI
upon written notice to TSAT following certain changes in control of TSAT, and
(iii) either party if the other party is the subject of certain bankruptcy or
insolvency-related events. Pursuant to the terms of the Transition Services
Agreement, TCI has the right to terminate the agreement upon the consummation
of the Restructuring Transaction, and TSAT expects that, concurrently with the
consummation of the Restructuring Transaction, TCI will exercise its right to
terminate the Transition Services Agreement. TSAT does not believe that any
such termination will have a material adverse effect on TSAT.
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Tax Sharing Agreement. Through the TSAT Spin-off Date, TSAT's results of
operations were included in TCI's consolidated U.S. federal income tax
returns, in accordance with the existing tax sharing arrangements among TCI
and its consolidated subsidiaries. Effective July 1, 1995, TCI, TCIC and
certain other subsidiaries of TCI entered into a tax sharing agreement (the
"Tax Sharing Agreement"), which formalized such pre-existing tax sharing
arrangements and implemented additional procedures for the allocation of
certain consolidated income tax attributes and the settlement of certain
intercompany tax allocations. The Tax Sharing Agreement encompasses U.S.
federal, state, local and foreign tax consequences and relies upon the Code
and any applicable state, local and foreign tax law and related regulations.
In connection with the TSAT Spin-off, the Tax Sharing Agreement was amended to
provide that TSAT be treated as if it had been a party to the Tax Sharing
Agreement, effective July 1, 1995.
In connection with the Restructuring Transaction, TSAT and TCI entered into
a tax sharing agreement dated June 1997, to confirm that pursuant to the
amended Tax Sharing Agreement (i) neither TSAT nor any of its subsidiaries has
any obligation to indemnify TCI, any other members of the TCI Group (as
hereinafter defined) or the TCI shareholders for any tax resulting from the
TSAT Spin-off failing to qualify as a tax-free distribution pursuant to
Section 355 of the Code; (ii) TCI is obligated to indemnify TSAT and its
subsidiaries for any taxes resulting from the TSAT Spin-off failing to qualify
as a tax-free distribution pursuant to Section 355 of the Code; (iii) to the
best knowledge of TCI, TSAT's total payment obligation under the Tax Sharing
Agreement could not reasonably be expected to exceed $5 million; and (iv) the
sole agreement between TCI or the TCI Group, on the one hand, and TSAT or any
of its subsidiaries, on the other, relating to taxes is the Tax Sharing
Agreement. As of the TSAT Spin-off Date, the sole agreement, if any, between
any of the TCI stockholders, on the one hand, and TSAT or any of its
subsidiaries, on the other, relating to taxes was the Tax Sharing Agreement.
Indemnification Agreements. On the TSAT Spin-off Date, TSAT entered into an
indemnification agreement with each of TCIC and TCI UA 1, Inc., an indirect
subsidiary of TCIC ("TCI UA 1") (collectively, the "Indemnification
Agreements"). The Indemnification Agreement with TCIC provides for TSAT to
reimburse TCIC for any amounts drawn under an irrevocable transferable letter
of credit issued for the account of TCIC to support TSAT's share of the
Partnership's obligations under the GE-2 Agreement, with respect to the
Partnership's use of transponders on GE-2. The drawable amount of such letter
of credit was $25,000,000, at September 30, 1997. Although TCIC's obligations
under such letter of credit expire on February 14, 1998, TCIC has agreed to
extend such letter of credit through June 30, 1999. See "RISK FACTORS--Risks
of Satellite Failure," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--TSAT," included elsewhere herein, and
"BUSINESS OF THE PARTNERSHIP--PRIMESTAR(R) Satellite Signal."
The Indemnification Agreement with TCI UA 1 provides for TSAT to reimburse
TCI UA 1 for any amounts drawn under an irrevocable transferable letter of
credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter of Credit"),
which supports the PRIMESTAR Credit Facility that was obtained by the
Partnership to finance advances to Tempo for payments due in respect of the
construction of the Tempo Satellites and that is supported by letters of
credit arranged for by affiliates of the Partners (other than GEAS). The
drawable amount of the TCI UA 1 Letter of Credit was $141,250,000 at September
30, 1997. TCI UA 1 has agreed to maintain the TCI UA 1 Letter of Credit
through June 30, 1999.
The Indemnification Agreements further provide for TSAT to indemnify and
hold harmless TCIC and TCI UA 1 and certain related persons from and against
any losses, claims, and liabilities arising out of the respective letters of
credit or any drawings thereunder. The payment obligations of TSAT to TCIC and
TCI UA 1, under such Indemnification Agreements are subordinated in right of
payment with respect to TSAT's obligations under the Bank Credit Facility.
Pursuant to the TSAT Asset Transfer Agreement, New PRIMESTAR will assume the
rights and obligations of TSAT under the Indemnification Agreements, including
the reimbursement obligations in favor of TCIC and TCI UA 1, on substantially
the same terms as the Reimbursement Agreements. See "RELATED AGREEMENTS--
Reimbursement Agreements."
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During the first quarter of 1997, two additional irrevocable transferable
letters of credit were issued pursuant to the Bank Credit Facility for the
account of TSAT, one to support TSAT's share of the Partnership's obligations
under the GE-2 Agreement and the second to support the PRIMESTAR Credit
Facility. The initial drawable amount of the first letter of credit is
$25,000,000, increasing to $50,000,000 if the Partnership exercises the End-
of-Life Option, and the initial drawable amount of the second letter of credit
is $5,000,000. Upon consummation of the Restructuring Transaction, New
PRIMESTAR will assume such letters of credit.
Trade Name and Service Mark License Agreement. Pursuant to a Trade Name and
Service Mark License Agreement (the "License Agreement"), TCI granted to TSAT,
for an initial term of three years following the TSAT Spin-off, a non-
exclusive non-assignable license to use certain trade names and service marks
specifically identified in the License Agreement, including the mark "TCI" in
the context of the digital satellite business. The License Agreement provides,
among other things, that all advertising, promotion and use of certain of
TCI's trade names and service marks by TSAT shall be consistent with TCI
guidelines and standards, as well as subject to TCI approval in certain
circumstances. Since the TSAT Spin-off, TSAT has taken steps to phase out the
use of the TCI names and marks covered by the License Agreement, except in
connection with its corporate name. TSAT and TCI intend to terminate the
License Agreement immediately prior to the Closing of the Restructuring
Transaction.
Fulfillment Agreement. TCIC historically provided TSAT with certain customer
fulfillment services with respect to customers of the PRIMESTAR(R) medium
power service enrolled by TSAT's direct sales force or the National Call
Center. Charges for such services were allocated to TSAT by TCIC based on
scheduled rates.
Pursuant to the Fulfillment Agreement, TCIC provided fulfillment services on
an exclusive basis to TSAT from the TSAT Spin-off through December 31, 1997,
with respect to customers of the PRIMESTAR(R) medium power service. Such
services included installation, maintenance, retrieval, inventory management
and other customer fulfillment services. Among other matters, the Fulfillment
Agreement (i) set forth the responsibilities of TCIC with respect to
fulfillment services, including performance standards, (ii) provided for
TCIC's fulfillment sites to be connected to the billing and information
systems used by TSAT, allowing for on-line scheduling and dispatch of
installation and other service calls, and (iii) provided scheduled rates to be
charged to TSAT for the various customer fulfillment services provided by
TCIC. TSAT retained sole control under the Fulfillment Agreement to establish
the retail prices and other terms and conditions on which installation and
other services were provided to TSAT's customers.
From January 1, 1997 through July 21, 1997, charges for customer fulfillment
services provided to TSAT by TCIC were made pursuant to the Fulfillment
Agreement as originally executed by TSAT and TCIC in connection with the TSAT
Spin-off (the "Original Fulfillment Agreement"). The scheduled rates for the
services provided by TCIC under the Original Fulfillment Agreement exceeded
the scheduled rates upon which charges historically had been allocated to TSAT
for such services. The Original Fulfillment Agreement had an initial term of
two years and was terminable, on 180 days notice to TCIC, by TSAT at any time
during the six month period ended June 30, 1997. Effective July 22, 1997, the
Original Fulfillment Agreement was amended to, among other things, (i) change
the termination date to December 31, 1997 and (ii) reduce the scheduled rates
for the customer fulfillment services provided by TCIC to rates that are
comparable to those that were used to allocate fulfillment charges to TSAT
prior to the TSAT Spin-off. In September and October 1997, TSAT entered into
agreements with eight regional fulfillment companies (none of which is
affiliated with TSAT or any other party to the Restructuring Transaction) to
perform the services that are no longer performed by TCIC since the
termination of the Fulfillment Agreement. TSAT's management believes that the
terms and conditions of such new third party fulfillment agreements are in the
aggregate no less favorable to TSAT than the terms and conditions of the
Original Fulfillment Agreement or the amended Fulfillment Agreement. See the
Condensed Pro Forma Combined Statement of Operations of TSAT, included
elsewhere in this Proxy Statement/Prospectus.
TCIC Credit Facility. In connection with the TSAT Spin-off, TSAT and TCIC
entered into a credit facility (the "TCIC Credit Facility") to provide for the
terms of the TSAT Note and to provide for a revolving credit facility (the
"TCIC Revolving Loans"). The TCIC Credit Facility required TSAT to use its
best efforts to obtain external debt or equity financing after the TSAT Spin-
off Date and provided for mandatory prepayment of the
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TCIC Revolving Loans and the TSAT Note from the proceeds thereof. The initial
borrowings under the Bank Credit Facility were used to repay the TSAT Note in
full. In connection with the February 1997 issuance of the Notes and the March
1997 determination that GE-2 was commercially operational, borrowing
availability pursuant to the TCIC Credit Facility was terminated.
Prior to the termination of the TCIC Credit Facility, borrowings thereunder
bore interest at 10% per annum, compounded semi-annually. Commitment fees
equal to 3/8% of the average unborrowed availability under the TCIC Credit
Facility were payable to TCIC annually. Commitment fees paid to TCIC during
the year ended December 31, 1996 aggregated $141,000. From the TSAT Spin-off
Date through December 31, 1996, the aggregate amount of interest paid by TSAT
to TCIC pursuant to the TCIC Credit Facility was $1,946,000. No interest
expense or commitment fees were incurred during the nine months ended
September 30, 1997.
Reimbursement of Certain Satellite Expenses. During 1996, TCIC made
intercompany advances to TSAT to fund the majority of the construction and
related costs associated with the Tempo Satellites. Prior to 1996, the
Partnership had funded substantially all of the construction and related costs
associated with the Tempo Satellites. In connection with the TSAT Spin-off, a
determination was made to provide that such 1996 advances from TCIC would be
repaid by TSAT to TCIC (notwithstanding the Reorganization Agreement), to the
extent (and only to the extent) that Tempo received corresponding advances
from the Partnership.
As a result of negotiations between TSAT and the Partnership to resolve a
disagreement concerning the Tempo Satellites, the Partnership advanced
$73,786,000 to Tempo in December 1996 to reimburse Tempo for all the 1996
costs which previously had been funded by TCIC. Upon receipt, such advance was
paid to TCIC by Tempo in repayment of such 1996 advance by TCIC. See "--Tempo
Satellites."
Other Arrangements. As a result of the TSAT Spin-off, each outstanding
option to purchase shares of TCI Group Series A Common Stock (a "TCI Option")
was divided into two separately exercisable options: (i) an option to purchase
TSAT Series A Common Stock (an "Add-on TSAT Option"), exercisable for the
number of shares of TSAT Series A Common Stock that would have been issued in
the TSAT Spin-off in respect of the shares of TCI Group Series A Common Stock
subject to the applicable TCI Option, if such TCI Option had been exercised in
full immediately prior to the TSAT Spin-off Record Date, and containing
substantially equivalent terms as the existing TCI Option, and (ii) an option
to purchase TCI Group Series A Common Stock (an "Adjusted TCI Option"),
exercisable for the same number of shares of TCI Group Series A Common Stock
as the corresponding TCI Option had been. In connection therewith, on the TSAT
Spin-off Date, TCI and TSAT entered into a share purchase agreement (the
"Share Purchase Agreement"), to sell to each other from time to time, at the
then current market price, shares of TCI Group Series A Common Stock and TSAT
Series A Common Stock, respectively, as necessary to satisfy their respective
obligations under Adjusted TCI Options and Add-on TSAT Options held after the
TSAT Spin-off Date by their respective employees and nonemployee directors.
Following the TSAT Merger, TCI will have the right to purchase from New
PRIMESTAR, on the same terms as are applicable under the Share Purchase
Agreement, the same number of shares of New PRIMESTAR Class A Common Stock as
TCI would have been entitled to receive pursuant to the TSAT Merger had TCI
exercised in full its rights to purchase shares of TSAT Series A Common Stock
under the Share Purchase Agreement immediately prior to the TSAT Effective
Time, at a price per share equal to the purchase price for the shares of TSAT
Series A Common Stock otherwise purchasable pursuant to the Share Purchase
Agreement.
Certain officers of TSAT who were officers or directors of TCI and/or TCIC
prior to the TSAT Spin-off received undertakings of indemnification from TCI
and/or TCIC. Such undertakings survived the TSAT Spin-off.
In June 1996, the Board of Directors of TCI (the "TCI Board") authorized TCI
to permit certain of its executive officers to acquire equity interests in
certain of TCI's subsidiaries. In connection therewith, the TCI Board approved
the acquisition by each of Brendan R. Clouston and Larry E. Romrell, executive
officers of TCI, of 1.0% of the net equity of TSAT. The TCI Board also
approved the acquisition by Gary S. Howard, an executive officer of TCIC prior
to the TSAT Spin-off Date and Chief Executive Officer and a director of TSAT,
of 1.0% of the net equity of TSAT and the acquisition by David P. Beddow, an
executive officer of certain TCI
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subsidiaries and a director of TSAT, of 0.5% of the net equity of TSAT. The
TCI Board determined to structure such transactions as grants to such persons
of options to purchase shares of TSAT Series A Common Stock representing 1.0%
(in the case of each of Messrs. Clouston, Romrell and Howard) and 0.5% (in the
case of Mr. Beddow) of the shares of TSAT Series A Common Stock and TSAT
Series B Common Stock issued and outstanding on the TSAT Spin-off Date,
determined immediately after giving effect to the TSAT Spin-off, but before
giving effect to any exercise of such options ("TSAT Spin-off Date Options").
The aggregate exercise price for each such option is equal to 1.0% (in the
case of each of Messrs. Clouston, Romrell and Howard) and 0.5% (in the case of
Mr. Beddow) of TCI's Net Investment (as defined below) as of the TSAT Spin-off
Date, but excluding any portion of TCI's Net Investment that as of such date
was represented by a promissory note or other evidence of indebtedness from
TSAT to TCI. TSAT Spin-off Date Options to purchase 2,324,266 shares of TSAT
Series A Common Stock at a per share price of $8.86 were granted on the TSAT
Spin-off Date, will vest in 20% cumulative increments on each of the first
five anniversaries of February 1, 1996, and will be exercisable for up to ten
years following February 1, 1996. Pursuant to the Reorganization Agreement,
and (in the case of the options granted to Messrs. Clouston, Romrell and
Beddow) in partial consideration for the capital contribution made by TCI to
TSAT in connection with the TSAT Spin-off, TSAT agreed, effective as of the
TSAT Spin-off Date, to bear all obligations under such options and to enter
into stock option agreements with respect to such options with each of Messrs.
Clouston, Romrell, Howard and Beddow. For purposes of determining the
aggregate exercise price for each TSAT Spin-off Date Option, "TCI's Net
Investment" means the cumulative amount invested by TCI and its predecessor in
TSAT and its predecessors prior to and including the applicable date of
determination, less the aggregate amount of all dividends and distributions
made by TSAT and its predecessors to TCI and its predecessor prior to and
including such date.
In addition, beginning in March 1997, TCIC began providing TSAT with
customer support services from the Boise Call Center to assist TSAT in
responding to calls that exceed the capacity of TSAT's National Call Center.
Management believes that the rates charged by TCIC to TSAT approximate fair
market rates, as established by agreement between TSAT and TCIC. Currently,
TCIC and TSAT are negotiating for the sale or long-term lease of the Boise
Call Center to TSAT.
EMPLOYEES
TSAT had approximately 1,200 employees as of September 30, 1997. None of
TSAT's employees are represented by a union, and TSAT believes its employee
relations are good.
Pursuant to the Transition Services Agreement, TCI currently provides
certain services to TSAT. Under the terms of the Transition Services
Agreement, TCI has the right to terminate the agreement upon the consummation
of the Restructuring Transaction, and TSAT expects that, concurrently with the
consummation of the Restructuring Transaction, TCI will exercise its right to
terminate the Transition Services Agreement. See "--Certain Arrangements
Between TSAT and TCI--Transition Services Agreement."
PROPERTIES
TSAT owns no real property. TSAT has entered into noncancellable operating
leases for all of its facilities, all of which expire at various times through
2002. TSAT believes that such facilities are in good condition and are
suitable and adequate for its business operations for the foreseeable future.
Upon consummation of the Restructuring Transaction, New PRIMESTAR will succeed
to such facilities and will assume the leases relating thereto.
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The following table sets forth certain information concerning TSAT's
principal properties as of September 30, 1997:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION OF
DESCRIPTION/USE LOCATION SQUARE FOOTAGE LEASE
- --------------- -------- -------------- -------------
<S> <C> <C> <C>
Corporate Headquarters Englewood, Colorado 56,371 6/30/2001
National Call Center Englewood, Colorado 50,009 6/30/2001
National Call Center Englewood, Colorado 33,745 12/31/1997
Northwest Regional Office Lake Oswego, Oregon 3,236 3/31/1998
Northeast Regional Office State College, Pennsylvania 7,073 8/31/2000
Great Lakes Regional Office St. Charles, Missouri 4,300 2/28/1998
South Central Regional Office Farmers Branch, Texas 4,328 8/31/1998
Southeast Regional Office Atlanta, Georgia 5,308 1/31/2002
</TABLE>
TSAT leases additional properties as field offices to support its sales
force.
LEGAL PROCEEDINGS
On September 30, 1997, a civil action entitled Croce Advertising, Inc. v.
TCI Digital Satellite Entertainment, Inc., d/b/a/ PRIMESTAR By TCI and The
Hibbert Company d/b/a/ The Hibbert Group was filed in the U.S. District Court
for the District of Colorado, Civil Action No. 97-S-2130. On October 20, 1997,
Croce Advertising, Inc. ("Croce"), the plaintiff, filed an amended complaint
naming TSAT as a defendant and dropping TCI Digital Satellite Entertainment,
Inc. d/b/a/ PRIMESTAR By TCI from the action. Service was made upon TSAT on
October 20, 1997. Croce alleges copyright infringement based on its
allegations that after its relationship with TSAT was terminated, TSAT
reprinted certain marketing materials created by Croce. TSAT is investigating
the merits of the claim and believes it has legitimate defenses. Croce's claim
for damages includes alleged profits related to the printing of the materials
at issue and TSAT's profits from the use of these materials. Croce also named
The Hibbert Company as a defendant on the copyright infringement claim because
The Hibbert Company printed certain TSAT marketing materials. TSAT has agreed
to indemnify The Hibbert Company for costs and damages arising out of the
copyright claim. Croce's remaining claims arise out of the parties' ongoing
dispute concerning unpaid invoices. Croce alleges that TSAT owes $4,962,560.05
on these invoices, plus interest from March 7, 1997, until final resolution.
Although no assurance can be given regarding the outcome of this action,
management of TSAT believes that it should not have a material adverse effect
upon the financial condition of TSAT.
In a civil action entitled Jerry Wayne Self v. PRIMESTAR By TCI, et al.,
filed in the Circuit Court of Jefferson County, Alabama, Civil Action No. 96-
831, an Order of Judgment was entered against PRIMESTAR By TCI on November 12,
1997, in the amount of $4,257,242, consisting of medical expenses of $15,242,
lost wages of $52,000, future lost wages of $1,040,000, physical and mental
pain and suffering in an amount of $150,000 and punitive damages of
$3,000,000. The judgment arises out of a case in which the plaintiff alleges
that on September 19, 1995, he was riding in the front seat of a car that was
struck head-on by a car driven by William Francis Hinton, causing the
plaintiff to suffer injuries. The plaintiff alleges that Hinton was
intoxicated and was "acting within the line and scope of his employment" for
PRIMESTAR By TCI when the accident occurred. "PRIMESTAR By TCI" is a trade
name currently or formerly used in certain jurisdictions by TSAT and/or its
predecessors. On December 3, 1997, TSAT filed an Answer and Affirmative
Defenses and a Motion to Set Aside Entry of Default and Default Judgment or in
the Alternative for Relief from Judgment or in the Alternative a Motion to
Reconsider or for a New Trial. On December 12, 1997, the Court entered an
order setting aside the Entry of Default and Default Judgment. The Court has
set trial for March 23, 1998.
See "REGULATORY MATTERS--Antitrust Decree."
While TSAT is a party to certain legal proceedings in the ordinary course of
business, TSAT is not a party to any litigation that it believes will have a
material adverse effect on TSAT's financial position or results of operations.
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BUSINESS OF OTHER PRIMESTAR(R) DISTRIBUTORS
GENERAL
The Distributors market the PRIMESTAR(R) service and contract with
subscribers. Currently, each of PRIMESTAR(R)'s authorized Distributors is
affiliated with one or more of the Partners, although the Partnership
Agreement does not require that Distributors be so affiliated with the
Partners. None of the Distributors currently has a formal written distribution
agreement with the Partnership, although the Partnership and the Distributors
have attempted to negotiate such an agreement from time to time since 1990.
Currently, all of the Distributors operate in non-exclusive territories
assigned by the Partnership. The Distributors set their own retail pricing and
are responsible in their respective territories for authorization of
subscribers, installation, maintenance and retrieval of customer premises
equipment, and billing and collection of monthly and other fees, and the
Distributors bear all risks of loss relating thereto. The Partnership
negotiates and enters into agreements with programmers, arranges for satellite
capacity and is responsible for the uplinking and compression of programming
signals. In addition, the Partnership provides marketing and administrative
support, including national advertising and a national toll-free number, "1-
800-PRIMESTAR," that automatically transfers potential customers to one of the
Distributors, based on the potential customers' zip codes. In return for such
services, the Partnership collects from the Distributors a monthly programming
fee based on the number of Authorized Units receiving such programming plus a
separate monthly authorization fee based on each Distributor's total number of
Authorized Units.
TWSSI
TWSSI, a combination of the DBS operations conducted by TWE and TWEAN, a
joint venture between TWE and Newhouse, distributes programming services under
the PRIMESTAR(R) brand name to subscribers within specified areas of the
continental U.S. As of September 30, 1997, TWSSI served approximately 567,000
subscribers, with PrimeValueSM being the most popular customer offering. TWSSI
currently charges $32.99 per month including all related equipment charges for
the PrimeValueSM programming package. TWSSI distributes PRIMESTAR(R) through
44 local offices.
COX SI
Cox SI, a wholly-owned subsidiary of Cox, distributes the PRIMESTAR(R)
service under the name "PrimeStar by Cox." Cox, an indirect 75.3% owned
subsidiary of Cox Enterprises, is among the nation's five largest cable
multiple system operators, serving some 3.3 million customers. Cox is a fully
integrated, diversified broadband communications company with interest in
domestic and United Kingdom cable distribution systems, programming networks
and telecommunications technology.
Cox SI, like TSAT, distributes PRIMESTAR(R) services through several
distribution channels. These include (i) four master sales agents, (ii) dealer
sales representatives, (iii) Radio Shack stores in its territories pursuant to
the Partnership's national agreement with Radio Shack, (iv) independent
dealers and (v) Electronic Data Systems, a national call center, that has
historically provided Cox SI with certain customer sales services for
customers of PrimeStar by Cox. Cox SI has entered into agreements with four
master sales agents to perform sales and installations for customers. Cox SI's
master agent program provides services, which include installation,
maintenance, retrieval, inventory management and other customer fulfillment
services, to be performed in accordance with specified performance standards.
The agreements with the master agents expire in accordance with their terms in
1998, and are terminable in the event of the agents' non-performance.
In common with all other PRIMESTAR(R) Distributors, Cox SI leases
PRIMESTAR(R) equipment to subscribers of that service. However, unlike TSAT,
Cox SI does not offer any purchase options with respect to the PRIMESTAR(R)
equipment.
As of September 30, 1997, Cox SI had an installed base of over 157,000,
representing approximately 8.7% of the Partnership's 1.8 million subscribers
as of such date.
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COMCAST SCI
Comcast SCI, a wholly-owned subsidiary of Comcast distributes PRIMESTAR(R)
to subscribers within specified areas of 19 states in the continental U.S.
Comcast SCI uses independent sales agents, national retailers (i.e., Radio
Shack) and localized advertising campaigns to create demand for the
PRIMESTAR(R) service. The independent agents use outbound telemarketing, door-
to-door selling and participation in local events, including fairs, rodeos,
auto races, etc., to create sales. Comcast SCI's advertising promotions are
usually delivered by newspaper, radio and targeted direct mail efforts. Other
marketing strategies include customer referrals and service demonstrations at
local retailers. As of September 30, 1997, it is estimated that Comcast SCI
offers the PRIMESTAR(R) service within its territories at a total of 1,025
points of sale, including, among others, 650 Radio Shack stores and 250 local
market retailers. As of September 30, 1997, Comcast SCI had an installed base
of approximately 169,000 subscribers, of which approximately 42.7% received
the Partnership's premier programming package, PrimeHitsSM. See "BUSINESS OF
THE PARTNERSHIP--PRIMESTAR(R) Programming." At September 30, 1997, Comcast
SCI's subscribers represented approximately 9.4% of the Partnership's
estimated 1.8 million subscribers.
CONTINENTAL SATELLITE
Several subsidiaries of MediaOne (collectively, "Continental Satellite")
serve as distributors of the PRIMESTAR(R) service. MediaOne is a provider of
broadband communications services with operations and investments encompassing
cable television systems, international broadband communication ventures,
telecommunications and technology ventures and programming services. MediaOne
was merged with and into US WEST, Inc. in November 1996, and became a member
of the US WEST Media Group, one of two major groups that comprise US WEST,
Inc. The other major group of US WEST, Inc., the Communications Group,
provides telecommunications services in fourteen western and midwestern
states.
Continental Satellite distributes the PRIMESTAR(R) service under the name
"PRIMESTAR(R) by Continental Satellite." Continental Satellite estimates that
10.2% of U.S. television households are located within its territories. In
order to acquire customers in its assigned territories, Continental Satellite
uses traditional direct marketing tactics, a "neighbor-to-neighbor" referral
program, and has developed a retail distribution infrastructure and a full-
service national sales and service center. As of September 30, 1997, it is
estimated that Continental Satellite offers the PRIMESTAR(R) service within
its territories at more than 1,100 points of sale, including, among others,
665 Radio Shack stores and 395 local market retailers. As of September 30,
1997, Continental Satellite had an installed base of approximately 166,000
subscribers, of which approximately 35.8% received the Partnership's premier
programming package, PrimeHitsSM. See "BUSINESS OF THE PARTNERSHIP--
PRIMESTAR(R) Programming." At September 30, 1997, Continental Satellite's
subscribers represented approximately 9.2% of the Partnership's estimated 1.8
million subscribers.
EMPLOYEES AND PROPERTIES
TSAT believes that New PRIMESTAR will desire to own and operate some, but
not all, of the local and/or regional offices now operated by some or all of
the Distributors, and that the Distributors now operating such offices will
agree to transfer such offices to New PRIMESTAR in connection with the
consummation of the Restructuring Transaction. It is expected that New
PRIMESTAR will assume occupancy and miscellaneous equipment leases in
connection with the locations it acquires from the Distributors, but will not
otherwise pay any additional consideration to the Distributors in respect
thereof. It is expected that New PRIMESTAR will offer employment to most or
all of the employees of such Distributors currently working out of the
locations it acquires and will assume certain severance obligations with
respect to such employees. New PRIMESTAR will also assume the obligation to
pay certain "stay bonuses" to certain employees of the Distributors, whether
or not such employees are engaged at locations that New PRIMESTAR intends to
acquire. The aggregate financial impact to New PRIMESTAR of its obligations in
respect of such employees and assumed locations is not expected to be
material.
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Except as described in the immediately preceding paragraph and as described
under "MANAGEMENT OF NEW PRIMESTAR," employees of the respective Distributors
(other than TSAT) are not currently expected to become employees of New
PRIMESTAR in connection with the Restructuring Transaction.
None of TSAT, New PRIMESTAR or the Partnership has agreed to acquire any
real property (or rights, title or interests therein) of any of the
Distributors (other than TSAT), and TSAT does not expect that, at the
Effective Time, Comcast SCI and Cox SI will have any rights, title or interest
with respect to any real property, except in each case for any real property
leases with respect to any regional offices of any Distributors to be assumed
by New PRIMESTAR as described in the first paragraph under this heading.
LEGAL PROCEEDINGS
While each of TWSSI, TWEAN, Cox SI, Comcast SCI and Continental Satellite is
a party to certain legal proceedings in the ordinary course of business, none
of such parties is a party to any litigation that it believes will have a
material adverse effect on its financial position or results of operations.
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BUSINESS OF NEW PRIMESTAR
GENERAL
New PRIMESTAR, a newly-formed Delaware corporation, is currently a wholly-
owned subsidiary of TSAT that has not conducted any significant activities
other than those incident to its formation, the preparation of this Proxy
Statement/Prospectus, the execution of the Restructuring Agreement, the TSAT
Merger Agreement and related agreements, and financing activities relating to
the Restructuring Transaction. As a result of the Restructuring Transaction,
New PRIMESTAR will acquire the TSAT Business, the Partnership Interests of the
other Partners and the PRIMESTAR Assets of the other Distributors.
Accordingly, after consummation of the Restructuring Transaction, the business
of New PRIMESTAR will be the businesses currently conducted by the Partnership
and TSAT, and the PRIMESTAR(R) distribution businesses of the other
Distributors. It is expected that, measured by the number of subscribers, New
PRIMESTAR will be the second largest provider of satellite television services
in the United States. Under the terms of the Restructuring Agreement, TSAT
will own approximately 36% of the outstanding shares of New PRIMESTAR Common
Stock at the Closing of the Restructuring Transaction, and TWE and Newhouse
(collectively), Comcast, MediaOne, Cox and GE Americom will own approximately
31%, 10%, 9%, 9% and 5%, respectively, of the outstanding shares of New
PRIMESTAR Common Stock at the Closing, subject in each case to adjustments
based on closing subscriber counts and other factors. See "THE RESTRUCTURING
AGREEMENT--Consideration to be Received in the Restructuring Transaction."
Upon consummation of the TSAT Merger, stockholders of TSAT on the TSAT Closing
Date will own approximately 34% of the outstanding shares of New PRIMESTAR
Common Stock, and the shares of New PRIMESTAR Common Stock then held by TSAT
will be canceled. The ownership of New PRIMESTAR Common Stock not then held by
TSAT at the TSAT Closing will not be affected by the TSAT Merger. See "THE
TSAT MERGER--Consideration to be Received in the TSAT Merger."
BUSINESS STRATEGY
New PRIMESTAR's primary objective will be to maintain and expand its
position in the market as one of the leading providers of satellite delivered
entertainment programming and to continue to grow its subscriber base. To
achieve this objective, New PRIMESTAR will adopt the following strategy:
Provide High Quality Digital Programming at an Attractive Price. TSAT and
the other Distributors offer, and New PRIMESTAR will offer, consumers the
PRIMESTAR(R) service, which consists of a wide variety of high quality
programming, delivered digitally with laser-disc-quality image and compact-
disc-quality sound, for a competitive price. TSAT believes that the image and
sound quality of the PRIMESTAR(R) service is superior to that provided by most
existing cable systems and wireless cable providers, which currently transmit
analog signals to their subscribers, and is comparable to that of other
digital satellite television providers, including those using compression
methods based on the MPEG-2 digital compression architecture. TSAT further
believes that PRIMESTAR(R)'s combination of price and services provides
consumers with greater value than the respective price and service offerings
of other current digital satellite service providers. In April 1997, using the
additional capacity of GE-2, the PRIMESTAR(R) programming service increased
its channel offerings from 95 to 150 channels, and completed its expansion to
over 160 channels in August 1997. Also, in April 1997, PRIMESTAR(R) became the
first and only television service to reorganize its channel offerings into
easily accessible programming categories, enabling viewers to find their
favorite programming more easily. Since April 1997, PRIMESTAR(R) has also
offered subscribers in the majority of the U.S. the opportunity to use HSDs of
approximately 27 to 29 inches in diameter. See "BUSINESS OF THE PARTNERSHIP,"
"RISK FACTORS--Risks of Satellite Failure," "RISK FACTORS--Potential
Interference with Satellite Signal" and "RISK FACTORS--Risks of Adverse
Governmental Regulations and Adjudications."
Continue to Develop and Expand Diverse Distribution Channels. TSAT and the
other PRIMESTAR(R) Distributors continue, and New PRIMESTAR will continue, to
increase the PRIMESTAR(R) customer base through multiple sales and
distribution channels, which include master sales agents and their sub-agents,
direct sales representatives, telemarketing agents and consumer retail
outlets. PRIMESTAR(R) is also distributed through
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more than 6,200 Radio Shack stores nationwide, and in September 1997, the
Partnership announced that Nobody Beats the Wiz began distribution of the
PRIMESTAR(R) service in its stores, which are located throughout New York, New
Jersey and Connecticut. PRIMESTAR(R) is also distributed through the
Association of Video Buyers, a consumer electronics buying cooperative, and
The People's Network, a multi-level marketing company. TSAT believes that,
following the Restructuring Transaction, New PRIMESTAR will pursue a national
sales strategy with consistent programming, packages and prices and a
rationalized marketing effort and infrastructure. In addition, TSAT expects
that New PRIMESTAR's ability to implement consistent national retail
agreements will enable New PRIMESTAR to expand its presence with consumer
electronics outlets. See "BUSINESS OF TSAT--PRIMESTAR By TSAT" and "BUSINESS
OF OTHER PRIMESTAR(R) DISTRIBUTORS."
Differentiate PRIMESTAR(R)'s Offerings through Superior Customer
Service. TSAT believes that providing outstanding service, convenience and
value are essential to developing long term customer relationships. TSAT and
the other Distributors offer consumers a "one-stop shopping" service which
includes programming, installation, maintenance, reliable customer service and
satellite reception equipment. Through their respective national call centers,
TSAT and the other Distributors provide customers with round-the-clock
telephone support for sales, installation, authorization and billing, as well
as scheduling of repair and customer service calls, 365 days per year. In the
recent consumer survey of cable and satellite customers by J.D. Power and
Associates, PRIMESTAR(R) ranked number one in customer satisfaction and was
found to be superior to its competitors in the areas of corporate image,
reception quality, service representatives and billing. New PRIMESTAR will
continue to offer such customer services. New PRIMESTAR also intends to
enhance its customer service by providing consistent installation guidelines
nationwide. In that connection, New PRIMESTAR plans to open five regional
offices and to operate a national call center and customer billing facilities.
See "BUSINESS OF TSAT--PRIMESTAR By TSAT" and "BUSINESS OF OTHER PRIMESTAR(R)
DISTRIBUTORS."
Provide Subscribers Attractive Alternatives to Obtain Digital Satellite
Equipment. The PRIMESTAR(R) equipment rental program, which includes free
maintenance and repair, provides significant benefits to customers, who are
not required to buy satellite equipment in order to receive the PRIMESTAR(R)
service. Because PRIMESTAR(R) is marketed as a service, with programming,
equipment rental, maintenance and customer service included in the monthly
charge, the up-front costs to new PRIMESTAR(R) subscribers are generally lower
than the up-front costs to new subscribers of other digital satellite
television providers, who must typically purchase and install HSDs, satellite
receivers and related equipment. Moreover, since TSAT and the other
Distributors generally own, service and install all customer premises
equipment for their respective rental customers, the Distributors protect
their respective subscribers from the inconvenience of equipment failure,
maintenance concerns, obsolete technology, self-installation and expired
warranties. It is expected that New PRIMESTAR will continue to offer such
services. See "BUSINESS OF THE PARTNERSHIP--PRIMESTAR(R) Equipment," "BUSINESS
OF TSAT--PRIMESTAR By TSAT--Equipment and Installation" and "BUSINESS OF OTHER
PRIMESTAR(R) DISTRIBUTORS." In addition, it is expected that New PRIMESTAR
will endeavor to decrease churn through enhanced customer retention programs
and by providing consumers with attractive alternatives to its current
equipment rental program.
Expand Commercial Opportunities for Digital Satellite Service. TSAT believes
that the commercial marketplace (including hotels, motels, bars, restaurants,
MDUs, businesses and schools) offers a substantial opportunity for growth and
is therefore of strategic importance. With the enhanced channel capacity in
PRIMESTAR(R)'s audio and video entertainment programming provided by GE-2,
TSAT believes that PRIMESTAR(R) has an increased ability to successfully
penetrate the commercial marketplace. TSAT expects that New PRIMESTAR will
continue to pursue opportunities to provide private network service to
businesses, and to participate in the growing market for distance learning.
Market Medium Power Service to All Potential Customers. TSAT and the other
Distributors seek, and New PRIMESTAR will seek, with respect to the
PRIMESTAR(R) medium power service, to maximize penetration among all consumers
of entertainment programming, including in the "underserved" marketplace,
defined by TSAT as those areas not passed by cable, or served by cable systems
with fewer than 40 channels. To date, the Distributors
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have been at a competitive disadvantage vis-a-vis other satellite programming
distributors due to the relatively larger dish size required by PRIMESTAR(R)'s
medium power service. As a result, the Distributors' primary direct marketing
success has been in rural areas, which are generally underserved for variety,
choice and convenience in audio and video entertainment programming, and in
which the larger dish size is not as great a competitive disadvantage. With
the commencement of high power service utilizing the capacity of Tempo DBS-1
and the new satellite assets expected to be acquired through the ASkyB
Transaction, New PRIMESTAR will be positioned to offer a competitive
alternative high power service, which will enable it to utilize 18 inch or
smaller dishes and to compete more successfully in suburban and urban markets,
including those served by cable systems with 40 or more channels.
Provide High Power DBS Services. New PRIMESTAR intends to implement a high
power DBS system and to provide high power DBS services, commencing in the
first half of 1998, subject to testing and acceptance of Tempo DBS-1. In that
connection, New PRIMESTAR intends to initiate a high power DBS business at
119(degrees) W.L. on Tempo DBS-1 using its 11 transponder frequencies. Such
high power DBS service will initially provide approximately 100 channels of
digital video and 20 channels of digital audio programming. Following receipt
of FCC Approval to the assignment of the MCI FCC Licenses pursuant to the
ASkyB Transaction, New PRIMESTAR intends to implement a high power DBS
business using 28 transponder frequencies at the 110(degrees) W.L. orbital
location. At such time, New PRIMESTAR would consider whether or not to shift
its existing high power subscribers from 119(degrees) W.L. to 110(degrees)
W.L. based on the anticipated demand for, and cost of, such shift, and subject
to regulatory requirements. It is expected that current medium power
PRIMESTAR(R) subscribers will be gradually transferred to the new high power
service at 110(degrees) W.L. by 2002 when the GE-2 Agreement expires.
New PRIMESTAR's high power service is expected to use GI's advanced
statistical multiplexing compression technology and the new high power boxes
will feature an interactive, on-screen programming guide developed by United
Video Satellite Group, Inc., a subsidiary of TCI ("UVSG"). New PRIMESTAR has
selected GI's DigiCipher II digital compression system for its high power set-
top boxes, and GI is expected to be the first of several suppliers for the
hardware. The high power service will require a dish of only 18 inches, as
compared to the 27 to 36 inch dishes currently used by PRIMESTAR(R) medium
power subscribers. Yet, current subscribers would not necessarily require a
new dish in the transition from medium to high power, although the existing
dishes would need to be repointed. Larger dishes may even give high power
subscribers an advantage in areas where rain fade exists.
New PRIMESTAR intends to take advantage of PRIMESTAR(R)'s wide variety of
programming choices (including unique regional sports packages and a-la-carte
options), its popular "nothing to buy" subscription policy and its strong
brand name and reputation for customer service to market its proposed high
power DBS service aggressively to residential customers as the best value in
satellite television. New PRIMESTAR also plans to market satellite delivered
digital programming on a wholesale basis to smaller cable systems, wireless
cable and other channel constrained analog services, which would resell such
programming to their own customers under New PRIMESTAR's "DigiPix" brand name.
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REGULATORY MATTERS
GENERAL
Pursuant to the Communications Act, the FCC regulates the use of radio
spectrum in the United States. U.S. DBS licensees and permittees are subject
to the regulatory authority of the FCC. Although the non-technical aspects of
DBS operations are generally subject to less regulation than other
communications services, some regulations do apply. In addition, the FCC has
proposed to adopt regulations that will affect DBS licensees and permittees.
Currently, a DBS permittee must complete and file with the FCC a satellite
construction contract with respect to its authorized satellite station(s)
within one year of the grant of the construction permit. DBS permittees who
received their permits prior to January 19, 1996 have six years from the date
of permit grant to begin operating their DBS systems. New permits and permit
extensions granted after January 19, 1996 provide for a four year construction
period. Upon completion of construction, the FCC authorizes DBS permittees to
launch and operate their satellites. Those DBS providers which control the
video programming they distribute, and DBS licensees which offer broadcast
service, are subject to equal employment opportunity requirements. DBS
providers offering non-broadcast service from their DBS satellites are
licensed to operate for ten years, while those offering broadcast services
(that is, services available on a non-subscription basis) are licensed for
five years. FCC licenses must be renewed at the end of each license term. FCC
licenses are generally renewed in the ordinary course, absent misconduct by
the licensee.
In 1995, the FCC adopted several new service rules for DBS permittees and
licensees. The FCC established a requirement that those entities acquiring DBS
permits or licenses after January 19, 1996, must provide service to Alaska and
Hawaii if such service is technically feasible. It also required that all
existing DBS permittees and licensees provide service to Alaska and Hawaii
from at least one of their currently assigned orbital positions or relinquish
their western orbital location. In addition, the FCC revised its rules with
respect to licensees' ability to use portions of their satellite capacity for
non-DBS services. The FCC provided that licensees must principally use their
DBS authorizations for DBS service, but that during their first five years in
operation, licensees may offer non-DBS services. After five years, licensees
may continue to provide non-DBS services so long as at least half of their
total satellite capacity at a given orbital location is used for DBS service.
In December 1996, the International Bureau of the FCC concluded that foreign
ownership restrictions do not apply to subscription DBS service. This
decision, however, is subject to a pending review by the FCC, and the current
Administration has requested that the FCC reconsider its decision in a general
rulemaking proceeding. Should the FCC determine that foreign ownership
restrictions apply to subscription DBS service providers, then, as a condition
to the consummation of the ASkyB Transaction, New PRIMESTAR would have to seek
a waiver of such restrictions. There can be no assurance that the FCC would
grant such a waiver.
Regulations proposed for DBS, but not yet adopted by the FCC include access
requirements for federal political candidates on DBS systems, limitations on
charges for advertising by political candidates and a requirement that DBS
providers reserve four to seven percent of their channel capacity for
noncommercial programming of an educational and informational nature. In the
spring of 1997, the FCC announced during an FCC-sponsored DBS discussion that
it planned to initiate a review of its DBS rules by year-end. Such a review
has not been initiated to date but is expected to begin by March 1998. TSAT
cannot predict how application of the FCC's current or proposed rules will
affect its own operations, the operations of New PRIMESTAR or the operations
of its competitors.
In addition, regulations promulgated by governmental entities other than the
FCC may affect the distribution of programming by DBS providers. The SHVA
prohibits the retransmission by a satellite carrier of the television
broadcast signal of a network television station to households that receive a
Grade B intensity over-the-air signal of a television broadcast station
affiliated with such network and to households that receive (or within the
past 90 days had received) through a cable system the signal of a television
station affiliated with such network. The
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Partnership has received numerous challenges to its network subscribers from
certain network affiliates and in some instances has discontinued network
service to certain subscribers. The networks and their affiliates have
commenced infringement actions against certain other satellite carriers for
violation of the network service restrictions. However, while the networks and
affiliates have from time to time threatened litigation, none of the networks
or affiliates has yet asserted any claim for damages under applicable law
against the Partnership or any of the other parties to the Roll-up Plan.
Negotiations are continuing between representatives of the Partnership, the
National Association of Broadcasters, certain network-affiliated television
stations, and their respective affiliate associations, regarding a proposed
Settlement and Compliance Agreement, which agreement is expected to provide
for pre-screening techniques for customers based on zip codes and maps to
ensure compliance with SHVA procedures, the timing for disconnecting any
existing non-compliant network subscribers, and provisions for mutual release
for any past or future liability. Although a final agreement with respect to
such matters has not yet been executed, the Partnership currently expects to
enter into such an agreement during the first quarter of 1998. However, if an
agreement is not reached, it is likely that litigation will be initiated
against the Partnership. The SHVA provides for remedies which can include
actual damages, injunctions, and statutory damages. Statutory damages per
individual claim are limited to $5.00 per subscriber, per month, and statutory
damages for a pattern or practice of violations are limited to $250,000 in a
six month period. At present, the Partnership is unable to determine the basis
upon which any damages might be calculated or what their amount might be.
Therefore, it is not possible to assess the impact, if any, of such unasserted
claims on the Partnership's results of operations or cash flow. Management is
also currently unable to determine the extent to which the restriction on the
delivery of network service to subscribers, as contemplated by the proposed
Settlement and Compliance Agreement, would have on the marketing of its
services generally.
The Copyright Office reviewed the SHVA and submitted its report to Congress
on August 1, 1997. Of particular note, the Copyright Office recommended the
adoption of a "red zone/green zone" plan under which satellite carriers
generally would be barred from retransmitting a network-affiliated station to
households located within the local market area (i.e., Area of Dominant
Influence) of another affiliate of the same network, but would be permitted to
retransmit (subject to payment of the applicable SHVA royalty fee) a network-
affiliated station to households located in any Area of Dominant Influence
that is not served by an affiliate of the same network. The Copyright Office
further proposed that a new royalty fee system be established that would
permit satellite carriers to retransmit a network-affiliated station to
households located in the local market of another affiliate upon the payment
of a royalty fee which would be distributed to network affiliates. The
Copyright Office also recommended that the Copyright Act be amended to
expressly permit satellite carriers to retransmit a network affiliated station
to households located in that station's own market. The Copyright Office took
no position on whether there should be a royalty fee payment imposed for such
"local into local" retransmissions. In response to a petition by EchoStar, the
Copyright Office has initiated a proceeding to consider whether the
retransmission of a network's affiliated station within a station's own market
is permissible under the Copyright Act as presently codified. Lastly, the
Copyright Office recommended that Congress indefinitely extend the satellite
carrier license, similar to the cable compulsory license. The recommendations
of the Copyright Office do not currently have legal force or effect and will
not unless and until they are adopted by Congress and enacted as legislation.
At present, no such legislation has been proposed.
A CARP convened pursuant to the terms of the SHVA recommended that the
Librarian of Congress adopt an increase in the royalty fees paid by satellite
carriers for the distribution of superstations and network affiliates directly
to homes to a level commensurate with fair market value. Specifically, the
CARP recommended that the rates be increased from their current level, $0.06
per subscriber per month for network signals and $0.175 ($0.14 for certain
"syndex proof" stations) per subscriber per month for superstations, to a
uniform rate of $0.27 per subscriber per month for all signals. The satellite
carriers filed petitions with the Librarian of Congress to set aside or modify
the report, arguing, inter alia, that the new rate is unfair because it is
well in excess of the effective royalty rates currently paid by cable
television systems, and because the increases were made effective
retroactively to July 1, 1997. The Librarian of Congress released his report
on October 27, 1997, adopting CARP's recommendation. However the Librarian of
Congress rejected CARP's recommendation to make the new fees retroactive, and
instead, made the new fees effective as of January 1, 1998. The SBCA,
representing
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the satellite carriers, filed a petition with the Librarian of Congress
requesting a stay of the effectiveness of the rate increase, pending judicial
review or congressional action. The Librarian of Congress denied the petition.
The SBCA also filed a petition seeking review of the rate increase with the
U.S. Court of Appeals for the District of Columbia. In addition, the satellite
carriers requested Congress to override the rate adjustment by legislation. A
bill has been introduced in the Senate (S. 1422) which would delay an increase
in the royalty fees until January 1, 1999 and would require the FCC to report
to Congress within 180 days of enactment of the legislation on the effect of
the increase of the royalty fees on the satellite carriers' abilities to
compete in the market for delivery of multichannel video programming. A bill
also has been introduced in the House of Representatives (H.R. 2291) which is
similar to the Senate bill and requires a stay of the royalty increase until
the FCC reviews the effects on the market and reports to Congress; however,
the stay would be in effect no later than 210 days after enactment. No
assurance can be given that the carriers will be able to obtain relief from
the U.S. Court of Appeals or Congress. With the rate increase, Tempo or New
PRIMESTAR (and all other direct broadcast satellite and direct-to-home
satellite service providers) may be competitively disadvantaged as against
cable operators.
THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act of 1996 ("1996 Act") clarified that the FCC has
exclusive jurisdiction over direct-to-home satellite services, and that
criminal penalties may be imposed for piracy of direct-to-home satellite
services. The 1996 Act also preempted local (but not state) governments from
imposing taxes or fees on direct-to-home services, including DBS, and directed
the FCC to promulgate regulations prohibiting local (including state)
governments from maintaining zoning or other regulations that impair a
viewer's ability to receive video programming services through the use of DBS
receive-only dishes in residential areas. The FCC has adopted rules that it
believes comply with the statutory requirements. Finally, the 1996 Act
requires that multichannel video programming distributors such as DBS
operators scramble or block channels providing indecent or sexually explicit
adult programming.
EXISTING FCC PERMITS AND LICENSES
Tempo holds the FCC Permit, which authorizes construction of a high power
DBS system consisting of two or more satellites delivering DBS service in 11
frequencies at the 119(degrees) W.L. orbital location and 11 frequencies at
the 166(degrees) W.L. orbital location. As the holder of a DBS permit, Tempo
is subject to FCC jurisdiction and review primarily for: (i) authorization of
individual satellites (i.e., meeting minimum financial, legal, and technical
standards) and earth stations, (ii) avoiding interference with other radio
frequency transmitters, (iii) complying with the rules the FCC has established
specifically for holders of U.S. DBS authorizations and (iv) complying with
applicable provisions of the Communications Act. Under the FCC Permit, which
was issued in May 1992, the time by which the Tempo Satellites must be
operational expires in May 1998. TSAT believes that it has complied with the
obligations for Tempo DBS-1 to become operational by that date, but there can
be no assurance that the FCC would agree that such satellite is operational,
and if an application for extension of the FCC Permit were required, there can
be no assurance that such an extension would be granted by the FCC.
In an order released February 24, 1997, the International Bureau of the FCC
granted, subject to certain conditions, Tempo's request to launch and operate
the Tempo DBS-1 satellite at 119(degrees) W.L. and to test its satellite at
109.8(degrees) W.L. for eight weeks. In addition, the International Bureau
required Tempo to submit to the FCC information required to initiate advance
publication and notification of Tempo's operations in accordance with the
Radio Regulations of the International Telecommunications Union. The
International Bureau also granted Tempo authority to modify its satellite
design, as requested in a July 1993 application, and denied oppositions which
had been filed by numerous existing and potential DBS competitors. Tempo DBS-1
was launched on March 8, 1997, and is now stationed in its authorized location
at 119(degrees) W.L. Tempo may need to file an application with the FCC for a
license to operate the satellite in orbit. Tempo expects that the FCC would
approve any such request, but cannot assure the ultimate outcome. Tempo DBS-1
is currently expected to be available for commercial operations in the first
quarter of 1998, but if it does not become operational by May 1998, Tempo may
need to apply to the FCC for an extension of time to complete its system at
119(degrees) W.L. Tempo cannot be certain that such an extension would be
granted. See "RISK FACTORS--Risks of Satellite Failure."
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At present, Tempo must continue to demonstrate that it is exercising due
diligence in progressing toward the completion of its system at 166(degrees)
W.L and has in place the Satellite Construction Agreement with Loral to
fulfill this due diligence requirement. There can be no assurance that Tempo
will be able to comply with the FCC's due diligence obligations for
166(degrees) W.L. or that the FCC will determine that Tempo has complied with
such due diligence obligations. If Tempo is unable to meet the terms of its
permit, it would be necessary for Tempo to apply to the FCC for an extension
of time to complete its DBS system at 166(degrees) W.L. Tempo cannot be
certain that such an extension would be granted.
In addition to the general conditions placed on DBS permits, the FCC Permit,
when originally granted, was subject to the condition that in areas served by
cable systems affiliated with TCI, Tempo or any related entities could not
offer or provide its DBS service (i) to subscribers exclusively or primarily
as an ancillary or supplementary cable service, and (ii) in a manner that
would allow subscribers of cable systems affiliated with TCI to receive
Tempo's DBS service under terms and conditions different from those offered or
provided to consumers who are not subscribers to cable systems affiliated with
TCI.
In a rulemaking proceeding concluded in December 1995, the FCC removed the
marketing conditions set forth above. The FCC noted, however, that it could
reimpose such restrictions on Tempo or any other DBS operator in the future.
DirecTv appealed the FCC's decision to the U.S. Court of Appeals for the
District of Columbia Circuit, arguing, among other things, that the FCC's
decision to remove the conditions on Tempo's permit was arbitrary and
capricious. The Court of Appeals upheld the FCC order, but Tempo cannot
predict whether the FCC will reimpose such restrictions in the future.
While Tempo generally has been successful to date with respect to compliance
with regulatory matters, there can be no assurance that it will succeed in
obtaining all requisite regulatory approvals for its operations without the
imposition of restrictions on or other adverse consequences to Tempo or TSAT.
REQUIRED FCC APPROVALS
On July 18, 1997, TSAT and the Partnership filed the Transfer Application
with the FCC for consent to the transfer of control of Tempo, as the holder of
the FCC Permit, to New PRIMESTAR. The FCC released a Public Notice of the
Transfer Application on July 23, 1997, establishing procedural dates for
petitions to deny and responsive pleadings. EchoStar, CAI Wireless Systems,
Inc., the Small Cable Business Association and Media Access Project filed
petitions to deny the Transfer Application, while DirecTv and the Wireless
Cable Association International filed comments on the Transfer Application.
These petitions and comments request that the FCC deny or dismiss the Transfer
Application on a variety of procedural and substantive grounds or that the FCC
condition its approval of the Transfer Application upon New PRIMESTAR's and
the Restructuring Parties' compliance with restrictions designed to ensure
access to programming and protect against cross-subsidization, among other
requests. TSAT and the Partnership filed a joint opposition to these petitions
and comments, and the National Rural Telecommunications Cooperative filed a
reply comment in support of DirecTv's comments. The petitioners and commenters
filed replies to TSAT's and the Partnership's opposition on September 9, 1997.
There can be no assurance that the FCC's review of these documents or the
Transfer Application will be favorable, or that the FCC will not impose
conditions unacceptable to TSAT, the Partnership, or the other Restructuring
Parties in connection with its review.
On August 15, 1997, the Partnership (on behalf of New PRIMESTAR) and MCI
filed the Assignment Application with the FCC for consent to the assignment to
New PRIMESTAR of the high power DBS authorizations and certain other assets
described above owned by MCI. As part of this transaction, ASkyB, an entity
presently ultimately owned by News Corp., will acquire non-voting securities
convertible into an approximate 31% equity interest in New PRIMESTAR. The FCC
released a Public Notice of the Assignment Application on August 25, 1997,
establishing procedural dates for petitions to deny and responsive pleadings.
EchoStar, DirecTv, SCBA, United Church of Christ et al., and the Wireless
Cable Association filed petitions to deny the Assignment Application. The
National Rural Telecommunications Cooperative, BellSouth et al., and Ameritech
New Media filed comments on the Assignment Application. The Partnership, MCI
and News Corp.
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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 New PRIMESTAR holding the
110(degrees) W.L. authorization; (2) opposition to the Partnership or New
PRIMESTAR simultaneously holding authorizations for both the 110(degrees) W.L.
orbital position (28 transponders) and the 119(degrees) W.L. orbital position
(11 transponders), which together represent about 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 satellite delivered programming to 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 Communications Act's Section 310(b) foreign ownership
restrictions. UCC et al. also filed a petition to stay the effectiveness of
MCI's DBS authorizations or, in the alternative, to hold the MCI authorization
and the Transfer Application and the Assignment Application in abeyance,
pending the initiation and resolution of a rulemaking on the applicability of
certain statutory provisions to DBS providers, including the foreign ownership
provisions. The Partnership filed an opposition to this petition, which is
presently pending before the FCC. 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 New
PRIMESTAR, MCI, ASkyB or News Corp. in connection with its review.
In support of the Transfer Application and Assignment Application, the
Partnership filed two ex parte pleadings. The first was an economic study
prepared by outside economic consultants which demonstrated that (1) the
Partnership has not engaged in a systematic strategy to compete selectively
and (2) New PRIMESTAR's incentives to compete are comparable to those of a
stand-alone DBS operator. The second was an analysis of the Transfer
Application and Assignment Application proceedings using the framework
established in the FCC's Bell Atlantic/NYNEX decision, as well as a summary of
the partnership's responses to the arguments and requested conditions raised
by parties during the proceedings. The FCC has requested responses from
interested parties to those filings. Responses are due February 13, 1998, and
replies are due February 20, 1998.
ANTITRUST DECREE
The Partnership and the parties named in the actions described below are
subject to the jurisdiction of the U.S. District Court for the Southern
District of New York to ensure compliance with an antitrust consent decree. In
United States v. PRIMESTAR Partners L.P., et al., 93 Civ. 3919 (SDNY, 1993)
(the "Federal Decree"), the Partnership and such parties agreed to refrain
from (i) enforcing any provisions of the Partnership Agreement that affect the
availability, price, terms or conditions of sale of programming to any
provider of multichannel subscription television, or (ii) entering into
certain other agreements restricting the availability of programming services.
The Federal Decree expires in April 1999. TSAT was not named as a defendant in
the above action, but may be subject to certain provisions of the Federal
Decree as a successor-in-interest to TCI K-1, Inc. and United Artists K-1
Investments, Inc., indirect subsidiaries of TCI that were original partners in
the Partnership and named defendants in the action. TSAT believes that it is
currently in compliance with the Federal Decree in all material respects and
that the Federal Decree currently does not have a material adverse effect on
TSAT or its operations. In any event, the Federal Decree will continue to
apply to New PRIMESTAR after consummation of the Restructuring Transaction
(whether or not the TSAT Merger is consummated) and could be expanded as a
condition for any necessary governmental approvals of the ASkyB Transaction.
Such conditions may be unacceptable to New PRIMESTAR.
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DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK
GENERAL
The following description of New PRIMESTAR's capital stock is intended as a
summary only, does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the applicable provisions of the DGCL and to
the New PRIMESTAR Charter and the New PRIMESTAR Bylaws. The complete text of
the forms of the New PRIMESTAR Charter and the New PRIMESTAR Bylaws are
attached as Appendices E and F, respectively, to this Proxy
Statement/Prospectus.
New PRIMESTAR will be authorized to issue 1,430,000,000 shares of capital
stock, of which (i) 850,000,000 shares will be of a class designated as New
PRIMESTAR Class A Common Stock, (ii) 50,000,000 shares will be of a class
designated as New PRIMESTAR Class B Common Stock, (iii) 30,000,000 shares will
be of a class designated as New PRIMESTAR Class C Common Stock,
(iv) 150,000,000 shares will be of a class designated as New PRIMESTAR Class D
Common Stock and (v) 350,000,000 shares will be of a class designated as New
PRIMESTAR Preferred Stock, issuable in series.
Upon consummation of the Restructuring Transaction, New PRIMESTAR estimates
that there will be approximately 175,200,000 shares of New PRIMESTAR Class A
Common Stock, 8,500,000 shares of New PRIMESTAR Class B Common Stock and
13,800,000 shares of New PRIMESTAR Class C Common Stock outstanding. TSAT will
own 100% of such shares of New PRIMESTAR Class B Common Stock and
approximately 36% of such shares of New PRIMESTAR Class A Common Stock. If the
TSAT Merger is consummated, all such shares owned by TSAT will be canceled,
and (i) each outstanding share of TSAT Series B Common Stock on the TSAT
Closing Date will be converted into the right to receive one share of New
PRIMESTAR Class B Common Stock, and (ii) each outstanding share of TSAT Series
A Common Stock on such date will be converted into the right to receive one
share of New PRIMESTAR Class A Common Stock. See "THE RESTRUCTURING
AGREEMENT--Consideration to be Received in the Restructuring Transaction" and
"THE TSAT MERGER AGREEMENT--Consideration to be Received in the TSAT Merger."
No shares of New PRIMESTAR Class D Common Stock or New PRIMESTAR Preferred
Stock will be issued in connection with the Restructuring Transaction or the
TSAT Merger. If the ASkyB Transaction is consummated, New PRIMESTAR will file
a certificate of designation establishing a series of New PRIMESTAR Preferred
Stock to be designated as New PRIMESTAR Convertible Preferred Stock. The ASkyB
Agreement provides for the issuance of a number of shares of New PRIMESTAR
Convertible Preferred Stock having an aggregate stated liquidation value equal
to the remainder ASkyB Valuation, minus the aggregate original principal
amount of the New PRIMESTAR Convertible Subordinated Notes.
COMMON STOCK
The rights of holders of New PRIMESTAR Class A Common Stock, New PRIMESTAR
Class B Common Stock, New PRIMESTAR Class C Common Stock and New PRIMESTAR
Class D Common Stock are identical except as provided below. All of the shares
of New PRIMESTAR Common Stock issued pursuant to the Restructuring Transaction
and the TSAT Merger will be validly issued, fully paid and nonassessable.
VOTING
Holders of New PRIMESTAR Class A Common Stock are entitled to one vote for
each share of such stock held, holders of New PRIMESTAR Class B Common Stock
are entitled to ten votes for each share of such stock held and holders of New
PRIMESTAR Class C Common Stock are entitled to ten votes for each share of
such stock held, on all matters presented to such stockholders. Holders of New
PRIMESTAR Class D Common Stock are not entitled to any voting rights with
respect to such shares, except as may be required by law. Except as otherwise
required by applicable law or the New PRIMESTAR Charter (including, without
limitation, the provisions of the New PRIMESTAR Charter with respect to the
election of Class B Directors and Class C Directors and stockholder
supermajority rights), and subject to the rights of holders of any series of
New PRIMESTAR Preferred Stock that may be issued from time to time, the
holders of shares of New PRIMESTAR Voting Common
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Stock vote as a single class on all matters with respect to which a vote of
the stockholders of New PRIMESTAR is required under applicable law, the New
PRIMESTAR Charter or the New PRIMESTAR Bylaws or on which a vote of
stockholders is otherwise duly called for by New PRIMESTAR. Holders of shares
of New PRIMESTAR Voting Common Stock are not entitled to cumulative voting
rights.
DIVIDENDS AND OTHER DISTRIBUTIONS
Except as otherwise provided below, and subject to the rights, if any, of
the holders of shares of any series of New PRIMESTAR Preferred Stock, holders
of shares of New PRIMESTAR Class A Common Stock, holders of shares of New
PRIMESTAR Class B Common Stock, holders of shares of New PRIMESTAR Class C
Common Stock and holders of shares of New PRIMESTAR Class D Common Stock are
entitled to receive equal dividends or other distributions per share, and
whenever a dividend or other distribution is paid to the holders of any such
class of New PRIMESTAR Common Stock, New PRIMESTAR will also pay to the
holders of each such other class of New PRIMESTAR Common Stock a dividend or
other distribution per share equal to the dividend or other distribution per
share paid to the holders of such class of New PRIMESTAR Common Stock.
Dividends and other distributions in cash, stock or property will be payable
only as and when declared by the New PRIMESTAR Board from time to time out of
assets or funds of New PRIMESTAR legally available therefor.
If at any time a dividend or other distribution (collectively, a "share
distribution") payable in shares of any class of New PRIMESTAR Common Stock or
any other securities of New PRIMESTAR or of any other corporation,
partnership, limited liability company, trust or other legal entity is to be
made with respect to any class of New PRIMESTAR Common Stock, such share
distribution may be declared and paid only as follows, and share distributions
declared and paid as follows will be deemed to be equal distributions for
purposes of the previous paragraph:
(i) a share distribution consisting of (A) shares of New PRIMESTAR Class
A Common Stock (or Convertible Securities (as defined below) that are
convertible into, exchangeable for or evidence the right to purchase shares
of New PRIMESTAR Class A Common Stock), on an equal per share basis to
holders of New PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common
Stock, New PRIMESTAR Class C Common Stock and (B) on an equal per share
basis, shares of New PRIMESTAR Class D Common Stock (or non-voting
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of New PRIMESTAR Class D Common
Stock) to holders of New PRIMESTAR Class D Common Stock; provided, that if
Convertible Securities are so distributed with respect to any such class of
New PRIMESTAR Common Stock, then Convertible Securities shall be so
distributed with respect to each such class of New PRIMESTAR Common Stock,
and the Convertible Securities so distributed shall not differ in any
respect other than their relative voting rights and related differences in
designation, conversion and share distribution provisions;
(ii) a share distribution consisting of (A) shares of New PRIMESTAR Class
A Common Stock (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase shares of New PRIMESTAR
Class A Common Stock) to holders of New PRIMESTAR Class A Common Stock and
(B) on an equal per share basis, shares of New PRIMESTAR Class B Common
Stock (or Convertible Securities that are convertible into, exchangeable
for or evidence the right to purchase shares of New PRIMESTAR Class B
Common Stock) to holders of New PRIMESTAR Class B Common Stock and (C) on
an equal per share basis, shares of New PRIMESTAR Class C Common Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of New PRIMESTAR Class C Common
Stock) to holders of New PRIMESTAR Class C Common Stock and (D) on an equal
per share basis, shares of New PRIMESTAR Class D Common Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of New PRIMESTAR Class D Common
Stock) to holders of New PRIMESTAR Class D Common Stock; provided that if
Convertible Securities are so distributed with respect to any such class of
New PRIMESTAR Common Stock, then Convertible Securities shall be so
distributed with respect to each such class of New PRIMESTAR Common Stock,
and the Convertible Securities so distributed shall not differ in any
respect other than their relative voting rights and related differences in
designation, conversion and share distribution provisions; or
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(iii) a share distribution consisting of shares of any class or series of
securities of New PRIMESTAR or any other corporation, partnership, limited
liability company, trust or other legal entity other than New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock, New PRIMESTAR
Class C Common Stock or New PRIMESTAR Class D Common Stock (and other than
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of New PRIMESTAR Class A Common
Stock, New PRIMESTAR Class B Common Stock, New PRIMESTAR Class C Common
Stock or New PRIMESTAR Class D Common Stock), either (x) on the basis of a
distribution of identical securities, on an equal per share basis, to
holders of New PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common
Stock, New PRIMESTAR Class C Common Stock and New PRIMESTAR Class D Common
Stock (provided, that holders of New PRIMESTAR Class D Common Stock shall
receive non-voting securities (or non-voting Convertible Securities that
are convertible into, exchangeable for or evidence the right to purchase
non-voting securities)); or (y) on the basis of a distribution of one class
or series of securities to holders of New PRIMESTAR Class A Common Stock
and, on an equal per share basis, one class or series of securities to
holders of New PRIMESTAR Class B Common Stock and, on an equal per share
basis, one class or series of securities to holders of New PRIMESTAR Class
C Common Stock and, on an equal per share basis, one class or series of
securities to holders of New PRIMESTAR Class D Common Stock; provided that
the securities so distributed (and, if applicable, the securities into
which the distributed securities are convertible or for which they are
exchangeable or which they evidence the right to purchase) do not differ in
any respect other than their relative voting rights and related differences
in designation, conversion and share distribution provisions; and provided,
further, that (1) holders of shares of New PRIMESTAR Class A Common Stock
receive a class or series of securities having no more than one vote per
share (or Convertible Securities that are convertible into, exchangeable
for or evidence the right to purchase securities with no more than one vote
per share), (2) holders of shares of New PRIMESTAR Class D Common Stock
receive a class or series of securities that are non-voting (or non-voting
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase non-voting securities (provided, that such
Convertible Securities may be convertible into, exchangeable for or
evidence the right to purchase voting securities with no more than one vote
per share on the same terms as the New PRIMESTAR Class D Common Stock is
convertible into New PRIMESTAR Class A Common Stock as provided in the
applicable provisions of the New PRIMESTAR Charter)), (3) holders of shares
of New PRIMESTAR Class B Common Stock receive a class or series of
securities having a number of votes per share equal to that of the class or
series of securities distributed pursuant to clause (4) below (which shall
in no event exceed ten votes per share) and having class voting rights
identical to those for the shares of New PRIMESTAR Class B Common Stock as
provided in the applicable provisions of the New PRIMESTAR Charter (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase securities having a number of votes per
share equal to that of the class or series of securities distributed
pursuant to clause (4) below (which shall in no event exceed ten votes per
share) and having class voting rights identical to those for the shares of
New PRIMESTAR Class B Common Stock as provided in the applicable provisions
of the New PRIMESTAR Charter), and (4) holders of shares of New PRIMESTAR
Class C Common Stock receive a class or series of securities having a
number of votes per share equal to that of the class or series of
securities distributed pursuant to clause (3) above (which shall in no
event exceed ten votes per share) and having class voting rights identical
to those for the shares of New PRIMESTAR Class C Common Stock as provided
in the applicable provisions of the New PRIMESTAR Charter (or Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase securities having a number of votes per share equal to
that of the class or series of securities distributed pursuant to clause
(3) above (which shall in no event exceed ten votes per share) and having
class voting rights identical to those for the shares of New PRIMESTAR
Class C Common Stock as provided in the applicable provisions of the New
PRIMESTAR Charter); provided, that if Convertible Securities are so
distributed with respect to any such class of New PRIMESTAR Common Stock,
then Convertible Securities shall be so distributed with respect to each
such class of New PRIMESTAR Common Stock, and the Convertible Securities so
distributed shall not differ in any respect other than their relative
voting rights and related differences in designation, conversion and share
distribution provisions.
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The term "Convertible Securities" means any securities of New PRIMESTAR
(other than any class of New PRIMESTAR Common Stock) that are convertible
into, exchangeable for or evidence the right to purchase any shares of any
class of New PRIMESTAR Common Stock, whether upon conversion, exercise,
exchange, pursuant to anti-dilution provisions of such securities or
otherwise.
The New PRIMESTAR Board will determine its dividend policy with respect to
the New PRIMESTAR Common Stock based on New PRIMESTAR's results of operations,
financial condition, capital requirements and other circumstances, including
restrictions that may be contained in agreements pursuant to which New
PRIMESTAR borrows funds. It is the New PRIMESTAR Board's present intention to
retain cash for the operations of New PRIMESTAR and it is anticipated that
cash dividends will not be paid on the New PRIMESTAR Common Stock in the
foreseeable future. The payment by New PRIMESTAR of dividends on and
repurchases by New PRIMESTAR of its capital stock will be subject to certain
restrictions, including those contained in the Indentures relating to the
Notes and the Bank Credit Facility, both of which will be assumed by New
PRIMESTAR in connection with the Restructuring Transaction. Future loan
agreements may contain similar restrictions. See "THE ROLL-UP PLAN--Financing
in Connection with the Restructuring Transaction."
STOCK SPLITS, SUBDIVISIONS, COMBINATIONS AND RECLASSIFICATIONS
In the case of any split, subdivision, combination or reclassification of
shares of New PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common
Stock, New PRIMESTAR Class C Common Stock or New PRIMESTAR Class D Common
Stock (other than share distributions described above under the subheading "--
Dividends and Other Distributions"), the shares of each other such class of
New PRIMESTAR Common Stock will also be split, subdivided, combined or
reclassified, in each case so that the numbers of shares of New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock, New PRIMESTAR Class
C Common Stock and New PRIMESTAR Class D Common Stock outstanding immediately
following such split, subdivision, combination or reclassification will bear
the same relationship to one another as do the numbers of shares of New
PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common Stock, New
PRIMESTAR Class C Common Stock and New PRIMESTAR Class D Common Stock
outstanding immediately prior to such split, subdivision, combination or
reclassification.
CONVERSION
Optional Conversion. Each share of New PRIMESTAR Class B Common Stock is
convertible, at the option of its holder, into one share of New PRIMESTAR
Class A Common Stock at any time. Each share of New PRIMESTAR Class C Common
Stock is convertible, at the option of its holder, into one share of New
PRIMESTAR Class B Common Stock at any time. Shares of New PRIMESTAR Class A
Common Stock and New PRIMESTAR Class D Common Stock are not convertible at any
time except, in the case of New PRIMESTAR Class D Common Stock, as provided
under "--Mandatory and Automatic Conversion."
Mandatory and Automatic Conversion. Each issued and outstanding share of New
PRIMESTAR Class C Common Stock will, without any further act on the part of
the holder thereof or New PRIMESTAR, be mandatorily and automatically
converted into one share of New PRIMESTAR Class B Common Stock upon the tenth
anniversary of the Effective Date.
Each issued and outstanding share of New PRIMESTAR Class D Common Stock
will, without any further act on the part of the holder thereof or New
PRIMESTAR, be mandatorily and automatically converted into one share of New
PRIMESTAR Class A Common Stock upon transfer of such share to any person other
than ASkyB, News Corp. or any of their respective affiliates.
BOARD OF DIRECTORS
Number of Members. The New PRIMESTAR Board will consist of eleven members
until the Class C Termination Date, which is the earlier to occur of (i) the
tenth anniversary of the Effective Date and (ii) the date
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on which the New PRIMESTAR Class C Common Stock voting as a class will not be
entitled to elect a specified number of directors to the New PRIMESTAR Board
as provided below. On and after the Class C Termination Date, the New
PRIMESTAR Board will consist of not less than three members, the exact number
of which will from time to time be determined by resolution of the New
PRIMESTAR Board.
Class B Directors. So long as at least 80% of the shares of New PRIMESTAR
Class B Common Stock outstanding on the Effective Date remain outstanding, the
New PRIMESTAR Class B Common Stock voting as a class will be entitled to elect
three Class B Directors to the New PRIMESTAR Board. So long as less than 80%
but at least 60% of the shares of New PRIMESTAR Class B Common Stock
outstanding on the Effective Date remain outstanding, the New PRIMESTAR Class
B Common Stock voting as a class will be entitled to elect two Class B
Directors. So long as less than 60% but at least 40% of the shares of New
PRIMESTAR Class B Common Stock outstanding on the Effective Date remain
outstanding, the New PRIMESTAR Class B Common Stock voting as a class will be
entitled to elect one Class B Director. The right of the New PRIMESTAR Class B
Common Stock voting as a class to elect a specified number of Class B
Directors will terminate upon the earlier to occur of (x) the date on which
less than 40% of the shares of New PRIMESTAR Class B Common Stock outstanding
on the Effective Date remain outstanding and (y) the Class C Termination Date.
Class C Directors. So long as at least 80% of the shares of New PRIMESTAR
Class C Common Stock outstanding on the Effective Date remain outstanding, the
New PRIMESTAR Class C Common Stock voting as a class will be entitled to elect
the lesser of (x) six Class C Directors to the New PRIMESTAR Board and (y) the
number of Class C Directors determined by adding the then applicable
Individual Class C Stockholder Caps (as defined below). So long as less than
80% but at least 66.7% of the shares of New PRIMESTAR Class C Common Stock
outstanding on the Effective Date remain outstanding, the New PRIMESTAR Class
C Common Stock voting as a class will be entitled to elect the lesser of (x)
five Class C Directors and (y) the number of Class C Directors determined by
adding the then applicable Individual Class C Stockholder Caps. So long as
less than 66.7% but at least 53.4% of the shares of New PRIMESTAR Class C
Common Stock outstanding on the Effective Date remain outstanding, the New
PRIMESTAR Class C Common Stock voting as a class will be entitled to elect the
lesser of (x) four Class C Directors and (y) the number of Class C Directors
determined by adding the then applicable Individual Class C Stockholder Caps.
So long as less than 53.4% but at least 40.1% of the shares of New PRIMESTAR
Class C Common Stock outstanding on the Effective Date remain outstanding, the
New PRIMESTAR Class C Common Stock voting as a class will be entitled to elect
the lesser of (x) three Class C Directors and (y) the number of Class C
Directors determined by adding the then applicable Individual Class C
Stockholder Caps. In the event that less than 40.1% of the shares of New
PRIMESTAR Class C Common Stock outstanding on the Effective Date remain
outstanding, the New PRIMESTAR Class C Common Stock voting as a class will not
be entitled to elect a specified number of Class C Directors. The "Individual
Class C Stockholder Caps" as of any date of determination will be as follows
(for purposes of this definition, TWE and Newhouse together with their
respective affiliates, will collectively be deemed to be a single Class C
Stockholder, and Class C Stockholders that are affiliates of one another will
collectively be deemed to be a single Class C Stockholder): (A) three Class C
Directors in respect of any Class C Stockholder that is the record holder on
such date of determination of a number of shares of New PRIMESTAR Class C
Common Stock equal to 80% or more of the aggregate number of shares of New
PRIMESTAR Class C Common Stock held of record by TWE and Newhouse on the
Effective Date; (B) two Class C Directors in respect of any Class C
Stockholder that is the record holder on such date of determination of a
number of shares of New PRIMESTAR Class C Common Stock that is less than 80%
of the aggregate number of shares of New PRIMESTAR Class C Common Stock held
of record by TWE and Newhouse on the Effective Date but greater than or equal
to 160% of the number of shares of New PRIMESTAR Class C Common Stock held of
record by the Smallest C (as defined below) on the Effective Date; and (C) one
Class C Director in respect of any Class C Stockholder that is the record
holder on such date of determination of a number of shares of New PRIMESTAR
Class C Common Stock that is less than 160% but greater than or equal to 80%
of the number of shares of New PRIMESTAR Class C Common Stock held of record
by the Smallest C on the Effective Date. "Smallest C" means any one of
MediaOne (together with its affiliates),
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Cox and Comcast, being the beneficial owner of the lowest number of
outstanding shares of New PRIMESTAR Class C Common Stock among such persons as
of the Effective Date.
Common Directors. The New PRIMESTAR Voting Common Stock voting together as a
single class will be entitled to elect such number of Common Directors to the
New PRIMESTAR Board as shall equal the total number of directors minus the
number of Class B Directors and Class C Directors that the New PRIMESTAR Class
B Common Stock and the New PRIMESTAR Class C Common Stock will respectively be
entitled to elect at any time as provided under "--Class B Directors" and "--
Class C Directors" above. The New PRIMESTAR Board will consist exclusively of
Common Directors on and after the Class C Termination Date. Prior to the Class
C Termination Date, the New PRIMESTAR Board's nominees for election as Common
Directors will be approved by the affirmative vote of 83% of the Class B
Directors and the Class C Directors then in office. On and after the Class C
Termination Date, the New PRIMESTAR Board's nominees for election as Common
Directors will be approved by a simple majority of the New PRIMESTAR Board.
Removal of Directors. Directors may be removed from office with "cause" (as
defined in the New PRIMESTAR Charter) only upon the affirmative vote of, prior
to the Class C Termination Date, the holders of record of at least 83%, and on
and after the Class C Termination Date, the holders of record of at least 66
2/3%, of the total voting power of the then outstanding shares of New
PRIMESTAR Voting Common Stock voting together as a single class. Directors may
be removed from office without "cause" only upon the affirmative vote of (i)
in the case of Class B Directors, the holders of record of at least 66 2/3% of
the total voting power of the then outstanding shares of New PRIMESTAR Class B
Common Stock voting separately as a class, (ii) in the case of Class C
Directors, the holders of record of at least 66 2/3% of the total voting power
of the then outstanding shares of New PRIMESTAR Class C Common Stock voting
separately as a class and (iii) in the case of Common Directors, prior to the
Class C Termination Date, the holders of record of at least 83%, and on and
after the Class C Termination Date, the holders of record of at least 66 2/3%,
of the total voting power of the then outstanding shares of New PRIMESTAR
Voting Common Stock voting together as a single class.
Filling of Newly Created Directorships and Vacancies. Any newly created
directorship for a Class B Director or vacancy in the office of a Class B
Director will be filled either by (A) the affirmative vote of a majority of
the remaining Class B Directors or of the sole remaining Class B Director, as
the case may be or (B) if the vacancy or newly created directorship has not
been filled pursuant to (A) above, the holders of at least a majority of the
total voting power of the then outstanding New PRIMESTAR Class B Common Stock
voting separately as a class. Any newly created directorship for a Class C
Director or vacancy in the office of a Class C Director will be filled solely
by the affirmative vote of holders of at least 66 2/3% of the total voting
power of the then outstanding shares of New PRIMESTAR Class C Common Stock
voting separately as a class. Any newly created directorship for a Common
Director or vacancy in the office of a Common Director will be filled solely
by the affirmative vote of 83% of the Class B Directors and the Class C
Directors then in office if such newly created directorship is created or such
vacancy occurs prior to the Class C Termination Date or by the affirmative
vote of a majority of the remaining directors then in office (even though less
than a quorum) or by the sole remaining Common Director, as the case may be,
if such newly created directorship is created or such vacancy occurs on or
after the Class C Termination Date. Any director elected as provided above to
fill a newly created directorship or vacancy will serve the same remaining
term as that of his or her predecessor, if applicable, and until his or her
successor has been elected and has qualified.
Preferred Stock. Anything contained herein to the contrary notwithstanding,
the provisions of the New PRIMESTAR Charter with respect to the number of
directors constituting the New PRIMESTAR Board, the removal of directors and
the filling of vacancies are in each case subject to the rights of holders of
any series of New PRIMESTAR Preferred Stock that may be created and
outstanding from time to time after the Closing of the Restructuring
Transaction.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of New PRIMESTAR,
whether voluntary or involuntary, after payment or provision for payment of
the debts and liabilities of New PRIMESTAR and subject
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to the prior payment in full of or provision for the preferential or other
amounts to which any series of New PRIMESTAR Preferred Stock outstanding at
any time may be entitled, holders of shares of New PRIMESTAR Common Stock will
be entitled to receive all assets and funds of New PRIMESTAR available for
distribution to the holders of shares of New PRIMESTAR Common Stock, pro rata
in accordance with the numbers of such shares held by such holders,
respectively, without regard to class.
MERGERS
In the event of any merger, consolidation, purchase or acquisition of
property or stock or other reorganization in which any consideration is to be
received by holders of shares of New PRIMESTAR Class A Common Stock, holders
of shares of New PRIMESTAR Class B Common Stock, holders of shares of New
PRIMESTAR Class C Common Stock or holders of shares of New PRIMESTAR Class D
Common Stock, holders of each such class of New PRIMESTAR Common Stock will
receive the same consideration on a per share basis.
Notwithstanding the previous paragraph, if any consideration received by
holders of New PRIMESTAR Class A Common Stock, holders of New PRIMESTAR Class
B Common Stock, holders of New PRIMESTAR Class C Common Stock and holders of
New PRIMESTAR Class D Common Stock in connection with a merger, consolidation,
purchase or acquisition of property or stock or other reorganization will
consist of securities (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase other securities), and such
securities (or Convertible Securities) do not differ in any respect other than
their relative voting rights and related differences in designation,
conversion and share distribution provisions:
(i) holders of shares of New PRIMESTAR Class B Common Stock and holders
of shares of New PRIMESTAR Class C Common Stock may receive, on an equal
per share basis, voting securities with up to ten times the number of votes
per share as those voting securities to be received by holders of shares of
New PRIMESTAR Class A Common Stock and with respective class voting rights
corresponding to those for shares of New PRIMESTAR Class B Common Stock and
New PRIMESTAR Class C Common Stock as provided in the New PRIMESTAR Charter
(or Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase voting securities with up to ten times the
number of votes per share as those voting securities issuable upon the
conversion, exchange or exercise of the Convertible Securities to be
received by holders of shares of New PRIMESTAR Class A Common Stock and
with respective class voting rights corresponding to those for shares of
New PRIMESTAR Class B Common Stock and New PRIMESTAR Class C Common Stock
as provided in the New PRIMESTAR Charter; provided that holders of shares
of New PRIMESTAR Class B Common Stock and holders of shares of New
PRIMESTAR Class C Common Stock will receive securities that do not differ
in any respect other than differences corresponding to the differences
between the New PRIMESTAR Class B Common Stock and New PRIMESTAR Class C
Common Stock as provided in the New PRIMESTAR Charter; and
(ii) holders of shares of New PRIMESTAR Class D Common Stock may receive
non-voting securities (or non-voting Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase other
non-voting securities).
NO PREEMPTIVE RIGHTS
Holders of shares of New PRIMESTAR Common Stock are not entitled to
preemptive rights.
SUPERMAJORITY VOTING RIGHTS
In addition to any other vote required under the New PRIMESTAR Charter or by
applicable law, until the Class C Termination Date, the affirmative vote of
the holders of record of (i) a majority of the total voting power of the then
outstanding shares of New PRIMESTAR Class B Common Stock and (ii) 83% of the
total voting power of the then outstanding shares of New PRIMESTAR Class C
Common Stock, in each case voting separately as a class, is required in order
for New PRIMESTAR to effect (a) the amendment, alteration or repeal
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of any provision of the New PRIMESTAR Charter (subject to certain limited
exceptions); (b) the amendment, alteration or repeal of any provision of the
New PRIMESTAR Bylaws (subject to certain exceptions, the amendment, alteration
or repeal of which requires either (1) a simple majority vote of the New
PRIMESTAR Board or (2) the affirmative vote of the holders of record of a
majority of the total voting power of the then outstanding New PRIMESTAR
Voting Common Stock voting together as a single class); (c) except as
otherwise provided in Section 253 of the DGCL (or any successor provision
thereto), the merger or consolidation of New PRIMESTAR or any of its
Subsidiaries (as defined below) with or into any person (except the TSAT
Merger and except a merger between direct or indirect wholly-owned
subsidiaries of New PRIMESTAR or a merger between a direct or indirect wholly-
owned subsidiary of New PRIMESTAR and New PRIMESTAR if New PRIMESTAR is the
surviving entity of such merger and there is no change in any class or series
of outstanding capital stock of New PRIMESTAR nor any amendment to the New
PRIMESTAR Charter); (d) (x) the disposition, directly or indirectly, by New
PRIMESTAR (or by one or more direct or indirect subsidiaries thereof) by sale,
merger, new issuances or otherwise to a person other than New PRIMESTAR or a
direct or indirect wholly-owned subsidiary of New PRIMESTAR of shares of the
capital stock of one or more direct or indirect Subsidiaries of New PRIMESTAR
or (y) the disposition, directly or indirectly, by New PRIMESTAR (or by one or
more direct or indirect subsidiaries thereof) by sale, merger or otherwise
(other than to New PRIMESTAR or a direct or indirect wholly-owned subsidiary
of New PRIMESTAR), in any transaction or series of transactions outside the
ordinary course of the business of New PRIMESTAR, of all or substantially all
the assets of New PRIMESTAR and its Subsidiaries on a consolidated basis,
except for pledges, grants of security interests, security deeds, mortgages or
similar encumbrances securing bona fide indebtedness; (e) the dissolution or
liquidation of New PRIMESTAR; (f) the authorization or issuance by New
PRIMESTAR of shares of any class of capital stock with more than one vote per
share, securities convertible into or exchangeable for shares of any such
series or class of capital stock or options, warrants or other rights to
acquire such capital stock or securities, subject to certain exceptions; and
(g) the voluntary bankruptcy of New PRIMESTAR. In addition, whether before or
after the Class C Termination Date, the affirmative vote of the holders of
record of at least 66 2/3% of the total voting power of the then outstanding
New PRIMESTAR Voting Common Stock voting together as a single class is
required in order for New PRIMESTAR to effect the foregoing actions, except
the actions described in clauses (f) and (g), for which no stockholder vote
shall be required, unless otherwise required pursuant to the New PRIMESTAR
Charter or applicable law. "Subsidiary" of New PRIMESTAR means (i) a
corporation in which New PRIMESTAR, directly or indirectly, owns capital stock
having a majority of the voting power of such corporation's capital stock to
elect directors under ordinary circumstances and (ii) any partnership, limited
liability company, trust or other legal entity (other than a corporation) in
which New PRIMESTAR, directly or indirectly, has (x) a majority ownership
interest or (y) the power to elect or direct the election of a majority of the
members of the governing body of such entity.
In addition to the foregoing, (i) the amendment, alteration or repeal of any
provision of the terms of the New PRIMESTAR Class B Common Stock requires the
affirmative vote of the holders of record of a majority of the total voting
power of the then outstanding shares of New PRIMESTAR Class B Common Stock,
voting separately as a class, and the affirmative vote of the holders of
record of, prior to the Class C Termination Date, 83%, and on and after the
Class C Termination Date, a majority, of the total voting power of the then
outstanding shares of New PRIMESTAR Class C Common Stock, voting separately as
a class and (ii) the amendment, alteration or repeal of any provision of the
terms of the New PRIMESTAR Class C Common Stock requires the affirmative vote
of the holders of record of, prior to the Class C Termination Date, 83%, and
on and after the Class C Termination Date, a majority, of the total voting
power of the then outstanding shares of New PRIMESTAR Class C Common Stock,
voting separately as a class. However, the New PRIMESTAR Charter provides
that, without the affirmative vote of the holders of record of a majority of
the total voting power of the then outstanding shares of New PRIMESTAR Class B
Common Stock, voting separately as a class, the terms of the New PRIMESTAR
Class C Common Stock may not be amended or altered to (x) increase the number
of votes per share of New PRIMESTAR Class C Common Stock over the number of
votes per share of New PRIMESTAR Class B Common Stock, (y) provide for a
preference of the New PRIMESTAR Class C Common Stock relative to the New
PRIMESTAR Class B Common Stock as to payment of dividends or on a liquidation
or dissolution of New PRIMESTAR or (z) exempt the New PRIMESTAR Class C Common
Stock but not the
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New PRIMESTAR Class B Common Stock from the provisions of the New PRIMESTAR
Charter relating to restrictions on ownership of shares of New PRIMESTAR
Common Stock.
PREFERRED STOCK
The New PRIMESTAR Charter expressly authorizes the New PRIMESTAR Board to
provide for the issuance of all or any shares of the New PRIMESTAR Preferred
Stock 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 New PRIMESTAR Board providing for the issuance of
such series.
CONVERTIBLE PREFERRED STOCK
It is expected that the New PRIMESTAR Convertible Preferred Stock will have
a stated liquidation value of $10,000 per share, and that an aggregate of
120,000 shares of New PRIMESTAR Convertible Preferred Stock will be authorized
for issuance in connection with the ASkyB Transaction, if that transaction is
consummated. The New PRIMESTAR Convertible Preferred Stock will rank senior to
the New PRIMESTAR Common Stock with respect to dividend rights and rights upon
dissolution, liquidation or winding up.
The holders of New PRIMESTAR Convertible Preferred Stock, in preference to
the holders of shares of capital stock ranking junior to the New PRIMESTAR
Convertible Preferred Stock as to dividends, will be entitled to receive
cumulative dividends at the annual rate of 5% of the liquidation value of such
shares, payable quarterly, to the extent of funds legally available therefor.
Dividends will accrue on the New PRIMESTAR Convertible Preferred Stock on a
daily basis, whether or not earned or declared, from the date of original
issue of such shares. If any dividend is not declared and paid in full when
due, in accordance with the terms of this series, then the dividend rate will
increase to an annual rate of 6.5% of the liquidation value and such increased
dividend rate will continue in effect until all accrued and unpaid dividends
on the New PRIMESTAR Convertible Preferred Stock will have been paid in full;
provided that when all accrued and unpaid dividends on the New PRIMESTAR
Convertible Preferred Stock have been so paid in full, the dividend rate will
thereafter revert to the original rate. Prior to the fourth anniversary of the
closing of the ASkyB Transaction (the "Reset Date"), New PRIMESTAR may, at its
option, make any dividend payment to holders of record of the New PRIMESTAR
Convertible Preferred Stock in cash or in shares of the New PRIMESTAR Class D
Common Stock or in any combination of cash and such shares; provided that any
such dividend payable in shares to any person other than ASkyB, News Corp. or
any of their respective affiliates will be paid in shares of New PRIMESTAR
Class A Common Stock. From and after the Reset Date, all dividend payments
will be made solely in cash.
Upon the dissolution, liquidation or winding up of New PRIMESTAR, holders of
shares of New PRIMESTAR Convertible Preferred Stock will be entitled to
receive and be paid out of the assets of New PRIMESTAR available for
distribution to stockholders, (x) first, an amount equal to any accrued but
unpaid dividends on the New PRIMESTAR Convertible Preferred Stock, and (y)
second, an amount equal to the liquidation value thereof, which amounts will
be paid (i) before any payment or distribution will be made on or with respect
to any class of stock ranking junior to the New PRIMESTAR Convertible
Preferred Stock upon a dissolution, liquidation or winding up of New
PRIMESTAR; (ii) on a pari passu basis with any class or series of preferred
stock which, by its terms, ranks pari passu with the New PRIMESTAR Convertible
Preferred Stock upon a dissolution, liquidation or winding up of New
PRIMESTAR; and (iii) after any class or series of preferred stock which, by
its terms, ranks senior to the New PRIMESTAR Convertible Preferred Stock upon
a dissolution, liquidation or winding up of New PRIMESTAR.
The New PRIMESTAR Convertible Preferred Stock will have no voting rights,
except as required by applicable law, and except that the affirmative vote of
the holders of at least a majority of the outstanding shares of the New
PRIMESTAR Convertible Preferred Stock will be necessary to issue any
additional shares of New PRIMESTAR Convertible Preferred Stock.
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The New PRIMESTAR Convertible Preferred Stock will be redeemable at the
option of New PRIMESTAR, in whole at any time after the Reset Date and in part
from time to time after the Reset Date for a redemption price per share equal
to the Liquidation Preference (as defined below) thereof on such redemption
date. New PRIMESTAR shall redeem the New PRIMESTAR Convertible Preferred Stock
on the tenth anniversary of the closing of the ASkyB Transaction for a
redemption price per share equal to the Liquidation Preference thereof on such
redemption date. The "Liquidation Preference" of a share of the New PRIMESTAR
Convertible Preferred Stock as of any date in question means an amount equal
to the sum of (i) the stated liquidation value of $10,000 per share, plus (ii)
for purposes of determining redemption payments, an amount equal to all unpaid
cumulative dividends accrued on such share, whether or not such unpaid
dividends have been earned or declared or there are any unrestricted funds of
New PRIMESTAR legally available for the payment of dividends.
Each share of New PRIMESTAR Convertible Preferred Stock will be convertible,
at the option of its holder, at any time and from time to time into the number
of shares of New PRIMESTAR Class D Common Stock (or New PRIMESTAR Class A
Common Stock, if the holder of the shares to be converted is any person other
than ASkyB, News Corp. or any of their respective affiliates) equal to (x) the
aggregate liquidation value of the shares to be converted divided by (y) the
conversion price then in effect with respect to the New PRIMESTAR Convertible
Preferred Stock. No fractional shares of New PRIMESTAR Class D Common Stock
(or New PRIMESTAR Class A Common Stock, as the case may be) or scrip will be
issued upon conversion of the New PRIMESTAR Convertible Preferred Stock. A
holder otherwise entitled to a fractional share will receive cash, in an
amount equal to the same fraction of the then current value of a share of New
PRIMESTAR Convertible Preferred Stock (as determined in good faith by the New
PRIMESTAR Board). Upon conversion of shares of New PRIMESTAR Convertible
Preferred Stock, the rights of the holder of the shares so converted, as a
holder thereof, will cease. The initial conversion price with respect to the
New PRIMESTAR Convertible Preferred Stock will be the Conversion Price (as
defined in the ASkyB Agreement). See "THE ASKYB TRANSACTION--The ASkyB
Agreement--Consideration to be Received in the ASkyB Transaction." The
conversion price will be subject to adjustment in the case of certain
corporate transactions as provided in the certificate of designation for the
New PRIMESTAR Convertible Preferred Stock, and will be reduced on the Reset
Date to 120% of the current market price of the New PRIMESTAR Class A Common
Stock on the Reset Date, if such reset conversion price would be less than the
conversion price otherwise in effect.
In the event that New PRIMESTAR (i) pays a dividend or distribution on the
outstanding New PRIMESTAR Common Stock in shares of New PRIMESTAR Class A
Common Stock, (ii) subdivides the outstanding New PRIMESTAR Class A Common
Stock, (iii) combines the outstanding shares of New PRIMESTAR Class A Common
Stock into a smaller number of shares of New PRIMESTAR Common Stock or (iv)
issues by reclassification of the New PRIMESTAR Class A Common Stock (whether
pursuant to a merger or consolidation or otherwise) any other shares of New
PRIMESTAR, then the holder of any shares of New PRIMESTAR Convertible
Preferred Stock (or the transferee of such holder, as the case may be)
surrendered for conversion after the record date for, or effective date of (as
the case may be), such event, will have the right thereafter to receive upon
conversion of such shares of New PRIMESTAR Convertible Preferred Stock (or
upon conversion of the shares of New PRIMESTAR Class D Common Stock issuable
upon the conversion of such shares of New PRIMESTAR Convertible Preferred
Stock, as the case may be) the aggregate number and kind of shares of capital
stock of New PRIMESTAR which such holder (or transferee) would have been
entitled to receive in respect of such dividend, distribution, subdivision or
reclassification if such shares of New PRIMESTAR Convertible Preferred Stock
had been converted immediately prior to the record date for, or effective date
of (as the case may be), such event, and the conversion price will be
appropriately adjusted. In addition, in the event of a reorganization, merger,
consolidation or disposition of assets of New PRIMESTAR, pursuant to which
cash or shares of stock or other securities, property or assets of New
PRIMESTAR, or a successor or transferee or affiliate thereof, are to be
received by or distributed to the holders of New PRIMESTAR Class A Common
Stock, then the holders of New PRIMESTAR Convertible Preferred Stock (or the
transferee of such holder, as the case may be) will have the right thereafter
to receive, upon conversion of such shares of New PRIMESTAR Convertible
Preferred Stock (or upon conversion of the shares of New PRIMESTAR Class D
Common Stock issuable upon the conversion of such shares of New PRIMESTAR
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Convertible Preferred Stock, as the case may be) the number of shares of stock
or other securities, property or assets of New PRIMESTAR, or a successor or
transferee or affiliate thereof, or cash receivable upon or as a result of
such reorganization, merger, consolidation or disposition of assets by a
holder of the number of shares of New PRIMESTAR Class A Common Stock equal to
the number of shares of New PRIMESTAR Class A Common Stock into which such
shares of New PRIMESTAR Convertible Preferred Stock may be converted.
Holders of New PRIMESTAR Convertible Preferred Stock will be entitled to
certain preemptive rights if New PRIMESTAR issues common stock, or securities
convertible into or exercisable or exchangeable for shares of common stock, at
below market value, at a time when New PRIMESTAR does not have a class of
securities registered pursuant to Section 12 of the Exchange Act, but will not
otherwise be entitled to any preemptive rights.
The holders of shares of New PRIMESTAR Convertible Preferred Stock will be
entitled to certain registration rights as provided in the ASkyB Registration
Rights Agreement. See "THE ASKYB TRANSACTION--Registration Rights."
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
The New PRIMESTAR Charter provides that, to the fullest extent permitted by
the DGCL as it presently exists or may hereafter be amended, no director will
be personally liable to New PRIMESTAR or any of its stockholders for monetary
damages for breach of fiduciary duty as a director. Under existing Delaware
law, directors would not be liable except (i) for any breach of the director's
duty of loyalty to New PRIMESTAR or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (involving the
payment of an unlawful dividend), or (iv) for any transaction from which the
director derived improper personal benefit. While the New PRIMESTAR Charter
provides directors with protection from awards for monetary damages for breach
of their duty of care, it does not eliminate such duty. Accordingly, the New
PRIMESTAR Charter will have no effect on the availability of equitable
remedies, such as an injunction or rescission, based on a director's breach of
his or her duty of care.
Delaware law contains provisions permitting and, in some situations,
requiring Delaware corporations, such as New PRIMESTAR, to provide
indemnification to their officers and directors for losses and litigation
expenses incurred in connection with their service to the corporation in those
capacities. The New PRIMESTAR Charter requires New PRIMESTAR to indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person that was or is made
or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), by reason of the fact that such person is or
was a director or officer of New PRIMESTAR or, while a director or officer of
New PRIMESTAR, is or was serving at the request of New PRIMESTAR as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
person. The New PRIMESTAR Charter also requires New PRIMESTAR to indemnify or
make advances (pursuant to the following sentence) to a person in connection
with a Proceeding (or part thereof) initiated by such person only if the
initiation of such Proceeding (or part thereof) was authorized by the New
PRIMESTAR Board. The New PRIMESTAR Charter further requires New PRIMESTAR,
subject to the last sentence of this paragraph, to pay the expenses (including
attorneys' fees) incurred by any person that is or was a director or officer
of New PRIMESTAR or, while a director or officer of New PRIMESTAR, is or was
serving at the request of New PRIMESTAR as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, in defending any Proceeding in advance of its
final disposition upon receipt of an undertaking by such person to repay all
amounts advanced if it should be ultimately determined that such person is not
entitled to indemnification. If a claim for indemnification or advancement of
expenses is not paid in full within 60 calendar days after a written claim
therefor has been received by New PRIMESTAR, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in
part, will be entitled to be paid the expense of prosecuting such claim. In
any such action, New PRIMESTAR will have
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the burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
The New PRIMESTAR Charter provides that such right of indemnification and
advancement of expenses will, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent of New PRIMESTAR or other person indemnified as provided
above and will inure to the benefit of the heirs, executors and administrators
of such person.
The New PRIMESTAR Charter provides that the indemnification rights stated
therein are not exclusive of any other rights that a person may have or may in
the future acquire under any statute, provision of the New PRIMESTAR Charter,
the New PRIMESTAR Bylaws, agreement, vote of stockholders or resolution of
disinterested directors or otherwise. The New PRIMESTAR Charter further states
that no amendment, modification or repeal of the above-described provisions of
the New PRIMESTAR Charter will adversely affect any right or protection of any
person under such provisions of the New PRIMESTAR Charter in respect of any
act or omission occurring prior to the time of such amendment, modification or
repeal.
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COMPARISON OF STOCKHOLDERS' RIGHTS
If the TSAT Merger is consummated following the Restructuring Transaction,
holders of outstanding shares of TSAT Common Stock on the TSAT Closing Date
will become holders of shares of New PRIMESTAR Common Stock. If the TSAT
Merger is not consummated following the Restructuring Transaction, the
outstanding shares of TSAT Common Stock will remain outstanding and will not
be directly affected by the Restructuring Transaction.
The following is a summary of certain provisions affecting, and differences
between, the rights of holders of TSAT Common Stock and the rights of holders
of New PRIMESTAR Common Stock. Since TSAT and New PRIMESTAR are each organized
under the laws of the State of Delaware, any differences in the rights of
holders of TSAT Common Stock and those of holders of New PRIMESTAR Common
Stock arise from various provisions of the TSAT Charter and TSAT Bylaws and
the New PRIMESTAR Charter and New PRIMESTAR Bylaws. The following summary does
not purport to be complete and is qualified in its entirety by reference to
the DGCL and the complete text of the TSAT Charter, the TSAT Bylaws, the New
PRIMESTAR Charter and the New PRIMESTAR Bylaws. The complete text of the forms
of the New PRIMESTAR Charter and the New PRIMESTAR Bylaws are attached as
Appendices E and F, respectively, to this Proxy Statement/Prospectus.
AUTHORIZED CAPITAL STOCK
TSAT. TSAT's authorized capitalization consists of 200,000,000 shares of
capital stock, including (i) 195,000,000 shares of TSAT Common Stock of which
185,000,000 shares are designated TSAT Series A Common Stock and 10,000,000
shares are designated TSAT Series B Common Stock, and (ii) 5,000,000 shares of
preferred stock ("TSAT Preferred Stock"). No shares of the authorized TSAT
Preferred Stock have been issued.
New PRIMESTAR. The New PRIMESTAR Charter provides for authorized
capitalization consisting of 1,430,000,000 shares of capital stock, of which
(i) 850,000,000 shares will be of a class designated as New PRIMESTAR Class A
Common Stock, (ii) 50,000,000 shares will be of a class designated as New
PRIMESTAR Class B Common Stock, (iii) 30,000,000 shares will be of a class
designated as New PRIMESTAR Class C Common Stock, (iv) 150,000,000 shares will
be of a class designated as New PRIMESTAR Class D Common Stock and (v)
350,000,000 shares will be of a class designated as New PRIMESTAR Preferred
Stock, issuable in series. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--
General."
VOTING RIGHTS
TSAT. Holders of shares of TSAT Series A Common Stock are entitled to one
vote for each share of such stock held and holders of shares of TSAT Series B
Common Stock are entitled to ten votes for each share of such stock held, on
all matters presented to stockholders. Except as may otherwise be required by
the DGCL or, with respect to any series of TSAT Preferred Stock, as otherwise
provided in any resolution of the TSAT Board providing for the establishment
of such series of TSAT Preferred Stock, the holders of TSAT Series A Common
Stock and the holders of TSAT Series B Common Stock and the holders of each
series of TSAT Preferred Stock, if any, entitled to vote thereon vote as one
class on all matters to be voted on by such TSAT stockholders.
Subject to the rights of the holders of any series of TSAT Preferred Stock
and except as otherwise provided by applicable law, the TSAT Charter or the
TSAT Bylaws, and except for the election of directors, any question brought
before any meeting of the stockholders at which a quorum is present will be
decided by the affirmative vote of a majority of the combined voting power of
the shares present in person or represented by proxy and entitled to vote on
the subject matter. See "--Election of Directors."
New PRIMESTAR. Holders of shares of New PRIMESTAR Class A Common Stock are
entitled to one vote for each share of such stock held, holders of shares of
New PRIMESTAR Class B Common Stock are entitled to ten votes for each share of
such stock held and holders of shares of New PRIMESTAR Class C
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Common Stock are entitled to ten votes for each share of such stock held, on
all matters presented to such stockholders. Holders of shares of New PRIMESTAR
Class D Common Stock are not entitled to any voting rights with respect to
such shares, except as may be required by law. Except as otherwise required by
applicable law or the New PRIMESTAR Charter (see "--Election of Directors" and
"--Certain Supermajority Voting Rights"), and subject to the rights of holders
of any class or series of New PRIMESTAR Preferred Stock that may be issued
from time to time, the holders of shares of New PRIMESTAR Voting Common Stock
vote as a single class on all matters with respect to which a vote of the
stockholders of New PRIMESTAR is required under applicable law, the New
PRIMESTAR Charter or the New PRIMESTAR Bylaws or on which a vote of
stockholders is otherwise duly called for by New PRIMESTAR. See "DESCRIPTION
OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Voting."
Except as otherwise provided by applicable law, the New PRIMESTAR Charter or
the New PRIMESTAR Bylaws, and except for the election of directors, any
question brought before any meeting of the stockholders at which a quorum is
present will be decided by the affirmative vote of the holders of a majority
of the total number of votes of the capital stock present in person or
represented by proxy and entitled to vote on the applicable subject matter.
See "--Election of Directors."
CONVERSION RIGHTS
TSAT. Each share of TSAT Series B Common Stock is convertible, at the option
of its holder, into one share of TSAT Series A Common Stock. Shares of TSAT
Series A Common Stock are not convertible into shares of TSAT Series B Common
Stock.
New PRIMESTAR. Each share of New PRIMESTAR Class B Common Stock is
convertible, at the option of its holder, into one share of New PRIMESTAR
Class A Common Stock and each share of New PRIMESTAR Class C Common Stock is
convertible, at the option of its holder, into one share of New PRIMESTAR
Class B Common Stock. In addition, each issued and outstanding share of New
PRIMESTAR Class C Common Stock will, without any further act on the part of
the holder thereof or New PRIMESTAR, be mandatorily and automatically
converted into one share of New PRIMESTAR Class B Common Stock upon the tenth
anniversary of the Effective Date. Shares of New PRIMESTAR Class A Common
Stock and shares of New PRIMESTAR Class D Common Stock are not convertible,
except that upon transfer of any shares of New PRIMESTAR Class D Common Stock
to any person other than ASkyB, News Corp. or any of their respective
affiliates, such shares will mandatorily and automatically convert into New
PRIMESTAR Class A Common Stock on a one-to-one basis. See "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK--Common Stock--Conversion."
BOARD OF DIRECTORS
TSAT. The TSAT Charter provides for a TSAT Board of not less than three
members, divided into three classes of approximately equal size, with each
class to be elected for a three-year term. The terms of each class of
directors are staggered so that the term of one of the three classes of
directors is scheduled to expire at each annual meeting of stockholders. The
TSAT Charter and the TSAT Bylaws provide that, subject to the rights of
holders of any series of TSAT Preferred Stock to elect additional directors,
the number of directors constituting the whole board, currently six, is fixed
from time to time by the TSAT Board.
New PRIMESTAR. The New PRIMESTAR Charter and the New PRIMESTAR Bylaws
provide that, subject to any rights of the holders of any series of New
PRIMESTAR Preferred Stock outstanding at any time to elect additional
directors to the New PRIMESTAR Board, the New PRIMESTAR Board will consist of
eleven members, and will be comprised of Class B Directors, Class C Directors
and Common Directors until the Class C Termination Date. The New PRIMESTAR
Bylaws provide that, on and after the Class C Termination Date, the New
PRIMESTAR Board will consist of not less than three members, as determined
from time to time by resolution of the New PRIMESTAR Board. Both before and
after the Class C Termination Date, each director shall be elected to a term
expiring at the annual meeting of stockholders following the election of such
director,
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or until such director's successor is duly elected and has qualified. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of
Directors."
ELECTION OF DIRECTORS
TSAT. The holders of TSAT Common Stock, voting together as a single class,
vote in elections for directors. Stockholders of TSAT do not have cumulative
voting rights. Directors are elected under the TSAT Bylaws by a plurality of
the combined voting power of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors.
New PRIMESTAR. The New PRIMESTAR Charter provides that (i) the New PRIMESTAR
Class B Common Stock voting as a class will be entitled to elect three Class B
Directors (such number of Class B Directors to be reduced in accordance with a
schedule set forth in the New PRIMESTAR Charter as the number of shares of New
PRIMESTAR Class B Common Stock outstanding decreases), (ii) the New PRIMESTAR
Class C Common Stock voting as a class will be entitled to elect the lesser of
(x) six Class C Directors (subject to reduction in accordance with a schedule
set forth in the New PRIMESTAR Charter as the number of shares of New
PRIMESTAR Class C Common Stock outstanding decreases) and (y) the number of
Class C Directors determined by adding the then applicable Individual Class C
Stockholder Caps, and (iii) the New PRIMESTAR Voting Common Stock voting
together as a single class will be entitled to elect such number of Common
Directors as shall equal the total number of directors minus the number of
Class B Directors and Class C Directors that the New PRIMESTAR Class B Common
Stock and the New PRIMESTAR Class C Common Stock will respectively be entitled
to elect at any time. The New PRIMESTAR Board will consist exclusively of
Common Directors on and after the Class C Termination Date. See "DESCRIPTION
OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors."
The New PRIMESTAR Bylaws further provide that, except as otherwise required
by statute or by the New PRIMESTAR Charter, (i) Class B Directors, if any,
will be elected by a plurality of the votes cast at a meeting of stockholders
by the holders of shares of New PRIMESTAR Class B Common Stock entitled to
vote in the election of the Class B Directors; (ii) Class C Directors, if any,
will be elected by a plurality of the votes cast at a meeting of stockholders
by the holders of shares of New PRIMESTAR Class C Common Stock entitled to
vote in the election of Class C Directors; and (iii) Common Directors
(including all directors on and after the Class C Termination Date) will be
elected by a plurality of the votes cast at a meeting of stockholders by the
holders of shares of all classes of New PRIMESTAR Voting Common Stock entitled
to vote in the election of the Common Directors. Stockholders of New PRIMESTAR
do not have cumulative voting rights.
NOMINATION OF DIRECTORS
TSAT. The TSAT Bylaws provide that nominations of candidates for election to
the TSAT Board may be made at an annual meeting of stockholders (i) pursuant
to TSAT's notice of meeting, (ii) by, or at the direction of, the Chairman of
the Board or the TSAT Board, or (iii) by a stockholder of TSAT who is entitled
to vote at the meeting, has given timely written notice to the Secretary of
TSAT in accordance with the procedures set forth in the TSAT Bylaws and was a
stockholder of record at the time such notice was given. The TSAT Bylaws
further provide that at a special meeting at which directors are to be
elected, nominations of candidates for election to the TSAT Board can be made
only (i) by, or at the direction of, the TSAT Board, or (ii) by a stockholder
of TSAT who has given timely written notice to the Secretary of TSAT.
New PRIMESTAR. The New PRIMESTAR Bylaws provide that nominations of
candidates for election to the New PRIMESTAR Board may be made at any annual
meeting of stockholders, only (i) pursuant to New PRIMESTAR's notice of
meeting, (ii) by or at the direction of the New PRIMESTAR Board, or (iii) by
any stockholder of New PRIMESTAR who is entitled to vote at the meeting, has
given timely written notice to the Secretary of New PRIMESTAR in accordance
with the procedures set forth in the New PRIMESTAR Bylaws and was a
stockholder of record at the time such notice was given. The New PRIMESTAR
Bylaws further provide that nominations of candidates for election to the New
PRIMESTAR Board may be made at a special
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meeting at which directors are to be elected only pursuant to New PRIMESTAR's
notice of meeting (i) by or at the direction of the New PRIMESTAR Board or
(ii) provided that the New PRIMESTAR Board has determined that directors will
be elected at such meeting, by any stockholder of New PRIMESTAR who is
entitled to vote at the meeting, has given timely written notice to the
Secretary of New PRIMESTAR in accordance with the procedures set forth in the
New PRIMESTAR Bylaws and was a stockholder of record at the time such notice
was given.
The New PRIMESTAR Charter also provides that, (i) prior to the Class C
Termination Date, the New PRIMESTAR Board's nominees for election as Common
Directors shall be approved by the affirmative vote of 83% of the Class B
Directors and Class C Directors then in office, and (ii) on and after the
Class C Termination Date, the New PRIMESTAR Board's nominees for election as
Common Directors shall be approved by a simple majority of the New PRIMESTAR
Board. The Stockholders Agreement provides, according to the terms and subject
to the conditions therein, for the nomination of Class C Directors by the
Class C Stockholders and the nomination of Class B Directors by the Specified
Class B Stockholders. See "RELATED AGREEMENTS--Stockholders Agreement--
Nomination of Directors."
See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of
Directors--Nomination of Directors" and "RELATED AGREEMENTS--Stockholders
Agreement--Nomination of Directors."
REMOVAL OF DIRECTORS
TSAT. The TSAT Charter provides that, subject to the rights of holders of
any series of TSAT Preferred Stock, directors may be removed only for "cause"
(as defined in the TSAT Charter) upon the affirmative vote of 66 2/3% of the
total voting power of the then outstanding shares of TSAT Series A Common
Stock, TSAT Series B Common Stock and any series of TSAT Preferred Stock
entitled to vote at an election of directors, voting together as a single
class.
New PRIMESTAR. The New PRIMESTAR Charter provides that, subject to the
rights of the holders of any series of New PRIMESTAR Preferred Stock
outstanding at any time, directors may be removed from office with "cause" (as
defined in the New PRIMESTAR Charter) only upon the affirmative vote of, prior
to the Class C Termination Date, the holders of record of at least 83%, and on
and after the Class C Termination Date, the holders of record of at least 66
2/3%, of the total voting power of the then outstanding shares of New
PRIMESTAR Voting Common Stock voting together as a single class. The New
PRIMESTAR Charter also provides that, subject to the rights of the holders of
any series of New PRIMESTAR Preferred Stock outstanding at any time, directors
may be removed from office without "cause" only upon the affirmative vote of
(i) in the case of Class B Directors, the holders of record of at least 66
2/3% of the total voting power of the then outstanding shares of New PRIMESTAR
Class B Common Stock voting separately as a class, (ii) in the case of Class C
Directors, the holders of record of at least 66 2/3% of the total voting power
of the then outstanding shares of New PRIMESTAR Class C Common Stock voting
separately as a class and (iii) in the case of Common Directors, prior to the
Class C Termination Date, the holders of record of at least 83%, and on and
after the Class C Termination Date, the holders of record of at least 66 2/3%,
of the total voting power of the then outstanding shares of New PRIMESTAR
Voting Common Stock voting together as a single class. See "DESCRIPTION OF NEW
PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors--Removal of
Directors" and "RELATED AGREEMENTS--Stockholders Agreement--Removal of
Directors; Filling Vacancies."
VACANCIES ON THE BOARD OF DIRECTORS
TSAT. The TSAT Charter and the TSAT Bylaws provide that, subject to the
rights of holders of any series of TSAT Preferred Stock, any newly created
directorship resulting from an increase in the number of directors and any
vacancies on the TSAT Board caused by death, resignation, removal or
otherwise, may be filled only by the affirmative vote of a majority of the
remaining directors then in office, although less than a quorum, or the
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sole remaining director. The TSAT Charter and the TSAT Bylaws each provide
that any directors chosen to fill a vacancy on the TSAT Board or newly created
directorship will serve for the remainder of the full term of the class for
which such director was chosen and until his successor shall be duly elected
and shall have been qualified.
New PRIMESTAR. The New PRIMESTAR Charter provides that, subject to the
rights of holders of any series of New PRIMESTAR Preferred Stock outstanding
at any time, (i) any newly created directorship for a Class B Director or
vacancy in the office of a Class B Director will be filled either by (A) the
affirmative vote of a majority of the remaining Class B Directors or of the
sole remaining Class B Director, as the case may be or (B) if the vacancy or
newly created directorship has not been filled pursuant to (A) above, the
holders of at least a majority of the total voting power of the then
outstanding New PRIMESTAR Class B Common Stock voting separately as a class,
(ii) any newly created directorship for a Class C Director or vacancy in the
office of a Class C Director will be filled solely by the affirmative vote of
holders of at least 66 2/3% of the total voting power of the then outstanding
shares of New PRIMESTAR Class C Common Stock voting separately as a class, and
(iii) any newly created directorship for a Common Director or vacancy in the
office of a Common Director will be filled solely by the affirmative vote of
83% of the Class B Directors and the Class C Directors then in office if such
newly created directorship is created or such vacancy occurs prior to the
Class C Termination Date or by the affirmative vote of a majority of the
remaining directors then in office (even though less than a quorum) or by the
sole remaining Common Director, as the case may be, if such newly created
directorship is created or such vacancy occurs on or after the Class C
Termination Date. Any director so elected to fill a vacancy will serve the
same remaining term as that of his or her predecessor, if applicable, and
until his or her successor has been elected and has qualified. See
"DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of
Directors--Filling of Newly Created Directorships and Vacancies" and "RELATED
AGREEMENTS--Stockholders Agreement--Removal of Directors; Filling Vacancies."
ACTION BY WRITTEN CONSENT
TSAT. The TSAT Charter provides that, except as otherwise provided in the
terms of any series of TSAT Preferred Stock, no action required to be taken or
which may be taken at any annual meeting or special meeting of stockholders
may be taken without a meeting, and the power of stockholders to consent in
writing, without a meeting, to the taking of any action is specifically
denied.
New PRIMESTAR. The New PRIMESTAR Bylaws provide that, except as otherwise
provided by applicable law or by the New PRIMESTAR Charter, any action
required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the action so taken,
is signed by the holders of outstanding stock of New PRIMESTAR having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares of stock of New PRIMESTAR
entitled to vote thereon were present and voted.
CERTAIN SUPERMAJORITY VOTING RIGHTS
TSAT. The TSAT Charter requires, subject to the rights of holders of any
series of TSAT Preferred Stock, the affirmative vote of 66 2/3% of the total
voting power of the outstanding TSAT Voting Securities (as defined below),
voting together as a single class, to approve (a) a merger or consolidation of
TSAT with, or into, another corporation, other than a merger or consolidation
that does not require the consent of stockholders under the DGCL or a merger
or consolidation that has been approved by at least 75% of the members of the
TSAT Board (in which case, in accordance with the DGCL, the affirmative vote
of a majority of the total voting power of the outstanding TSAT Voting
Securities would, with certain exceptions, be required for approval), (b) the
sale, lease or exchange of all or substantially all of the property and assets
of TSAT; or (c) the dissolution of TSAT. "TSAT Voting Securities" is defined
in the TSAT Charter as the TSAT Series A Common Stock, the TSAT Series B
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Common Stock and any series of TSAT Preferred Stock entitled to vote with the
holders of TSAT Common Stock generally upon all matters that may be submitted
to a vote of stockholders at any annual meeting or special meeting thereof.
New PRIMESTAR. The New PRIMESTAR Charter provides that, in addition to any
other vote required under the New PRIMESTAR Charter (including, without
limitation, the votes required for certain charter and bylaw amendments, as
described below) or by applicable law, until the Class C Termination Date, the
affirmative vote of the holders of record of (i) a majority of the total
voting power of the then outstanding shares of New PRIMESTAR Class B Common
Stock and (ii) 83% of the total voting power of the then outstanding shares of
New PRIMESTAR Class C Common Stock, in each case voting separately as a class,
is required in order for New PRIMESTAR to effect (a) except as otherwise
provided in Section 253 of the DGCL (or any successor provision thereto), the
merger or consolidation of New PRIMESTAR or any of its Subsidiaries with or
into any person (except the TSAT Merger and except a merger between direct or
indirect wholly-owned subsidiaries of New PRIMESTAR or a merger between a
direct or indirect wholly-owned subsidiary of New PRIMESTAR and New PRIMESTAR
if New PRIMESTAR is the surviving entity of such merger and there is no change
in any class or series of outstanding capital stock of New PRIMESTAR nor any
amendment to the New PRIMESTAR Charter); (b) (x) the disposition, directly or
indirectly, by New PRIMESTAR (or by one or more direct or indirect
subsidiaries thereof) by sale, merger, new issuances or otherwise to a person
other than New PRIMESTAR or a direct or indirect wholly-owned subsidiary of
New PRIMESTAR of shares of the capital stock of one or more direct or indirect
Subsidiaries of New PRIMESTAR or (y) the disposition, directly or indirectly,
by New PRIMESTAR (or by one or more direct or indirect subsidiaries thereof)
by sale, merger or otherwise (other than to New PRIMESTAR or a direct or
indirect wholly-owned subsidiary of New PRIMESTAR), in any transaction or
series of transactions of New PRIMESTAR outside the ordinary course of the
business of New PRIMESTAR, of all or substantially all the assets of New
PRIMESTAR and its Subsidiaries on a consolidated basis, except for pledges,
grants of security interests, security deeds, mortgages or similar
encumbrances securing bona fide indebtedness; (c) the dissolution or
liquidation of New PRIMESTAR; (d) the authorization or issuance by New
PRIMESTAR of shares of any class of capital stock with more than one vote per
share, securities convertible into or exchangeable for shares of any such
series or class of capital stock or options, warrants or other rights to
acquire such capital stock or securities, subject to certain exceptions; and
(e) the voluntary bankruptcy of New PRIMESTAR. In addition, whether before or
after the Class C Termination Date, the affirmative vote of the holders of
record of at least 66 2/3% of the total voting power of the then outstanding
New PRIMESTAR Voting Common Stock voting together as a single class is
required in order for New PRIMESTAR to effect the foregoing actions, except
the actions described in clauses (d) and (e), for which no stockholder vote
shall be required, unless otherwise required under the New PRIMESTAR Charter
or applicable law.
In addition, except as otherwise required by applicable law or the New
PRIMESTAR Charter, and subject to the rights of holders of any series of New
PRIMESTAR Preferred Stock that may be issued from time to time, (i) the
amendment, alteration or repeal of any provision of the terms of the New
PRIMESTAR Class B Common Stock requires the affirmative vote of the holders of
record of a majority of the total voting power of the then outstanding shares
of New PRIMESTAR Class B Common Stock, voting separately as a class, and the
affirmative vote of the holders of record of, prior to the Class C Termination
Date, 83%, and on and after the Class C Termination Date, a majority, of the
total voting power of the then outstanding shares of New PRIMESTAR Class C
Common Stock, voting separately as a class, and (ii) the amendment, alteration
or repeal of any provision of the terms of the New PRIMESTAR Class C Common
Stock requires the affirmative vote of the holders of record of, prior to the
Class C Termination Date, 83%, and on and after the Class C Termination Date,
a majority, of the total voting power of the then outstanding shares of New
PRIMESTAR Class C Common Stock, voting separately as a class. However, the New
PRIMESTAR Charter provides that, without the affirmative vote of the holders
of record of a majority of the total voting power of the then outstanding
shares of New PRIMESTAR Class B Common Stock, voting separately as a class,
the terms of the New PRIMESTAR Class C Common Stock may not be amended or
altered to (x) increase the number of votes per share of New PRIMESTAR Class C
Common Stock over the number of votes per share of New PRIMESTAR Class B
Common Stock, (y) provide for a preference of the New PRIMESTAR Class C Common
Stock relative to the
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New PRIMESTAR Class B Common Stock as to payment of dividends or on a
liquidation or dissolution of New PRIMESTAR or (z) exempt the New PRIMESTAR
Class C Common Stock but not the New PRIMESTAR Class B Common Stock from the
provisions of the New PRIMESTAR Charter relating to restrictions on ownership
of shares of New PRIMESTAR Common Stock.
CHARTER OR BYLAW AMENDMENTS
TSAT. The TSAT Charter requires the affirmative vote of 66 2/3% of the total
voting power of the outstanding shares of TSAT Voting Securities, voting
together as a single class, to approve any amendment, alteration or repeal of
any provision of the TSAT Charter or the addition or insertion of other
provisions therein. The TSAT Charter also provides that the affirmative vote
of the holders of at least 66 2/3% of the total voting power of the
outstanding shares of TSAT Voting Securities, voting together as a single
class, is required to approve the adoption, amendment or repeal of any
provision of the TSAT Bylaws; provided, however, that this voting requirement
does not apply to, and no vote of the stockholders of TSAT is required to,
authorize the adoption, amendment or repeal of the TSAT Bylaws by the TSAT
Board by action taken by the affirmative vote of not less than 75% of the
members of the TSAT Board then in office.
New PRIMESTAR. The New PRIMESTAR Charter provides that, in addition to any
other vote required under the New PRIMESTAR Charter or by applicable law,
until the Class C Termination Date, and subject to certain exceptions, the
affirmative vote of the holders of record of (i) a majority of the total
voting power of the then outstanding shares of New PRIMESTAR Class B Common
Stock and (ii) 83% of the total voting power of the then outstanding shares of
New PRIMESTAR Class C Common Stock, in each case voting separately as a class,
is required in order for New PRIMESTAR to effect any amendment, alteration or
repeal of any provision of the New PRIMESTAR Charter (subject to certain
limited exceptions) or the New PRIMESTAR Bylaws. However, the amendment,
alteration or repeal of certain enumerated provisions of the New PRIMESTAR
Bylaws requires only either (1) a simple majority vote of the New PRIMESTAR
Board or (2) the affirmative vote of the holders of record of a majority of
the total voting power of the then outstanding New PRIMESTAR Voting Common
Stock voting together as a single class. In addition, whether before or after
the Class C Termination Date, the affirmative vote of the holders of record of
at least 66 2/3% of the total voting power of the then outstanding New
PRIMESTAR Voting Common Stock voting together as a single class is required in
order for New PRIMESTAR to effect any amendment, alteration or repeal of any
provision of the New PRIMESTAR Charter or the New PRIMESTAR Bylaws, subject to
certain exceptions. The New PRIMESTAR Bylaws further provide that prior to the
Class C Termination Date, the New PRIMESTAR Bylaws or any provision therein
may be amended, altered or repealed only by the stockholders except that
certain specified provisions of the New PRIMESTAR Bylaws may be amended,
altered or repealed by the New PRIMESTAR Board by the affirmative vote of a
simple majority of the New PRIMESTAR Board. On and after the Class C
Termination Date, the New PRIMESTAR Bylaws or any provision therein may be
amended, altered or repealed by (i) the New PRIMESTAR Board by the affirmative
vote of not less than 75% of the members of the New PRIMESTAR Board then in
office (but in no event less than a simple majority of the New PRIMESTAR
Board) or (ii) subject to the rights of the holders of any series of New
PRIMESTAR Preferred Stock, the stockholders by the affirmative vote of holders
of record representing at least 66 2/3% of the total voting power of the
capital stock of New PRIMESTAR then outstanding.
SPECIAL MEETINGS
TSAT. The TSAT Charter and the TSAT Bylaws provide that, except as otherwise
provided by law or in the terms of any series of TSAT Preferred Stock, special
meetings of stockholders may be called by the Secretary of TSAT (i) upon the
written request of the holders of not less than 66 2/3% in total voting power
of the outstanding TSAT Voting Securities or (ii) at the request of not less
than 75% of the members of the TSAT Board then in office.
New PRIMESTAR. The New PRIMESTAR Bylaws provide that, except as otherwise
provided by applicable law or by the New PRIMESTAR Charter, special meetings
of stockholders, for any purpose or purposes, will be called only (i) upon
written request of the holders of not less than a majority of the total voting
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power of the outstanding capital stock of New PRIMESTAR entitled to vote at
such meeting or (ii) upon request of not less than 50% of the entire New
PRIMESTAR Board.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
TSAT. Section 203 of the DGCL generally prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder for
three years following the date that such person becomes an interested
stockholder, subject to certain exceptions contained therein. The restrictions
of DGCL Section 203 do not apply to corporations that have elected, in the
manner provided therein, not to be subject to such section. The TSAT Charter
does not contain any provision "opting out" of the application of DGCL Section
203 and TSAT has not taken any of the actions necessary for it to "opt out" of
such provision. As a result, the restrictions of DGCL Section 203 are
applicable to transactions between TSAT and any of its interested
stockholders.
New PRIMESTAR. The New PRIMESTAR Charter expressly contains a provision
"opting out" of the application of DGCL Section 203, and as a result, the
restrictions of Section 203 will not apply to transactions between New
PRIMESTAR and any of its interested stockholders.
REDEMPTION
TSAT. The TSAT Charter does not contain any provisions empowering the TSAT
Board, in its sole discretion, to redeem shares of TSAT's outstanding capital
stock.
New PRIMESTAR. The New PRIMESTAR Charter empowers the New PRIMESTAR Board,
in its sole discretion, subject to the provisions of any resolution or
resolutions of the New PRIMESTAR Board creating any series of New PRIMESTAR
Preferred Stock, to redeem any shares of New PRIMESTAR's outstanding capital
stock to the extent necessary to prevent the loss or secure the reinstatement
of any license or franchise from any governmental agency held by New PRIMESTAR
or any Subsidiary thereof to conduct any portion of the business of New
PRIMESTAR or such Subsidiary, which license or franchise is conditioned upon
some or all of the holders of New PRIMESTAR's stock of any class or series
possessing prescribed qualifications. Such shares will be redeemed at fair
market value, payable in cash, Redemption Securities (as defined below) or any
combination thereof. "Redemption Securities" means any debt or equity
securities of New PRIMESTAR, any Subsidiary thereof or any other corporation
or any combination thereof, having such terms and conditions as shall be
approved by the New PRIMESTAR Board and which, together with any cash to be
paid as part of the redemption price has a value at least equal to the fair
market value of the shares to be redeemed. If New PRIMESTAR elects not to
redeem any such shares, each such share will be deemed to be converted into
one share of non-voting common stock of New PRIMESTAR identical in all other
respects to a share of New PRIMESTAR Class A Common Stock.
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MANAGEMENT OF TSAT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of TSAT:
<TABLE>
<CAPTION>
NAME AGE* POSITION
---- ---- --------
<S> <C> <C>
Gary S. Howard........... 46 Chief Executive Officer; Director
Christopher Sophinos..... 45 President
Kenneth G. Carroll....... 42 Senior Vice President and Chief Financial Officer
Lloyd S. Riddle III...... 37 Senior Vice President
William D. Myers......... 39 Vice President and Treasurer
John C. Malone........... 56 Chairman of the Board and Director
David P. Beddow.......... 53 Director
William E. Johnson....... 56 Director
John W. Goddard.......... 56 Director
Leo J. Hindery, Jr....... 50 Director
</TABLE>
- --------
* As of December 1, 1997.
The following is a five-year employment history for the directors and
executive officers of TSAT, including any directorships held in other public
companies.
Gary S. Howard has served as Chief Executive Officer of TSAT since December
1996 and a director of TSAT since November 1996. From February 1995 through
August 1997, Mr. Howard also served as President of TSAT. Since June 1997, Mr.
Howard has also served as Chief Executive Officer, Chairman of the Board and a
director of UVSG, a subsidiary of TCI, and since December 1997, he has served
as President and Chief Executive Officer of TCI Ventures Group, LLC, a
subsidiary of TCI. Mr. Howard served as President of UVSG from June 1997 to
September 1997, Senior Vice President of TCIC from October 1994 to December
1996 and as Vice President of TCIC from December 1991 through October 1994.
Mr. Howard will serve as a director of New PRIMESTAR upon consummation of the
Restructuring Transaction.
Christopher Sophinos has served as President of TSAT since September 1997,
and was previously Senior Vice President of TSAT from February 1996. Mr.
Sophinos has served as the President of Boats Unlimited since November 1993
and as a director of Sophinos & Sons, Inc. since November 1993. Mr. Sophinos
served as the President of Midwest CATV, a division of UNR Industries, Inc.,
from July 1987 to November 1993. Mr. Sophinos will serve as Senior Vice
President, Sales and Distribution upon consummation of the Restructuring
Transaction.
Kenneth G. Carroll has served as Senior Vice President and Chief Financial
Officer of TSAT since February 1995. Mr. Carroll served as Vice President of
TCI K-1, Inc. and as Vice President of United Artists K-1 Investments, Inc.
from December 1994 to May 1997. From April 1994 through January 1995, Mr.
Carroll served as Vice President of Business Operations and Chief Financial
Officer of Netlink USA, a subsidiary of TCI, and from July 1992 to May 1994,
Mr. Carroll served as Senior Director of Finance and Business Operations of
Netlink. From 1990 to July 1992, Mr. Carroll served as Vice President of
Finance of Midwest CATV. Mr. Carroll will serve as Chief Financial Officer of
New PRIMESTAR upon consummation of the Restructuring Transaction.
Lloyd S. Riddle III has served as Senior Vice President of TSAT since
February 1995, and also served as Chief Operating Officer of TSAT from
February 1995 to November 1997. Mr. Riddle served as State Manager of TCI of
New York from February 1993 to February 1995, Area Manager of TCI of Iowa from
January 1992 to February 1993 and General Manager of TCI of St. Charles, MO,
from January 1990 to January 1992.
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<PAGE>
William D. Myers has served as Vice President and Treasurer of TSAT since
September 1996. Mr. Myers served as Vice President of TCI Cable Management
Corporation from November 1994 through August 1996. Mr. Myers served as
Director of Finance of TCI from December 1991 to November 1994.
John C. Malone has served as Chairman of the Board and a director of TSAT
since December 1996. Dr. Malone has served as Chief Executive Officer of TCI
since January 1994, and as Chairman of the Board of TCI since November 1996.
Dr. Malone served as President of TCI from January 1994 to March 1997, as
Chief Executive Officer of TCIC from March 1992 to October 1994 and as
President of TCIC from 1973 to October 1994. Dr. Malone has also served as
Chairman of the Board and as a director of Tele-Communications International,
Inc. since May 1995. Dr. Malone is also a director of TCI, TCIC, TCI Pacific
Communications, Inc., BET Holdings, Inc. and The Bank of New York. Dr. Malone
will serve as a director of New PRIMESTAR upon consummation of the
Restructuring Transaction.
David P. Beddow has served as a director of TSAT since December 1996. Mr.
Beddow has served as Senior Vice President of TCI Technology Ventures, Inc., a
subsidiary of TCI, and The National Digital Television Center, Inc., formerly
known as Western Tele-Communications, Inc., a subsidiary of TCI, since
February 1995. Mr. Beddow served as Vice President of TCI Technology, Inc.
from June 1993 to February 1995 and as Executive Vice President and Chief
Operating Officer of the Partnership from March 1990 to June 1993. Mr. Beddow
has served as a director of UVSG, a subsidiary of TCI, since January 1996, and
served as President of UVSG from February 1997 to June 1997.
William E. Johnson has served as a director of TSAT since December 1996. Mr.
Johnson served as Chief Executive Officer of Scientific Atlanta, Inc. from
January 1987 to December 1992, at which time he retired. Mr. Johnson has
served as a director of Intelligent Electronic, Inc. since November 1994 and
as a director of ATX, Inc. since January 1993. Mr. Johnson was a director of
I.C.T. from 1991 to 1993.
John W. Goddard has served as a director of TSAT since December 1996. Mr.
Goddard served as President and Chief Executive Officer of the cable division
of Viacom International, Inc. from 1980 until his retirement in July 1996. Mr.
Goddard served as a director of StarSight Telecast, Inc. from May 1994 to May
1997. Mr. Goddard will serve as a director of New PRIMESTAR upon consummation
of the Restructuring Transaction.
Leo J. Hindery, Jr. has served as a director of TSAT since November 1997.
Mr. Hindery has served as President and Chief Operating Officer of TCI, and as
President and a director of TCIC, since March 1997. Prior to joining TCI, Mr.
Hindery was the founder, Managing General Partner and Chief Executive Officer
of InterMedia Partners and its affiliated entities since 1988. Mr. Hindery
will serve as a director of New PRIMESTAR upon consummation of the
Restructuring Transaction.
The directors of TSAT will hold office until the next annual meeting of
stockholders of TSAT and until their successors are duly elected and
qualified. The executive officers named above will serve in such capacities
until the next annual meeting of the TSAT Board, or until their respective
successors have been duly elected and have been qualified, or until their
earlier death, resignation, disqualification or removal from office. There is
no family relationship between any of the directors.
BOARD COMPOSITION
The TSAT Charter provides for a classified board of directors of not less
than three members, divided into three classes of approximately equal size,
with each class to be elected for a three year term at each annual meeting of
stockholders. The exact number of directors is fixed by resolution of the TSAT
Board. On the TSAT Spin-off Date, the number of directors on the TSAT Board
was fixed at five. For purposes of determining their terms, directors are
divided into three classes. The Class I director, whose term was fixed to
expire at the 1997 annual stockholders' meeting, is Mr. Beddow. The Class II
directors, whose terms expire at the 1998 annual stockholders' meeting, are
Messrs. Howard and Johnson. The Class III directors, whose terms expire at the
1999 annual stockholders' meeting, are Dr. Malone and Mr. Goddard. Each
director elected at an annual stockholders'
196
<PAGE>
meeting will serve for a term ending on the date of the annual stockholders'
meeting held in the third year following the year of his election or until his
earlier death, resignation or removal.
On November 10, 1997, the TSAT Board voted to increase the size of the TSAT
Board from five to six, and to add Leo J. Hindery, Jr. to fill the newly
created directorship, as a Class I director. In addition, the TSAT Board
determined that the 1997 annual stockholders' meeting would not be held, and
that the 1998 annual stockholders' meeting would be deferred, pending the
outcome of the vote in respect of the Roll-up Proposal.
COMMITTEES OF TSAT'S BOARD OF DIRECTORS
The TSAT Board currently has an Audit Committee and a Compensation
Committee, both of which were established in December 1996.
The Audit Committee of the TSAT Board, whose present members are Messrs.
Goddard (Committee Chairman) and Johnson, consists of only nonemployee
directors. The Audit Committee meets periodically with management and
representatives of TSAT's independent auditors. The Audit Committee reviews
the scope and approach of external audit activities and the results of such
audits and is responsible for making the annual recommendation to the TSAT
Board of the firm of independent accountants to be retained by TSAT to perform
the annual audit. The Audit Committee met one time in 1997.
The Compensation Committee, whose present members are Messrs. Johnson
(Committee Chairman) and Goddard, consists of only nonemployee directors. The
Compensation Committee is responsible for recommending the salaries and
compensation programs for executive officers to the TSAT Board. This committee
is also responsible for administering TSAT's stock incentive plan and certain
other benefit programs. None of the members of the Compensation Committee are
entitled to participate in any of TSAT's employee benefit plans administered
by the Compensation Committee. The Compensation Committee met four times in
1997.
The TSAT Board may from time to time establish certain other committees of
the TSAT Board and may fill any vacancies on any committee of the TSAT Board
as it deems advisable.
COMPENSATION OF DIRECTORS
Members of the TSAT Board who are also full-time employees of TSAT or TCI,
or any of their respective subsidiaries, do not receive any additional
compensation for their services as directors. Directors who are not full-time
employees of TSAT or TCI, or any of their respective subsidiaries, receive a
retainer of $30,000 per year. All members of the TSAT Board are also
reimbursed for expenses incurred to attend any meetings of the TSAT Board or
any committee thereof.
See also "BUSINESS OF TSAT--Certain Arrangements Between TSAT and TCI--Other
Arrangements."
EXECUTIVE COMPENSATION
Summary Compensation Table. Certain directors, officers and employees of TCI
and its subsidiaries (including TSAT, prior to the TSAT Spin-off) have been
granted TCI Options and stock appreciation rights with respect to shares of
TCI Group Series A Common Stock ("TCI SARs"). The TCI Options and TCI SARs
have been granted pursuant to various stock plans of TCI (the "TCI Plans").
The TCI Plans give the committee of the TCI Board that administers the TCI
Plans (the "TCI Plan Committee") the authority to make equitable adjustments
to outstanding TCI Options and TCI SARs in the event of certain transactions,
of which the TSAT Spin-off was one.
The TCI Plan Committee and the TCI Board determined that, immediately prior
to the TSAT Spin-off, each TCI Option would be divided into two separately
exercisable options: (i) an Add-on TSAT Option, exercisable for the number of
shares of TSAT Series A Common Stock that would have been issued in the TSAT
Spin-off
197
<PAGE>
in respect of the shares of TCI Group Series A Common Stock subject to the
applicable TCI Option, if such TCI Option had been exercised in full
immediately prior to the TSAT Spin-off Record Date, and containing
substantially equivalent terms as the existing TCI Option, and (ii) an
Adjusted TCI Option, exercisable for the same number of shares of TCI Group
Series A Common Stock as the corresponding TCI Option had been. The aggregate
exercise price of each TCI Option was allocated between the Add-on TSAT Option
and the Adjusted TCI Option into which it was divided, and all other terms,
including date of grant, of the Add-on TSAT Option and Adjusted TCI Option are
in all material respects the same as the terms of such TCI Option, except that
references therein to TCI generally refer to TSAT with respect to Adjusted TCI
Options and Add-on TSAT Options (and related stock appreciation rights
("SARs") held by TSAT Employees (as defined below). Similar adjustments were
made to the outstanding TCI SARs, resulting in the holders thereof holding
Adjusted TCI SARs and Add-on TSAT SARs instead of TCI SARs, and to outstanding
restricted share awards, resulting in the holders thereof holding restricted
shares of TSAT Series A Common Stock in addition to restricted shares of TCI
Group Series A Common Stock, effective immediately prior to the TSAT Spin-off.
The foregoing adjustments were made pursuant to the anti-dilution provisions
of the TCI Plans pursuant to which the respective TCI Options and TCI SARs
were granted.
As a result of the foregoing, certain persons who remained TCI employees or
nonemployee directors after the TSAT Spin-off and certain persons who were TCI
employees prior to the TSAT Spin-off but became TSAT employees after the TSAT
Spin-off hold both Adjusted TCI Options and separate Add-on TSAT Options
and/or hold both Adjusted TCI SARs and separate Add-on TSAT SARs. The
obligations with respect to the Adjusted TCI Options, Add-on TSAT Options,
Adjusted TCI SARs and Add-on TSAT SARs held by TCI employees and nonemployee
directors are obligations solely of TCI. The obligations with respect to the
Adjusted TCI Options, Add-on TSAT Options, Adjusted TCI SARs and Add-on TSAT
SARs held by persons who were TSAT employees at the time of the TSAT Spin-off
and following the TSAT Spin-off are no longer TCI employees ("TSAT Employees")
are obligations solely of TSAT. Prior to the TSAT Spin-off, TCI and TSAT
entered into an agreement to sell to each other from time to time at the then
current market price shares of TCI Group Series A Common Stock and TSAT Series
A Common Stock, respectively, as necessary to satisfy their respective
obligations under such securities. See "BUSINESS OF TSAT--Certain Arrangements
Between TSAT and TCI."
TCI, in addition to the TCI Group Common Stock, has other series of common
stock outstanding, including the Tele-Communications, Inc. Series A Liberty
Media Group Common Stock, $1.00 par value per share ("LMG Series A Common
Stock"), and the Tele-Communications, Inc. Series B Liberty Media Group Common
Stock, $1.00 par value per share ("LMG Series B Common Stock" and, together
with the LMG Series A Common Stock, "LMG Common Stock"), which are intended to
reflect the separate performance of TCI's programming and electronic retailing
businesses (the "Liberty Media Group"). Prior to the TSAT Spin-off, TSAT was a
member of the group of TCI businesses not attributed to the Liberty Media
Group (the "TCI Group") and all of the assets and businesses transferred to
TSAT were included in the TCI Group. Accordingly, the dividend effecting the
TSAT Spin-off was made to the holders of TCI Group Common Stock and the
holders of LMG Common Stock did not participate in the TSAT Spin-off.
198
<PAGE>
The following table is a summary of all forms of compensation paid by TSAT
(or by TCI or any other subsidiary of TCI) to the officers named therein for
services rendered in all capacities to TSAT (and, prior to the TSAT Spin-off,
TCI) for the fiscal years ended December 31, 1996 and 1995 (total of five
persons).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------- --------------------------------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARD OPTIONS/ COMPENSATION
POSITION WITH TSAT YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) SARS ($)(5)
------------------ ---- ---------- --------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 1996 $275,000 $23,210(6) $4,230 $ -- 664,076(3) $15,000
(Chief Executive
Officer) 1995 $262,500 $23,210(6) $3,415 $309,375 165,000(4) $15,000
Christopher Sophinos.... 1996 $ 96,865(7) $10,750(7) $ -- $ -- -- $ --
(President)
Lloyd S. Riddle III..... 1996 $140,000 $41,212 $3,263 $ -- -- $15,000
(Senior Vice President) 1995 $123,078 $34,478 $1,557 $ -- 19,250(4) $13,439
Kenneth G. Carroll...... 1996 $119,423 $33,150 $ -- $ -- -- $ 9,500
(Senior Vice President 1995 $ 98,845 $27,199 $ 861 $ -- 19,250(4) $ 3,668
and Chief Financial
Officer)
William D. Myers........ 1996 $115,010 $ 5,000 $2,683 $ -- -- $ 8,639
(Vice President and 1995 $108,130 $ -- $2,425 $ -- 11,000(4) $ 8,839
Treasurer)
</TABLE>
- --------
(1) Consists of amounts reimbursed during the year for the payment of taxes.
(2) Pursuant to the Tele-Communications, Inc. 1994 Stock Incentive Plan, on
December 13, 1995, Mr. Howard was granted 15,000 restricted shares of TCI
Group Series A Common Stock, and in connection with the TSAT Spin-off,
received 1,500 restricted shares of TSAT Series A Common Stock. Such
restricted shares vest as to 50% of such shares on December 13, 1999 and
as to the remaining 50% on December 13, 2000. The value of such restricted
shares at the end of 1996 was $210,750. TCI and TSAT have not paid cash
dividends on the TCI Group Series A Common Stock and TSAT Series A Common
Stock, respectively, and do not anticipate declaring and paying cash
dividends on the TCI Group Series A Common Stock and TSAT Series A Common
Stock, respectively, at any time in the foreseeable future.
(3) For Additional information regarding this award, see "--Option and SAR
Grants in Last Fiscal Year," below.
(4) On December 13, 1995, pursuant to the Tele-Communications, Inc. 1995 Stock
Incentive Plan, certain key employees of TCI were granted an aggregate of
2,757,500 options in tandem with stock appreciation rights to acquire
shares of TCI Group Series A Common Stock. Messrs. Howard, Riddle, Carroll
and Myers were granted 150,000, 17,500, 17,500 and 10,000 options,
respectively. In connection with the TSAT Spin-off, Messrs. Howard,
Riddle, Carroll and Myers received 15,000, 1,750, 1,750 and 1,000 Add-on
TSAT Options, respectively. Each such grant of options with tandem stock
appreciation rights vests evenly over five years with such vesting period
beginning August 4, 1995, first became exercisable on August 4, 1996 and
expires on August 4, 2005. Notwithstanding the vesting schedule as set
forth in the option agreement, the option shares shall become available
for purchase if the grantee's employment with TSAT (a) shall terminate by
reason of (i) termination by TSAT without cause (ii) termination by the
grantee for good reason (as defined in the agreement) or (iii) disability,
(b) shall terminate pursuant to provisions of a written employment
agreement, if any, between the grantee and TSAT which expressly permits
the grantee to terminate such employment upon occurrence of specified
events (other than the giving of notice and passage of time), or (c) if
the grantee dies while employed by TSAT. Further, the option shares will
become available for purchase in the event of an Approved Transaction,
Board Change, or Control Purchase (each as defined with reference to TCI),
unless in the case of an Approved Transaction, the Compensation Committee
of TCI under the circumstances specified determines otherwise.
(5) The accounts in the TCI Employee Stock Purchase Plan ("TCI ESPP") of all
employees of TSAT became vested in full as of the effective time of the
TSAT Spin-off. Directors who are not employees of TCI are ineligible to
participate in the TCI ESPP. The TCI ESPP, a defined contribution plan,
enables participating employees to acquire a proprietary interest in TCI
and benefits upon retirement. Under the terms of the TCI ESPP, employees
are eligible for participation after one year of service. The TCI ESPP's
normal retirement age is 65 years. Participants may contribute up to 10%
of their compensation and TCI (by annual resolution of the TCI Board) may
contribute up to a matching 100% of the participants' contributions. The
TCI ESPP includes a salary deferral feature in respect of employee
contributions. Forfeitures (due to participants' withdrawal prior to full
vesting) are used to reduce TCI's otherwise determined contributions.
Although TCI has not expressed an intent to terminate the TCI ESPP, it may
do so at any time. Effective
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<PAGE>
January 1, 1997, TSAT adopted an Employee Stock Purchase Plan, and,
effective as of the TSAT Spin-off Date, employees of TSAT discontinued
making contributions to the TCI ESPP.
(6) This amount reflects the amortization of obligations under an employment
contract between Mr. Howard and a prior employer, which obligations were
assumed by TCI in connection with the acquisition of such prior employer,
and were assumed by TSAT in connection with the TSAT Spin-off.
(7) Mr. Sophinos commenced employment on February 27, 1996, and accordingly,
the 1996 compensation information included in the table reflects ten
months of employment.
Option and SAR Grants in Last Fiscal Year. On the TSAT Spin-off Date, the
TSAT Board adopted, and TCI, as the sole stockholder of TSAT prior to the TSAT
Spin-off, approved, the TSAT 1996 Plan. The TSAT 1996 Plan provides for awards
to be made in respect of a maximum of 3,200,000 shares of TSAT Series A Common
Stock (subject to certain anti-dilution adjustments). Awards may be made as
grants of stock options, SARs, restricted shares, stock units, performance
awards or any combination thereof (collectively, "Awards"). Awards may be made
to employees and to consultants and advisors to TSAT who are not employees.
Shares of TSAT Series A Common Stock that are subject to Awards that expire,
terminate or are annulled for any reason without having been exercised (or
deemed exercised, by virtue of the exercise of a related SAR), or are
forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the TSAT 1996 Plan.
The following table discloses information regarding stock options granted in
tandem with stock appreciation rights during the year ended December 31, 1996
to each of the named executive officers of TSAT in respect of shares of TSAT
Series A Common Stock under the TSAT 1996 Plan.
<TABLE>
<CAPTION>
NO. OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE MARKET PRICE GRANT
OPTIONS EMPLOYEES PRICE ON GRANT DATE PRESENT
NAME GRANTED IN 1996 ($/SH) DATE ($/SH) EXPIRATION DATE VALUE ($)
---- ---------- ---------- -------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Howard.......... 664,076 28.6%(1) $8.86 $12.625(2) February 1, 2006 $5,806,083(3)
</TABLE>
- --------
(1) On the TSAT Spin-off Date, Mr. Howard was granted an option to purchase
shares of TSAT Series A Common Stock representing 1.0% of the number of
shares of TSAT Common Stock issued and outstanding on the TSAT Spin-off
Date, determined immediately after giving effect to the TSAT Spin-off, but
before giving effect to the exercise of such option or certain other
options. For additional information concerning such grant, see "BUSINESS
OF TSAT--Certain Arrangements Between TSAT and TCI--Other Arrangements."
(2) Represents the closing market price per share of TSAT Series A Common
Stock on December 5, 1996, the first day of trading following the date of
grant.
(3) The value shown is based on the Black-Scholes model and is stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.22% discount rate; (b) a 35% volatility factor; (c) the 10-year
option term; (d) the closing price of TSAT Series A Common Stock on
December 5, 1996; and (e) a per share exercise price of $8.86. The actual
value an executive may realize will depend upon the extent to which the
stock price exceeds the exercise price on the date the option is
exercised. Accordingly, the value, if any, realized by an executive will
not necessarily be the value determined by the model.
Effective February 3, 1997, certain key employees of TSAT were granted,
pursuant to the TSAT 1996 Plan, (a) an aggregate of 820,000 options in tandem
with stock appreciation rights to acquire shares of TSAT Series A Common Stock
at a per share exercise price of $8.00 per share and (b) an aggregate of
325,000 restricted shares of TSAT Series A Common Stock (collectively, the
"1997 Grant"). Mr. Howard was granted 125,000 restricted shares, and each of
Messrs. Sophinos, Riddle, Carroll and Myers were granted 100,000 options in
tandem with stock appreciation rights and 50,000 restricted shares. Each such
grant of options with tandem stock appreciation rights vests evenly over five
years with such vesting period beginning January 1, 1997, first becomes
exercisable on January 1, 1998 and expires on December 31, 2006. As originally
granted, each such grant of restricted shares vested as to 50% on January 1,
2001 and as to the remaining 50% on January 1, 2002.
On November 10, 1997, the TSAT Board and the Compensation Committee of the
TSAT Board approved modifications to the vesting provisions of all TSAT
Options and TSAT Restricted Stock Awards issued pursuant to the TSAT 1996
Plan, (i) accelerating the vesting schedules under such options, to provide
for vesting in three
200
<PAGE>
equal annual installments, commencing February 1998, and (ii) accelerating the
vesting schedules under such restricted stock awards to provide for vesting of
50% on each of the second and third anniversaries of the date of granting in
each case subject to consummation of the Restructuring Transaction. TSAT
Options granted prior to the TSAT Spin-off, which were 40% vested in February
1998, will become two-thirds vested in February 1999 and fully vested in
February 2000. If the Restructuring Transaction is not consummated, the
vesting provisions of such grants will revert back to their original
schedules.
Notwithstanding the vesting schedule as set forth in the option agreement,
the option shares shall become available for purchase if the grantee's
employment with TSAT (a) shall terminate by reason of (i) termination by TSAT
without cause (ii) termination by the grantee for good reason (as defined in
the agreement) or (iii) disability, (b) shall terminate pursuant to provisions
of a written employment agreement, if any, between the grantee and TSAT which
expressly permits the grantee to terminate such employment upon occurrence of
specified events (other than the giving of notice and passage of time), or (c)
if the grantee dies while employed by TSAT. Further, the option shares will
become available for purchase in the event of an Approved Transaction, Board
Change, or Control Purchase (each as defined in the TSAT 1996 Plan), unless in
the case of an Approved Transaction, the Compensation Committee of TSAT under
the circumstances specified determines otherwise.
Aggregated TCI Option/SAR Exercises and Fiscal Year-End TCI Option/SAR
Values. The following table provides, for the executives named in the Summary
Compensation Table, information on the exercise during the year ended December
31, 1996, of Add-on TSAT Options, Adjusted TCI Options and options to purchase
LMG Series A Common Stock, the number of shares of TSAT Series A Common Stock,
TCI Group Series A Common Stock and LMG Series A Common Stock represented by
unexercised options owned by them at December 31, 1996, and the value of those
options as of the same date. The number of options granted to purchase shares
of LMG Series A Common Stock and the price to purchase such options has been
adjusted to give effect to the distribution on January 14, 1997 by TCI of one
share of LMG Series A Common Stock for each two shares of LMG Series A Common
Stock held of record and one share of LMG Series A Common Stock for each two
shares of LMG Series B Common Stock held of record.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED ON VALUE (#) EXERCISABLE/ ($) EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE(1) UNEXERCISABLE(1)
---- ------------ ------------ -------------------- -----------------
<S> <C> <C> <C> <C>
Gary S. Howard
Exercisable
TSAT Series A....... -- -- 12,750 $ --
TCI Group Series A.. -- -- 127,500 $179,219
LMG Series A........ -- -- 36,563 $261,865
Unexercisable
TSAT Series A....... -- -- 681,326 $674,037
TCI Group Series A.. -- -- 172,500 $ 52,031
LMG Series A........ -- -- 19,687 $115,685
Lloyd S. Riddle III
Exercisable
TSAT Series A....... -- -- 510 $ --
TCI Group Series A.. -- -- 5,100 $ --
LMG Series A........ -- -- 600 $ 2,623
Unexercisable
TSAT Series A....... -- -- 1,640 $ --
TCI Group Series A.. -- -- 16,400 $ --
LMG Series A........ -- -- 900 $ 3,935
Kenneth G. Carroll
Exercisable
TSAT Series A....... -- -- 510 $ --
TCI Group Series A.. -- -- 5,100 $ --
LMG Series A........ -- -- 600 $ 2,623
Unexercisable
TSAT Series A....... -- -- 1,640 $ --
TCI Group Series A.. -- -- 16,400 $ --
LMG Series A........ -- -- 900 $ 3,935
William D. Myers
Exercisable
TSAT Series A....... -- -- 560 $ --
TCI Group Series A.. -- -- 5,600 $ --
LMG Series A........ -- -- 1,350 $ 5,902
Unexercisable
TSAT Series A....... -- -- 1,340 $ --
TCI Group Series A.. -- -- 13,400 $ --
LMG Series A........ -- -- 2,025 $ 8,853
</TABLE>
- --------
(1) Share numbers and values do not include any amounts with respect to the
1997 Grant. See "--Option and SAR Grants in Last Fiscal Year" above.
202
<PAGE>
MANAGEMENT OF NEW PRIMESTAR
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who will serve as the directors and executive officers of New
PRIMESTAR following the Restructuring Transaction:
<TABLE>
<CAPTION>
NAME AGE* POSITION
---- ---- --------
<S> <C> <C>
Daniel J. O'Brien......... 38 President and Chief Operating Officer
Kenneth G. Carroll........ 42 Chief Financial Officer
Marcus O. Evans........... 47 General Counsel
Joel Ginsparg............. 39 Senior Vice President, Technology and Operations
Christopher Sophinos...... 45 Senior Vice President, Sales and Distribution
Denny Wilkinson........... 49 Senior Vice President, Marketing and Programming
John C. Malone............ 56 Director
Leo J. Hindery, Jr. ...... 50 Director
Gary S. Howard............ 46 Director
Joseph J. Collins......... 53 Director
Carl U.J. Rossetti........ 49 Director
Robert J. Miron........... 60 Director
Jeffrey T. DeLorme........ 45 Director
Jack A. Markell........... 37 Director
Ajit M. Dalvi............. 55 Director
John F. Connelly.......... 54 Director
John W. Goddard........... 56 Director
</TABLE>
- --------
*As of December 1, 1997.
The following is a five-year employment history for the persons who will
serve as the directors and executive officers of New PRIMESTAR, including any
directorships held in public companies.
Daniel J. O'Brien has served as President of the Partnership since June
1997. Mr. O'Brien served as President of TWSSI from October 1993 to June 1997
and as Vice President of Operations at the Cincinnati Division of Time Warner
Cable from January 1991 to October 1993. Mr. O'Brien has served as a member of
the Partners Committee of the Partnership since 1990.
Kenneth G. Carroll has served as Senior Vice President and Chief Financial
Officer of TSAT since February 1995. Mr. Carroll served as Vice President of
TCI K-1, Inc. and as Vice President of United Artists K-1 Investments, Inc.
from December 1994 to May 1997. From April 1994 through January 1995, Mr.
Carroll served as Vice President of Business Operations and Chief Financial
Officer of Netlink USA, a subsidiary of TCI, and from July 1992 to May 1994,
Mr. Carroll served as Senior Director of Finance and Business Operations of
Netlink. From 1990 to July 1992, Mr. Carroll served as Vice President of
Finance of Midwest CATV.
Marcus O. Evans has served as Senior Vice President and General Counsel of
the Partnership since November 1991. Prior to joining the Partnership, Mr.
Evans served as Vice President and General Counsel for Group Cable of Chicago,
the Westinghouse-affiliated cable television properties which were sold in
1990.
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<PAGE>
Joel Ginsparg has served as Senior Vice President of Technology and
Operations of the Partnership since December 1995. Mr. Ginsparg served as
Senior Vice President and General Manager of the Interactive Multimedia Group
of Logica, Inc. from May 1991 through December 1995.
Christopher Sophinos has served as President of TSAT since September 1997,
and was previously Senior Vice President of TSAT from February 1996. Mr.
Sophinos has served as the President of Boats Unlimited since November 1993
and as a director of Sophinos & Sons, Inc. since November 1993. Mr. Sophinos
served as the President of Midwest CATV, a division of UNR Industries, Inc.,
from July 1987 to November 1993.
Denny Wilkinson has served as Senior Vice President, Marketing and
Programming of the Partnership since May 1995. Prior to joining the
Partnership, Mr. Wilkinson served as Senior Vice President, Consumer Marketing
at HBO from January 1992 through April 1995.
John C. Malone has served as Chairman of the Board and a director of TSAT
since December 1996. Dr. Malone has also served as Chief Executive Officer of
TCI since January 1994, and as Chairman of the Board of TCI since November
1996. Dr. Malone served as President of TCI from January 1994 to March 1997,
as Chief Executive Officer of TCIC from March 1992 to October 1994 and as
President of TCIC from 1973 to October 1994. Dr. Malone has also served as
Chairman of the Board and as a director of Tele-Communications International,
Inc. since May 1995. Dr. Malone is also a director of TCI, TCIC, TCI Pacific
Communications, Inc., BET Holdings, Inc. and The Bank of New York.
Leo J. Hindery, Jr. has served as a director of TSAT since November 1997.
Mr. Hindery has served as President and Chief Operating Officer of TCI, and as
President and a director of TCIC, since March 1997. Prior to joining TCI, Mr.
Hindery was the founder, Managing General Partner and Chief Executive Officer
of InterMedia Partners and its affiliated entities since 1988.
Gary S. Howard has served as Chief Executive Officer of TSAT since December
1996 and a director of TSAT since November 1996. From February 1995 through
August 1997, Mr. Howard also served as President of TSAT. Since June 1997, Mr.
Howard has also served as Chief Executive Officer, Chairman of the Board and a
director of UVSG, a subsidiary of TCI, and since December 1997, he has served
as President and Chief Executive Officer of TCI Ventures Group, LLC, a
subsidiary of TCI. Mr. Howard served as President of UVSG from June 1997 to
September 1997, Senior Vice President of TCIC from October 1994 to December
1996 and as Vice President of TCIC from December 1991 through October 1994.
Joseph J. Collins has served as Chairman of the Board and Chief Executive
Officer of Time Warner Cable, a division of TWE, since September 1989. From
June 1988 until September 1989, Mr. Collins served as Chairman and Chief
Executive Officer of American Television and Communications Corp. ("ATC"). Mr.
Collins served as President of Home Box Office, Inc. from October 1984 until
June 1988, prior to which he served as President of ATC from March 1982. From
June 1972 to 1982, Mr. Collins served in a number of other management and
senior management positions at ATC. Mr. Collins is a Co-Chairman of the Public
Affairs Committee of the National Cable Television Association.
Carl U.J. Rossetti has served as Senior Vice President--Corporate
Development of Time Warner Cable, a division of TWE, since 1992.
Robert J. Miron has served as the President of Advance/Newhouse
Communications since April 1, 1995. Mr. Miron served as President of Newhouse
Broadcasting from 1986 to April 1995, and prior to that time he held various
positions with Newhouse Broadcasting and its affiliated companies. Mr. Miron
also currently serves as the Chairman of the Board of the National Cable
Television Association ("NCTA"). He was elected to the NCTA Board in 1983,
served as an officer and member of the Executive Committee for several years,
and is also a past Chairman of the Board of NCTA, serving in 1989. Mr. Miron
also serves as a director of Newhouse Broadcasting, Advance Communications
Corp., Discovery Communications, Inc., Viewer's Choice Networks, the Walter
Kaitz Foundation, C-SPAN, Cable in the Classroom and CableLabs.
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<PAGE>
Jeffrey T. DeLorme has served as the Executive Vice President of MediaOne, a
subsidiary of US West, since November 1993. From January 1993 through November
1993, Mr. DeLorme served as Senior Vice President and General Manager of the
Southeast Region of MediaOne.
Jack A. Markell has served as Vice President of Comcast since April 1996.
Mr. Markell served as Vice President, and subsequently as Senior Vice
President, of Nextel Communications, Inc. from March 1989 until January 1996.
Ajit M. Dalvi has served as Senior Vice President of Programming and
Strategy for Cox since 1987. Mr. Dalvi joined Cox in February 1982, serving as
Vice President of Marketing and Programming from 1985 to 1987, Vice President
of Marketing Planning and Development from December 1984 to 1985, and Director
of Marketing from February 1982 to December 1984.
John F. Connelly has served as Chairman of the Board and Chief Executive
Officer of GE Americom, a subsidiary of GE, since 1992. Prior to that time,
Mr. Connelly held various positions with GE, including Manager--Finance,
Communications and Services (from 1991 to 1992), Deputy Treasurer (from 1987
to 1991) and Manager--Corporate Finance and Funds Management (from 1985 to
1987).
John W. Goddard has served as a director of TSAT since December 1996. Mr.
Goddard served as President and Chief Executive Officer of the cable division
of Viacom International, Inc. from 1980 until his retirement in July 1996. Mr.
Goddard served as a director of StarSight Telecast, Inc. from May 1994 to May
1997.
The directors of New PRIMESTAR will hold office until the next annual
meeting of stockholders of New PRIMESTAR and until their successors are duly
elected and qualified. The executive officers named above will be elected to
serve in such capacities until the next annual meeting of the New PRIMESTAR
Board, or until their respective successors have been duly elected and have
been qualified, or until their earlier death, resignation, disqualification or
removal from office. There is no family relationship between any of the
directors.
BOARD COMPOSITION
The New PRIMESTAR Charter and the New PRIMESTAR Bylaws provide that, subject
to any rights of the holders of any series of New PRIMESTAR Preferred Stock
outstanding at any time to elect additional directors to the New PRIMESTAR
Board, the New PRIMESTAR Board will consist of eleven members, and will be
comprised of Class B Directors, Class C Directors and Common Directors until
the Class C Termination Date. The New PRIMESTAR Bylaws provide that, on and
after the Class C Termination Date, the New PRIMESTAR Board will consist of
not less than three members, the exact number of which will from time to time
be determined by resolution of the New PRIMESTAR Board. See "DESCRIPTION OF
NEW PRIMESTAR CAPITAL STOCK--Common Stock--Board of Directors."
Of the eleven members of the New PRIMESTAR Board, initially, three Class B
Directors will be elected by holders of the New PRIMESTAR Class B Common Stock
and six Class C Directors will be elected by holders of the New PRIMESTAR
Class C Common Stock, in each case voting as a separate class. Pursuant to the
Stockholders Agreement, initially, of the six Class C Directors, three will be
nominated by TWE (and TWE has agreed with Newhouse pursuant to the
TWE/Newhouse Voting Agreement that of such three, one will be nominated by
Newhouse) and one will be nominated by each of Cox, Comcast and MediaOne. The
remaining two Common Directors will be nominated by a super-majority vote of
the Class B Directors and Class C Directors, and elected by the holders of the
New PRIMESTAR Voting Common Stock, voting together as a single class. The
number of Class B Directors will decrease as the number of shares of New
PRIMESTAR Class B Common Stock outstanding decreases, and the number of Class
C Directors will decrease as the number of shares of New PRIMESTAR Class C
Common Stock outstanding decreases, in each case in accordance with a schedule
set forth in the New PRIMESTAR Charter. The special class rights of the
holders of New PRIMESTAR
Class B Common Stock and the holders of New PRIMESTAR Class C Common Stock,
each voting as a separate
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<PAGE>
class, to elect the Class B Directors and Class C Directors, respectively,
will automatically terminate on the Class C Termination Date, at which time
the New PRIMESTAR Board will consist exclusively of Common Directors. At any
time prior to the Class C Termination Date that the maximum number of Class B
Directors or Class C Directors is decreased, the number of Common Directors
will be correspondingly increased, so that the total number of directors
constituting the entire New PRIMESTAR Board remains at eleven. On and after
the Class C Termination Date, all members of the New PRIMESTAR Board will be
elected by the holders of New PRIMESTAR Voting Common Stock, voting together
as a single class. See "DESCRIPTION OF NEW PRIMESTAR CAPITAL STOCK--Common
Stock--Board of Directors."
At the Closing of the Restructuring Transaction, 100% of the issued and
outstanding shares of New PRIMESTAR Class B Common Stock and approximately 36%
of the issued and outstanding shares of New PRIMESTAR Class A Common Stock,
will be owned by TSAT. Accordingly, TSAT will be entitled to elect the three
initial Class B Directors. If the TSAT Merger is consummated, each outstanding
share of TSAT Series B Common Stock on the TSAT Closing Date will be converted
into the right to receive one share of New PRIMESTAR Class B Common Stock,
each outstanding share of TSAT Series A Common Stock on such date will be
converted into the right to receive one share of New PRIMESTAR Class A Common
Stock and the shares of New PRIMESTAR Common Stock then held by TSAT will be
canceled.
COMMITTEES OF NEW PRIMESTAR'S BOARD
The New PRIMESTAR Board will establish an Audit Committee and a Compensation
Committee.
The Audit Committee of the New PRIMESTAR Board will consist of only
nonemployee directors. The Audit Committee will meet periodically with
management and representatives of New PRIMESTAR's independent auditors. The
Audit Committee will review the scope and approach of external audit
activities and the results of such audits and will be responsible for making
the annual recommendation to the New PRIMESTAR Board of the firm of
independent accountants to be retained by New PRIMESTAR to perform the annual
audit.
The Compensation Committee of the New PRIMESTAR Board will consist of only
nonemployee directors. The Compensation Committee will be responsible for
recommending the salaries and compensation programs for executive officers to
the New PRIMESTAR Board. This committee will also be responsible for
administering New PRIMESTAR's stock incentive plan and certain other benefit
programs. None of the members of the Compensation Committee will be entitled
to participate in any of New PRIMESTAR's employee benefit plans administered
by the Compensation Committee.
In addition, the New PRIMESTAR Board, by the affirmative vote of, prior to
the Class C Termination Date, all the members of the entire New PRIMESTAR
Board, and on and after the Class C Termination Date, a simple majority of the
New PRIMESTAR Board, may designate an executive committee of the New PRIMESTAR
Board to manage and operate the affairs of New PRIMESTAR. Except as provided
by applicable law, the New PRIMESTAR Charter or the New PRIMESTAR Bylaws, such
executive committee will exercise all powers and authority of the New
PRIMESTAR Board in the management of the business and affairs of New
PRIMESTAR; provided, however, that an executive committee will not have the
authority to approve any matters which (pursuant to applicable law, the New
PRIMESTAR Charter or the New PRIMESTAR Bylaws) require a higher vote than a
simple majority vote of the New PRIMESTAR Board, unless the resolution
establishing an executive committee (or vesting such executive committee with
such authority) states otherwise and such resolution is approved by such
requisite higher vote. The Executive Committee will report to the New
PRIMESTAR Board not less often than quarterly.
Except as provided by applicable law, the New PRIMESTAR Charter or the New
PRIMESTAR Bylaws, the New PRIMESTAR Board, by resolution of a simple majority
of its members, may from time to time establish certain other committees of
the New PRIMESTAR Board, consisting of one or more directors of New PRIMESTAR.
Except as provided by applicable law, the New PRIMESTAR Charter or the New
PRIMESTAR
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<PAGE>
Bylaws, the New PRIMESTAR Board, by a simple majority vote of its members,
will have the right from time to time to delegate to or to remove from any
board committee the authority to approve any matters which would not otherwise
require a higher vote than a simple majority vote of the New PRIMESTAR Board.
Except as required by applicable law, the New PRIMESTAR Charter or the New
PRIMESTAR Bylaws, for those matters that require a higher vote of the New
PRIMESTAR Board than a simple majority vote, the New PRIMESTAR Board, by such
requisite higher vote, will have the right from time to time to delegate to or
to remove from any board committee the authority to approve any such matters
requiring such requisite higher vote.
The New PRIMESTAR Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of such committee. In the absence or disqualification of a member
of a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not they constitute a quorum, may
unanimously appoint another member of the New PRIMESTAR Board to act at the
meeting in place of any such absent or disqualified member. Each committee
that may be established by the New PRIMESTAR Board may fix its own rules and
procedures.
COMPENSATION OF DIRECTORS
Members of the New PRIMESTAR Board who are also full-time employees of New
PRIMESTAR or any of its subsidiaries will not receive any additional
compensation for their services as directors. Directors who are not full-time
employees of New PRIMESTAR or any of its subsidiaries will receive an annual
retainer fee in an amount to be determined by the New PRIMESTAR Board prior to
the TSAT Closing. All members of the New PRIMESTAR Board will also be
reimbursed for expenses incurred to attend any meetings of the New PRIMESTAR
Board or any committee thereof.
COMPENSATION OF EXECUTIVE OFFICERS
New PRIMESTAR has not yet paid any compensation to its executive officers.
Following the consummation of the Restructuring Transaction, the New PRIMESTAR
Board will rely on its Compensation Committee, which will be composed of
nonemployee directors, to recommend the form and amount of compensation to be
paid to New PRIMESTAR's executive officers. It is anticipated that the
Compensation Committee will generally adhere to compensation policies which
reflect the belief that (i) New PRIMESTAR must attract and retain individuals
of outstanding ability and motivate and reward such individuals for sustained
performance and (ii) levels of compensation should generally be in line with
that offered by comparable corporations. TSAT expects that, prior to the
consummation of the Restructuring Transaction, the Partnership will engage a
number of individuals (many of whom are currently employees of the
Partnership, TSAT or another Distributor or affiliate thereof) to serve as
officers of, or in other key positions with, New PRIMESTAR, effective at the
Closing. In that connection, it is expected that the Partnership will enter
into employment agreements or offer letters with some or all of such potential
employees, setting forth the anticipated compensation, long-term incentives
and other terms of employment with New PRIMESTAR, subject to the consummation
of the Restructuring Transaction. It is expected that any such contracts or
offer letters will be assumed by New PRIMESTAR, effective at the Closing.
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<PAGE>
SECURITY OWNERSHIP OF TSAT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table lists stockholders believed by TSAT to be the beneficial
owners of more than five percent of the outstanding TSAT Common Stock as of
September 30, 1997. Shares issuable upon exercise of options and upon vesting
of restricted shares are deemed to be outstanding for the purpose of computing
the percentage ownership and overall voting power of persons believed to
beneficially own such securities, but have not been deemed to be outstanding
for the purpose of computing the percentage ownership or overall voting power
of any other person. Voting power in the table is computed with respect to a
general election of directors. The number of shares in the table of Dr. Malone
includes interests in shares held by the trustee of the TCI ESPP. So far as is
known to TSAT, the persons indicated below have sole voting and investment
power with respect to the shares indicated as believed to be owned by them
except as otherwise stated in the notes to the table, and except for the
shares held by the trustee of the TCI ESPP for the benefit of Dr. Malone,
which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
TITLE OF NUMBER OF SHARES PERCENT OF VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED CLASS(1) POWER(1)
- ------------------------------------ -------- ------------------ ---------- --------
<S> <C> <C> <C> <C>
John C. Malone, Chairman of Series A 806,061(4)(7) 1.4% 24.6%
the Board
5619 DTC Parkway Series B 3,439,958(5)(7) 40.6%
Englewood, Colorado
The Estate of Bob Magness Series A 352,432(2)(3) * 21.8%
5619 DTC Parkway Series B 3,078,586(2)(3) 36.4%
Englewood, Colorado
The Associated Group, Inc. Series A 1,247,997(8) 2.1% 5.8%
200 Gateway Towers Series B 707,185(9) 8.4%
Pittsburgh, Pennsylvania
Harris Associates L.P. Series A 7,115,696(6) 12.2% 5.0%
2 North LaSalle Street Series B -- --
Chicago, Illinois
Kim Magness (individually and Series A 231,533(2)(10) * 5.0%
as Personal Series B 686,421(2)(10) 8.1%
Representative of the Estate
of Betsy Magness)
4000 E. Belleview
Greenwood Village, Colorado
J. P. Morgan & Co., Series A 5,236,825(8) 9.0% 3.7%
Incorporated Series B -- --
60 Wall Street
New York, New York
Snyder Capital Management Series A 3,951,000(8) 6.8% 2.8%
L.P.
350 California Street Series B -- --
San Francisco, California
Wellington Management Series A 3,220,516(8) 5.5% 2.3%
Company, LLP Series B -- --
75 State Street
Boston, Massachusetts
</TABLE>
- --------
* Less than one percent.
(1) Based on 58,237,114 shares of TSAT Series A Common Stock and 8,465,324
shares of TSAT Series B Common Stock outstanding as of September 30,
1997.
(2) On September 30, 1997, the Co-Personal Representatives of the Estate of
Bob Magness were Mr. Donne F. Fisher and Mr. Daniel L. Ritchie. Effective
January 5, 1998, Messrs. Fisher and Ritchie resigned and Mr. Kim Magness
and Mr. Gary Magness were appointed Co-Personal Representatives of the
Estate of Bob Magness.
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(3) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to acquire 100,000 shares of TSAT
Series A Common Stock. All options became fully vested upon the death of
Bob Magness and, pursuant to the applicable TCI Plans, must be exercised
within one year.
(4) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock, all of which options are fully vested and (ii) stock
options granted in tandem with stock appreciation rights in December of
1995 to acquire 100,000 shares of TSAT Series A Common Stock, of which
options to purchase 40,000 shares are currently exercisable. Also assumes
the exercise in full of TSAT Options to purchase 50,000 shares of TSAT
Series A Common Stock granted pursuant to the TSAT Nonemployee Director
Plan effective February 3, 1997, none of which options are vested.
(5) Includes 117,300 shares of TSAT Series B Common Stock held by Dr.
Malone's wife, Mrs. Leslie Malone, but Dr. Malone disclaims any
beneficial ownership of such shares.
(6) The number of shares in the table is based upon a Schedule 13G, dated
June 9, 1997, filed by Harris Associates L.P., which Schedule 13G
reflects that said Corporation has shared voting power over 7,115,696
shares, sole dispositive power over 2,270,795 shares and shared
dispositive power over 4,844,901 shares of TSAT Series A Common Stock.
(7) On July 31, 1997, Kearns-Tribune Corporation ("Kearns-Tribune") became a
subsidiary of TCI. Pursuant to an agreement dated September 23, 1997, Dr.
Malone exchanged 911,250 shares of his TSAT Series A Common Stock for
911,250 shares of TSAT Series B Common Stock, which prior to such
exchange, had been held by Kearns-Tribune.
(8) The number of shares in the table is based on information provided by the
respective stockholders.
(9) The number of shares in the table is based upon a Schedule 13D, dated
December 12, 1996, filed by The Associated Group, which Schedule 13D
reflects that said corporation has shared voting power and dispositive
power over 707,185 shares of TSAT Series B Common Stock.
(10) Includes 210,533 shares of TSAT Series A Common Stock and 634,621 shares
of TSAT Series B Common Stock held by the Estate of Betsy Magness. Mr.
Magness is deemed to have beneficial ownership over such shares as
Personal Representative of the Estate of Betsy Magness. Also assumes the
exercise in full of all Add-On TSAT Options and Add-On TSAT SARs, whether
or not then exercisable or in-the-money of stock options granted in
November of 1994 to acquire 5,000 shares of TSAT Series A Common Stock,
of which options to acquire 3,000 shares are currently exercisable.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table lists the number of shares of TSAT Common Stock believed
to be owned beneficially by each director, each of the executive officers
named in the Summary Compensation Table set forth in "MANAGEMENT OF TSAT--
Executive Compensation," and all directors and executive officers as a group
as of September 30, 1997, according to data furnished by the persons named.
Shares issuable upon exercise of options and upon vesting of restricted shares
are deemed to be outstanding for the purpose of computing the percentage
ownership and overall voting power of persons believed to beneficially own
such securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership or overall voting power of any other
person. Voting power in the table is computed with respect to a general
election of directors. The number of shares in the table is based on amounts
which include interests of the named directors or executive officers or
members of the group of directors and executive officers in shares held by the
trustee of TSAT's Qualified Employee Stock Purchase Plan (the "TSAT ESPP"),
shares held by the trustee of the TCI ESPP and shares held by the trustee of
the United Artist Entertainment Employee Stock Ownership Plan for their
respective accounts. So far as is known to TSAT, the persons indicated below
have sole voting and investment power with respect to the shares indicated as
believed to be owned by them except for the shares held by the trustee of the
TCI ESPP for the benefit of such person, which shares are voted at the
discretion of the trustee.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS(1)
------------------------- --------------------------
TSAT TSAT TSAT TSAT VOTING
NAME SERIES A SERIES B SERIES A SERIES B POWER(1)
---- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Directors:
John C. Malone......... 806,061(2)(4) 3,439,958(3) 1.4% 40.6% 24.6%
Gary S. Howard......... 828,755(5) -- 1.4% -- *
David P. Beddow........ 414,525(6) -- * -- *
William E. Johnson..... 51,900(7) 10 * * *
John W. Goddard........ 51,408(7)(8) 1,425(8) * * *
Other Named Executive
Officers:
Christopher Sophinos... 152,310(9) -- * -- *
Kenneth G. Carroll..... 154,713(10) -- * -- *
Lloyd S. Riddle III.... 156,147(10) -- * -- *
William D. Myers....... 154,289(11) -- * -- *
All directors and
executive officers as a
group (nine persons)... 2,770,108(12) 3,441,393(3)(8) 4.6% 40.7% 25.6%
</TABLE>
- --------
*Less than one percent.
(1) Based on 58,237,114 shares of TSAT Series A Common Stock and 8,465,324
shares of TSAT Series B Common Stock outstanding as of September 30,
1997. Computation of voting power includes shares of TSAT Common Stock
held by the TSAT ESPP.
(2) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock, all of which options are fully vested; and (ii) stock
options granted in tandem with stock appreciation rights in December of
1995 to acquire 100,000 shares of TSAT Series A Common Stock, of which
options to purchase 40,000 shares are currently exercisable. Also assumes
the exercise in full of TSAT Options to purchase 50,000 shares of TSAT
Series A Common Stock granted pursuant to the TSAT Nonemployee Director
Plan effective February 3, 1997, none of which options are vested.
(3) Includes 117,300 shares of TSAT Series B Common Stock held by Dr.
Malone's wife, Mrs. Leslie Malone, but Dr. Malone disclaims any
beneficial ownership of such shares.
(4) On July 31, 1997, Kearns-Tribune became a subsidiary of TCI. Pursuant to
an agreement dated September 23, 1997, Dr. Malone exchanged 911,250
shares of his TSAT Series A Common Stock for 911,250 shares of TSAT
Series B Common Stock, which prior to such exchange, had been held by
Kearns-Tribune.
(5) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 5,000 shares of TSAT Series A
Common Stock, all of which options are fully vested; (ii) stock options
in tandem with stock appreciation rights granted in October of 1993 to
acquire 5,000 shares of TSAT
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<PAGE>
Series A Common Stock, all of which options are fully vested; (iii) stock
options in tandem with stock appreciation rights granted in November of
1994 to acquire 5,000 shares of TSAT Series A Common Stock, of which
options to acquire 3,000 shares are currently exercisable; and (iv) stock
options granted in tandem with stock appreciation rights in December of
1995 to purchase 15,000 shares of TSAT Series A Common Stock, of which
options to acquire 6,000 shares are currently exercisable. Additionally
assumes the exercise in full whether or not then exercisable or in-the-
money, of stock options granted in December of 1996 to purchase 664,076
shares of TSAT Series A Common Stock, of which options to acquire 132,815
shares are currently exercisable and assumes the vesting in full of
126,500 restricted shares of TSAT Series A Common Stock, none of which are
currently vested. Also includes 1,022 shares of TSAT Series A Common Stock
held by trusts in which Mr. Howard is beneficial owner as trustee for his
children.
(6) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in October of 1993 to acquire 750 shares of TSAT Series A Common
Stock, all of which options are fully vested; (ii) stock options granted
in tandem with stock appreciation rights in November of 1994 to acquire
5,000 shares of TSAT Series A Common Stock, of which options to purchase
3,000 shares are currently exercisable; and (iii) stock options granted
in tandem with stock appreciation rights in December of 1995 to purchase
25,000 shares of TSAT Series A Common Stock, of which options to purchase
10,000 shares are currently exercisable. Additionally assumes the
exercise in full whether or not then exercisable or in-the-money of stock
options granted in December of 1996 to purchase 332,038 shares of TSAT
Series A Common Stock, of which options to acquire 66,407 shares are
currently exercisable and assumes the vesting in full of 1,500 restricted
shares of TSAT Series A Common Stock, none of which are currently vested.
Also assumes the exercise in full of TSAT Options to purchase 50,000
shares of TSAT Series A Common Stock granted pursuant to the TSAT
Nonemployee Director Plan effective February 3, 1997, none of which
options are vested.
(7) Assumes the exercise in full of TSAT Options to purchase 50,000 shares of
TSAT Series A Common Stock granted pursuant to the TSAT Nonemployee
Director Plan effective February 3, 1997, none of which options are
vested.
(8) Includes 478 shares of TSAT Series A Common Stock held by Mr. Goddard's
wife, of which Mr. Goddard is beneficial owner, and 129 shares of TSAT
Series B Common Stock held by a trust in which Mr. Goddard is beneficial
owner as trustee.
(9) Assumes the exercise in full, whether or not then exercisable or in-the-
money, of stock options granted in tandem with stock appreciation rights
in February of 1997 to purchase 100,000 shares of TSAT Series A Common
Stock, none of which are currently exercisable and assumes the vesting in
full of 50,000 restricted shares of TSAT Series A Common Stock, none of
which are currently vested.
(10) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1994 to acquire 400 shares of TSAT Series A Common
Stock, of which options to acquire 240 shares of TSAT Series A Common
Stock are currently exercisable; and (ii) stock options granted in tandem
with stock appreciation rights in December of 1995 to purchase 1,750
shares of TSAT Series A Common Stock, of which options to purchase 700
shares of TSAT Series A Common Stock are currently exercisable.
Additionally assumes the exercise in full, whether or not then
exercisable or in-the-money, of stock options granted in tandem with
stock appreciation rights in February of 1997 to purchase 100,000 shares
of TSAT Series A Common Stock, none of which are currently exercisable
and assumes the vesting in full of 50,000 restricted shares of TSAT
Series A Common Stock, none of which are currently vested.
(11) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1994 to acquire 900 shares of TSAT Series A Common
Stock, of which options to acquire 540 shares of TSAT Series A Common
Stock are currently exercisable; and (ii) stock options granted in tandem
with stock appreciation rights in December of 1995 to purchase 1,000
shares of TSAT Series A Common Stock, of which options to purchase 400
shares are currently exercisable. Additionally assumes the exercise in
full, whether or not then exercisable or in-the-money, of stock options
granted in tandem with stock appreciation rights in February of 1997 to
purchase 100,000 shares of TSAT Series A Common Stock, none of which are
currently exercisable and assumes the vesting in full of 50,000
restricted shares of TSAT Series A Common Stock, none of which are
currently vested.
(12) See notes (2), (4), (5), (6), (7), (8), (9), (10) and (11) above.
211
<PAGE>
SECURITY OWNERSHIP OF NEW PRIMESTAR
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table lists stockholders that TSAT believes would have been
the beneficial owners of more than five percent of the outstanding shares of
New PRIMESTAR Class A Common Stock, New PRIMESTAR Class B Common Stock or New
PRIMESTAR Class C Common Stock if (i) the Restructuring Transaction and (ii)
the Restructuring Transaction and the TSAT Merger had been consummated on
September 30, 1997. Shares issuable upon exercise of options and upon vesting
of options are deemed to be outstanding for the purpose of computing the
percentage ownership and overall voting power of persons believed to
beneficially own such securities, but have not been deemed to be outstanding
for the purpose of computing the percentage ownership or overall voting power
of any other person. Voting power in the table is computed with respect to a
general election of Common Directors. The number of shares in the table of Dr.
Malone includes interests in shares that would have been held by the trustee
of the TCI ESPP for the benefit of Dr. Malone upon an assumed September 30,
1997 consummation of the Restructuring Transaction and the TSAT Merger. So far
as is known to TSAT, the persons indicated below would have had sole voting
and investment power with respect to the shares indicated as expected to be
owned by them except as otherwise stated in the notes to the table, and except
for the shares held by the trustee of the TCI ESPP for the benefit of Dr.
Malone, which shares will be voted at the discretion of the trustee.
References in the footnotes to the following table to shares of TSAT Common
Stock assume the conversion in the TSAT Merger of all shares of TSAT Common
Stock into an equal number of shares of the corresponding class of New
PRIMESTAR Common Stock. References in such footnotes to outstanding TSAT
Options and TSAT SARs assume the assumption by New PRIMESTAR of such TSAT
Options and TSAT SARs and the adjustment thereof as provided above under "THE
ROLL-UP PLAN--Interests of Certain Persons in the Roll-up Plan--Treatment of
TSAT Options, Stock Appreciation Rights and Restricted Stock Awards."
<TABLE>
<CAPTION>
PRO FORMA FOR RESTRUCTURING TRANSACTION
PRO FORMA FOR RESTRUCTURING TRANSACTION AND TSAT MERGER
--------------------------------------- ---------------------------------------
NAME AND ADDRESS TITLE OF NUMBER OF SHARES PERCENT VOTING NUMBER OF SHARES PERCENT VOTING
OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED OF CLASS(1) POWER(2) BENEFICIALLY OWNED OF CLASS(3) POWER(2)
- ------------------------ -------- ------------------ ----------- -------- ------------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
TCI Satellite Class A 58,237,114 36.2% 37.2% -- -- --
Entertainment, Inc. Class B 8,465,324 100% -- --
8085 S. Chester, Class C -- -- --
Suite 300
Englewood, Colorado
TW Programming Co./New Class A 56,995,304(4) 31.1% 32.0% 56,995,304(4) 32.5% 32.7%
Vision Satellite Class B -- -- -- --
300 First Stamford Class C 7,293,214(4) 52.9% 7,293,214(4) 52.9%
Place
Stamford, Connecticut
Comcast DBS, Inc. Class A 17,401,612 9.5% 9.8% 17,401,612 9.9% 10.0%
1500 Market Street Class B -- -- -- --
Philadelphia, Class C 2,226,739 16.2% 2,226,739 16.2%
Pennsylvania
MediaOne of Delaware, Class A 17,031,181 9.3% 9.6% 17,031,181 9.7% 9.8%
Inc. Class B -- -- -- --
Pilot House Class C 2,179,338 15.8% 2,179,338 15.8%
1 Lewis Wharf
Boston, Massachusetts
Cox Satellite, Inc. Class A 16,312,656 8.9% 9.1% 16,312,656 9.3% 9.3%
1400 Lake Hearn Drive Class B -- -- -- --
Atlanta, Georgia Class C 2,087,395 15.1% 2,087,395 15.1%
GE Americom Services, Class A 9,245,056 5.0% 2.3% 9,245,056 5.3% 2.3%
Inc Class B -- -- -- --
Four Research Way Class C -- -- -- --
Princeton, New Jersey
John C. Malone Class A -- -- -- 806,061(7)(9) * 8.8%
5619 DTC Parkway Class B -- -- 3,439,958(8)(9) 40.6%
Englewood, Colorado Class C -- -- -- --
The Estate of Bob Class A -- -- -- 352,432(5)(6) * 7.8%
Magness Class B -- -- 3,078,586(5)(6) 36.4%
5619 DTC Parkway Class C -- -- -- --
Englewood, Colorado
</TABLE>
212
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA FOR RESTRUCTURING PRO FORMA FOR RESTRUCTURING
TRANSACTION TRANSACTION AND TSAT MERGER
--------------------------------- ---------------------------------------
NUMBER OF NUMBER OF
SHARES SHARES
NAME AND ADDRESS TITLE OF BENEFICIALLY PERCENT VOTING BENEFICIALLY PERCENT VOTING
OF BENEFICIAL OWNER CLASS OWNED OF CLASS(1) POWER(2) OWNED OF CLASS(3) POWER(2)
- ------------------------------ -------- ------------ ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
The Associated Group, Inc Class A -- -- -- 1,247,997(10) * 2.1%
200 Gateway Towers Class B -- -- 707,185(11) 8.4%
Pittsburgh, Pennsylvania Class C -- --
Kim Magness (individually and Class A -- -- -- 231,533(5)(12) * 1.8%
as Personal Representative of Class B -- -- 686,421(5)(12) 8.1%
the Estate of Betsy Magness) Class C -- -- -- --
4000 E. Belleview
Greenwood Village, Colorado
</TABLE>
- --------
* Less than one percent.
(1) Based on 183,330,962, 8,465,324 and 13,786,687 shares of New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock and New
PRIMESTAR Class C Common Stock, respectively. Such outstanding share
amounts represent the assumed shares that would have been outstanding if
the Restructuring Transaction had occurred on September 30, 1997.
(2) Based on one vote per share for the shares of New PRIMESTAR Class A
Common Stock and ten votes per share for the shares of New PRIMESTAR
Class B Common Stock and New PRIMESTAR Class C Common Stock assumed to be
outstanding if the Restructuring Transaction had occurred on September
30, 1997. See notes 1 and 3.
(3) Based on 175,222,922, 8,465,324 and 13,786,687 shares of New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock and New
PRIMESTAR Class C Common Stock, respectively. Such outstanding share
amounts represent the assumed shares that would have been outstanding if
the Restructuring Transaction and the TSAT Merger had both occurred on
September 30, 1997.
(4) TWE and Newhouse, the respective parent companies of TW Programming Co.
and New Vision Satellite, entered into the TWE/Newhouse Voting Agreement,
which has a term of ten years, whereby New Vision's shares will be voted
at the direction of or by TWE.
(5) On September 30, 1997, the Co-Personal Representatives of the Estate of
Bob Magness were Mr. Donne F. Fisher and Mr. Daniel L. Ritchie. Effective
January 5, 1998, Messrs. Fisher and Ritchie resigned and Mr. Kim Magness
and Mr. Gary Magness were appointed Co-Personal Representatives of the
Estate of Bob Magness.
(6) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock; and (ii) stock options granted in tandem with stock
appreciation rights in December of 1995 to acquire 100,000 shares of TSAT
Series A Common Stock. All options became fully vested upon the death of
Bob Magness and, pursuant to the applicable TCI Plans, must be exercised
within one year.
(7) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock, all of which options are fully vested; and (ii) stock
options granted in tandem with stock appreciation rights in December of
1995 to acquire 100,000 shares of TSAT Series A Common Stock, of which
options to purchase 40,000 shares are currently exercisable. Also assumes
the exercise in full of TSAT Options to purchase 50,000 shares of TSAT
Series A Common Stock granted pursuant to the TSAT Nonemployee Director
Plan effective February 3, 1997, none of which options are vested.
(8) Includes 117,300 shares of TSAT Series B Common Stock held by Dr.
Malone's wife, Mrs. Leslie Malone, but Dr. Malone disclaims any
beneficial ownership of such shares.
(9) On July 31, 1997, Kearns-Tribune became a subsidiary of TCI. Pursuant to
an agreement dated September 23, 1997 Dr. Malone exchanged 911,250 shares
of his TSAT Series A Common Stock for 911,250 shares of TSAT Series B
Common Stock, which prior to such exchange, had been held by Kearns-
Tribune.
(10) The number of shares in the table is based on information provided by the
respective stockholders.
(11) The number of shares in the table is based upon a Schedule 13D, dated
December 12, 1996, filed by The Associated Group, which Schedule 13D
reflects that said corporation has shared voting power and dispositive
power over 707,185 shares of TSAT Series B Common Stock.
(12) Includes 210,533 shares of TSAT Series A Common Stock and 634,621 shares
of TSAT Series B Common Stock held by the Estate of Betsy Magness. Mr.
Magness is deemed to have beneficial ownership over such shares as
Personal Representative of the Estate of Betsy Magness. Also assumes the
exercise in full of all Add-On TSAT Options and Add-On TSAT SARs, whether
or not then exercisable or in-the-money of stock options granted in
November of 1994 to acquire 5,000 shares of TSAT Series A Common Stock,
of which options to acquire 3,000 shares are currently exercisable.
213
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
If the Restructuring Transaction and the TSAT Merger had both been
consummated as of September 30, 1997, the persons named in the following
table, each of whom is currently a director or executive officer of TSAT, and
is expected to become a director or executive officer of New PRIMESTAR on the
Closing Date, would have had the beneficial ownership in New PRIMESTAR
indicated in such table. Voting power in the table is computed with respect to
a general election of Common Directors. Shares issuable upon exercise of
options and upon vesting of restricted shares are deemed to be outstanding for
the purpose of computing the percentage ownership and overall voting power of
persons believed to beneficially own such securities, but have not been deemed
to be outstanding for the purpose of computing the percentage ownership or
overall voting power of any other person. The number of shares in the table is
based on amounts which include interests of the named directors or executive
officers or members of the group of directors and executive officers in shares
held by the respective trustee of the TSAT ESPP, the TCI ESPP and the United
Artists Entertainment Employee Stock Ownership Plan for their respective
accounts. So far as is known by TSAT, the persons indicated in the table will
have sole voting and dispositive power with respect to the shares indicated as
expected to be owned by them. New PRIMESTAR is currently considering whether
officers and other key employees of New PRIMESTAR following the Closing Date
will receive stock options, restricted stock awards and/or other equity-based
incentives, either at the Closing Date or the TSAT Closing Date.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENT OF CLASS
----------------------------------------- ------------------------------------------
NEW NEW NEW NEW NEW NEW
PRIMESTAR PRIMESTAR PRIMESTAR PRIMESTAR PRIMESTAR PRIMESTAR VOTING
NAME CLASS A CLASS B CLASS C CLASS A(1) CLASS B(1) CLASS C(1) POWER(2)
---- --------- --------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors:
John C. Malone........ 806,061(3)(5) 3,439,958(4)(5) -- * 40.6% -- 8.8%
Leo J. Hindery, Jr. .. -- -- -- -- -- -- --
Gary S. Howard........ 828,755(6) -- -- * -- -- *
John W. Goddard....... 51,408(7)(8) 1,425(8) -- * * -- *
Executive Officers:
Kenneth G. Carroll.... 154,713(9) -- -- * -- -- *
Christopher Sophinos.. 152,310(10) -- -- * -- -- *
All such directors and
executive officers as a
group (6 persons)...... 1,993,247 3,441,383 -- 1.1% 40.6% -- 9.1%
</TABLE>
- --------
* Less than one percent.
(1) Based on 175,222,922, 8,465,324 and 13,786,687 shares of New PRIMESTAR
Class A Common Stock, New PRIMESTAR Class B Common Stock and New PRIMESTAR
Class C Common Stock, respectively. Such outstanding share amounts
represent the assumed shares that would have been outstanding if the
Restructuring Transaction and the TSAT Merger had both occurred on
September 30, 1997.
(2) Based on one vote per share for the shares of New PRIMESTAR Class A Common
Stock and ten votes per share for the shares of New PRIMESTAR Class B
Common Stock and New PRIMESTAR Class C Common Stock assumed to be
outstanding if the Restructuring Transaction had occurred on September 30,
1997. See note 1.
(3) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1992 to acquire 100,000 shares of TSAT Series A
Common Stock, all of which options are fully vested; and (ii) stock
options granted in tandem with stock appreciation rights in December of
1995 to acquire 100,000 shares of TSAT Series A Common Stock, of which
options to purchase 40,000 shares are currently exercisable. Also assumes
the exercise in full of TSAT Options to purchase 50,000 shares of TSAT
Series A Common Stock granted pursuant to the TSAT Nonemployee Director
Plan effective February 3, 1997, none of which options are vested.
(4) Includes 117,300 shares of TSAT Series B Common Stock held by Dr. Malone's
wife, Mrs. Leslie Malone, but Dr. Malone disclaims any beneficial
ownership of such shares.
(5) On July 31, 1997, Kearns-Tribune became a subsidiary of TCI. Pursuant to
an agreement dated September 23, 1997 Dr. Malone exchanged 911,250 shares
of his TSAT Series A Common Stock for 911,250 shares of TSAT Series B
Common Stock, which prior to such exchange, had been held by Kearns-
Tribune.
(6) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money, in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in
214
<PAGE>
November of 1992 to acquire 5,000 shares of TSAT Series A Common Stock, all
of which options are fully vested; (ii) stock options in tandem with stock
appreciation rights granted in October of 1993 to acquire 5,000 shares of
TSAT Series A Common Stock, all of which options are fully vested; (iii)
stock options in tandem with stock appreciation rights granted in November
of 1994 to acquire 5,000 shares of TSAT Series A Common Stock of which
options to acquire 3,000 shares are currently exercisable; and (iv) stock
options granted in tandem with stock appreciation rights in December of
1995 to purchase 15,000 shares of TSAT Series A Common Stock, of which
options to acquire 6,000 shares are currently exercisable. Additionally,
assumes the exercise in full whether or not then exercisable of in-the-
money, of stock options granted in December of 1996 to purchase 664,076
shares of TSAT Series A Common Stock, of which options to acquire 132,815
shares are currently exercisable and assumes the vesting in full of 126,500
restricted shares of TSAT Series A Common Stock, none of which are
currently vested. Also includes 1,022 shares of TSAT Series A Common Stock
held by trusts in which Mr. Howard is beneficial owner as trustee for his
children.
(7) Assumes the exercise in full of TSAT Options to purchase 50,000 shares of
TSAT Series A Common Stock granted pursuant to the TSAT Nonemployee
Director Plan effective February 3, 1997, none of which options are
vested.
(8) Includes 478 shares of New PRIMESTAR Class A Common Stock held by Mr.
Goddard's wife, of which Mr. Goddard is beneficial owner, and 129 shares
of New PRIMESTAR Class B Common Stock held by a trust in which Mr. Goddard
is beneficial owner as trustee.
(9) Assumes the exercise in full of all Add-On TSAT Options and Add-On TSAT
SARs, whether or not then exercisable or in-the-money,in respect of the
following: (i) stock options granted in tandem with stock appreciation
rights in November of 1994 to acquire 400 shares of TSAT Series A Common
Stock, of which options to acquire 240 shares of TSAT Series A Common
Stock are currently exercisable; and (ii) stock options granted in tandem
with stock appreciation rights in December of 1995 to purchase 1,750
shares of TSAT Series A Common Stock, of which options to purchase 700
shares of TSAT Series A Common Stock are currently exercisable.
Additionally assumes the exercise in full, whether or not then exercisable
or in-the-money, of stock options granted in tandem with stock
appreciation rights in February of 1997 to purchase 100,000 shares of TSAT
Series A Common Stock, none of which are currently exercisable and assumes
the vesting in full of 50,000 restricted shares of TSAT Series A Common
Stock, none of which are currently vested.
(10) Assumes the exercise in full, whether or not then exercisable or in-the-
money, or stock options granted in tandem with stock appreciation rights
in February of 1997 to purchase 100,000 shares of TSAT Series A Common
Stock, none of which are currently exercisable and assumes the vesting in
full of 50,000 restricted shares of TSAT Series A Common Stock, none of
which are currently vested.
215
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS OF TSAT
Set forth below is a summary of the material elements of certain
indebtedness to which TSAT is subject. This summary does not purport to be
complete and is qualified in its entirety by reference to the applicable
agreements filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
BANK CREDIT FACILITY
On December 31, 1996, TSAT entered into the Bank Credit Facility with The
Bank of Nova Scotia, as administrative agent, NationsBank of Texas, N.A., as
syndication agent, Credit Lyonnais New York Branch, as documentation agent,
and the lenders named therein, with respect to a senior secured reducing
revolving credit facility. The Bank Credit Facility, which is guaranteed by
all direct and indirect subsidiaries of TSAT except Tempo, initially provided
for maximum commitments of up to $350 million and, as a result of the February
1997 issuance of the Notes and the March 1997 determination that GE-2 was
commercially operational, the maximum commitments increased to $750 million,
subject to TSAT's compliance with operating and financial covenants and other
customary conditions. At September 30, 1997, $720 million of such maximum
commitments were unused and the remaining $30 million in commitments were used
to support an aggregate $30 million of standby letters of credit issued for
the account of TSAT. Commencing March 31, 2001, aggregate commitments will be
reduced quarterly in accordance with a schedule, until final maturity at June
30, 2005. TSAT's initial borrowings under the Bank Credit Facility were used
to repay in full the principal amount of and accrued interest on the TSAT Note
and to fund financing costs associated with arrangement of the facility. As of
September 30, 1997, there were no outstanding borrowings under the Bank Credit
Facility.
TSAT anticipates that it will be required to refinance and/or amend the Bank
Credit Facility prior to the consummation of the Restructuring Transaction,
given that (i) certain terms and conditions thereof (as described below) would
be violated upon consummation of the Restructuring Transaction and (ii) it is
a provision of the Restructuring Transaction that New PRIMESTAR assume all
indebtedness of TSAT under the Bank Credit Facility. No assurance can be given
that any such refinancing and/or amendment will be completed on terms
acceptable to TSAT.
At the option of TSAT, borrowings under the Bank Credit Facility bear
interest at a rate per annum equal to (i) the London interbank offered rate
(LIBOR), (ii) the CD Rate, which is the rate per annum equal to the average of
the bid rates for certificates of deposit of the administrative agent (and two
reference banks) plus statutory reserves and FDIC assessments, or (iii) the
Base Rate, which is the higher of (a) the administrative agent's established
base rate and (b) the Federal Funds effective rate plus 1/2%, plus in each
case an Applicable Margin (as defined in the Bank Credit Facility). In
addition, TSAT must pay a commitment fee equal to 0.250% on unavailable
commitments and 0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Such commitment
fees aggregated $1,749,000 during the nine months ended September 30, 1997.
Borrowings under the Bank Credit Facility are guaranteed by all restricted
subsidiaries of TSAT (defined under the Bank Credit Facility to mean each
domestic subsidiary of TSAT (other than Tempo, unless Tempo becomes a
restricted subsidiary under any subordinated or senior subordinated
indebtedness of TSAT) of which TSAT owns directly or indirectly at least 80%
of the outstanding capital stock), and secured by collateral assignments or
other security interests in (i) all material contracts to which TSAT and the
restricted subsidiaries are parties, (ii) all equipment and other tangible
assets of TSAT (including, without limitation, satellite dishes and related
reception and decoding equipment), (iii) all receivables of TSAT and (iv) all
intellectual property and other general intangible assets of TSAT. In
addition, borrowings under the Bank Credit Facility will be secured by
security interests in all capital stock of each of TSAT's restricted
subsidiaries, upon the Partnership's consent with respect thereto. Further, if
a restricted subsidiary increases its assets by $5 million or all restricted
subsidiaries increase their assets in the aggregate by $10 million, such
restricted subsidiaries are required to pledge all their assets to the banks.
216
<PAGE>
The Bank Credit Facility contains affirmative covenants regarding minimum
subscribers, revenue per subscriber and debt service coverage, as well as
negative covenants that restrict TSAT and its restricted subsidiaries from,
among other things, (i) incurring indebtedness, (ii) creating liens and other
encumbrances, (iii) entering into merger or consolidation transactions, (iv)
entering into transactions with affiliates, (v) making investments, (vi)
making capital expenditures, (vii) paying dividends and other distributions,
(viii) redeeming stock, (ix) redeeming or purchasing subordinated debt (except
under limited circumstances), (x) paying interest on or principal of
subordinated debt (including the Notes and the Exchange Notes (as defined
under "--Notes--Registration Rights")) during the continuation of (A) an event
of default under the Bank Credit Facility or (B) a default under the Bank
Credit Facility of which management of TSAT has actual or constructive notice,
(xi) entering into sale and leaseback transactions and (xii) engaging in non-
designated activities.
The Bank Credit Facility contains customary events of default, including but
not limited to, (i) nonpayment of principal or interest, (ii) violation of
covenants, (iii) material breach of representations and warranties, (iv)
failure of security, (v) cross-default to any debt in excess of $15 million
under any other agreement governing indebtedness of TSAT, any of its
subsidiaries or the Partnership, (vi) material judgments, (vii) certain
defaults under the Employee Retirement Income Security Act of 1974 ("ERISA"),
(viii) bankruptcy, insolvency or a material adverse change of TSAT, any of its
subsidiaries or the Partnership, and (ix) a Change of Control (as defined
therein). The Bank Credit Facility also contains provisions for mandatory
prepayments and commitment reductions in the event of certain asset sales. The
Bank Credit Facility defines "Change in Control" as (i) the acquisition by any
person, or two or more persons acting in concert, of beneficial ownership
(within the meaning of Rule 13d-3 of the Exchange Act) of 25% or more of the
outstanding shares of voting stock of TSAT, provided, however, that the
acquisition of 25% or more of the outstanding shares of voting stock of TSAT
by John C. Malone, the legal heirs of Bob Magness, the Partnership so long as
the partners thereof were partners as of the closing date thereunder, and/or
one or more of the partners on the closing date of the Partnership shall not
constitute a Change in Control, (ii) the event of both Gary S. Howard and John
C. Malone ceasing to be directors or ceasing to hold the same or similar
offices with TSAT as they did on the closing date, or (iii) the event that,
during any consecutive two-year period, individuals who at the beginning of
such period constituted the TSAT Board (together with any new directors whose
election by the TSAT Board or whose nomination for election by the
stockholders of TSAT was approved by a vote of at least a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the TSAT Board then
in office.
The Bank Credit Facility was syndicated in the bank market in June 1997.
During the first quarter of 1997, two letters of credit with an aggregate
drawable amount of $30,000,000 were issued for the account of TSAT pursuant to
the Bank Credit Facility, consisting of a $5,000,000 letter of credit issued
in connection with the PRIMESTAR Credit Facility and a $25,000,000 letter of
credit issued in connection with the GE-2 Agreement. Upon consummation of the
Restructuring Transaction, New PRIMESTAR will assume such letters of credit
and will assume, by novation, the Bank Credit Facility, as refinanced and/or
amended.
NOTES
General. In February 1997, TSAT issued $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,
which generated net proceeds of approximately $340,500,000, after deducting
offering expenses. The Notes were issued under the Indentures between TSAT and
The Bank of New York, as trustee. The net proceeds from the issuance of the
Notes were initially held in escrow and were subsequently released to TSAT on
March 17, 1997, in connection with the determination that GE-2 was
commercially operational. TSAT initially used $244,404,000 of such net
proceeds to repay amounts outstanding under the Bank Credit Facility.
Upon consummation of the Restructuring Transaction, New PRIMESTAR will
assume all obligations of TSAT under the Notes and the Indentures by entering
into supplemental indentures in respect thereof.
217
<PAGE>
Interest and Maturity. 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, commencing August 15, 1997. Cash interest will
not accrue or be payable on the Senior Subordinated Discount Notes prior to
February 15, 2002. Thereafter, cash interest 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, TSAT
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 Election 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
February 15, 2007.
Redemption. The Indentures provide that the Notes will be redeemable at the
option of TSAT, in whole or in part, at any time on or after February 15, 2002
at the redemption prices set forth in the Indentures, plus accrued and unpaid
interest thereon, if any, to the date of redemption. In addition, prior to
February 15, 2000, TSAT, other than in any circumstance resulting in a Change
of Control (as defined in the Indentures), may redeem up to 35% of the
originally issued principal amount of Senior Subordinated Notes at a
redemption price equal to 110.875% of the principal amount of the Senior
Subordinated Notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the redemption date and may redeem up to 35% of the originally issued
principal amount at maturity of Senior Subordinated Discount Notes at a
redemption price equal to 112.250% of the Accreted Value at the redemption
date of the Senior Subordinated Discount Notes so redeemed (or, if a Cash
Interest Election has been made, 112.250% of the principal amount at maturity
of the Senior Subordinated Discount Notes so redeemed, plus accrued and unpaid
interest thereon, if any, to the date of redemption), in each case with the
net cash proceeds of certain specified equity transactions resulting in gross
cash proceeds to TSAT of at least $100.0 million in the aggregate; provided,
however, that at least 65% of the originally issued principal amount of Senior
Subordinated Notes and 65% of the originally issued principal amount at
maturity of Senior Subordinated Discount Notes would remain outstanding
immediately after giving effect to such redemption.
Offer to Purchase upon Change of Control. The Indentures provide that
following the occurrence of a Change of Control, TSAT will be required to make
an offer to purchase all outstanding Notes of each tranche at a purchase price
in cash equal to (x) with respect to the Senior Subordinated Notes, 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase and (y) with respect to the Senior
Subordinated Discount Notes, 101% of the Accreted Value on the date of
purchase (unless the date of purchase is on or after the earlier to occur of
February 15, 2002 and the Cash Interest Election Date, in which case such
purchase price shall be equal to 101% of the aggregate principal amount at
maturity thereof, plus accrued and unpaid interest thereon, if any, to the
date of purchase).
Certain Covenants. The Indentures contain certain restrictive covenants
that, among other things, limit the ability of TSAT and its Restricted
Subsidiaries (as defined in the Indentures) to incur additional indebtedness,
create certain liens, make certain restricted payments, permit dividend and
other payment restrictions to apply to such Restricted Subsidiaries, enter
into certain transactions with affiliates and certain other related persons or
consummate certain merger, consolidation or similar transactions. These
covenants are subject to a number of significant exceptions and
qualifications.
Registration Rights. In connection with the offering of the Notes, TSAT
entered into registration rights agreements (the "Notes Registration Rights
Agreements"), pursuant to which, among other things, TSAT agreed to file with
the SEC on or before the Filing Date (generally defined as the 45th day after
February 20, 1997), an offer to exchange (the "Exchange Offer") the Notes for
a like aggregate principal amount of senior subordinated debt securities of
TSAT, which would be entitled to substantially the identical benefits of the
applicable
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Indenture, and which would be substantially identical to the Notes (the
"Exchange Notes"), except that (x) the Exchange Notes would be registered
under the Securities Act and, therefore, would not bear any legends
restricting the transfer thereof, and (y) holders of Exchange Notes would not
be entitled to certain rights of holders of Notes under the Notes Registration
Rights Agreements. Copies of the Notes Registration Rights Agreements have
been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
Pursuant to the Notes Registration Rights Agreements, TSAT agreed to
commence the Exchange Offer pursuant to an effective registration statement
for each tranche of the Notes or cause each tranche of the Notes to be
registered under the Securities Act on or prior to the Effectiveness Date
(generally defined as the 135th day after February 20, 1997), to keep the
Exchange Offer open for 20 business days (the last day of such period, the
"Expiration Date") and exchange Exchange Notes for all Notes validly tendered
and not withdrawn pursuant to the Exchange Offer on or prior to the fifth day
following the Expiration Date. The Notes Registration Rights Agreements
provide that if any such registration statement is not filed, declared
effective or the Exchange Offer is not consummated, in each case within the
time limits required, then TSAT is required to pay additional interest (in
addition to the interest otherwise due on the Notes) to each holder of Senior
Subordinated Notes or Senior Subordinated Discount Notes, as the case may be,
during the first 90-day period immediately following the occurrence of each
such default in an amount equal to $0.05 per week per $1,000 principal amount
of Senior Subordinated Notes or $0.05 per week per $1,000 of Accreted Value of
Senior Subordinated Discount Notes, as the case may be, increasing by an
additional $0.05 per week per $1,000 principal amount of Senior Subordinated
Notes or $0.05 per week per $1,000 of Accreted Value of Senior Subordinated
Discount Notes, as the case may be, for each subsequent 90-day period until
such default is cured, up to a maximum amount of additional interest of $0.50
per week per $1,000 principal amount of Senior Subordinated Notes or $0.50 per
week per $1,000 of Accreted Value of Senior Subordinated Discount Notes, as
the case may be. Such additional interest will cease accruing on the Notes
when the default has been cured.
Although TSAT filed a registration statement in connection with the Exchange
Offer with the SEC on April 11, 1997, such registration statement has not been
declared effective, and accordingly, the Exchange Offer has not been
commenced. As a result, effective July 5, 1997, TSAT began to incur additional
interest on the Notes, in accordance with the Notes Registration Rights
Agreements. During the 90-day periods ended October 3, 1997 and January 3,
1998, TSAT incurred approximately $252,000 and $476,000, respectively, of
additional interest (in addition to the interest otherwise due on the Notes),
and will continue to incur additional interest for each subsequent 90-day
period, in accordance with the Notes Registration Rights Agreements. TSAT
currently expects that, due to the pendency of the Restructuring Transaction,
it may not be able to comply with the registration requirements under the
Notes, and accordingly, additional interest may continue to accrue until the
second quarter of 1998.
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PROPOSAL TO APPROVE THE TSAT 1997 NONEMPLOYEE
DIRECTOR STOCK OPTION PLAN
GENERAL
The TSAT Board believes that TSAT's ability to attract and retain capable
persons as independent directors will be enhanced if it can provide its
nonemployee directors with stock options and that TSAT will benefit from
encouraging a sense of proprietorship of such persons and stimulating the
active interest of such persons in the development and financial success of
TSAT. Accordingly, on February 3, 1997, the TSAT Board adopted the TSAT
Nonemployee Director Plan and directed that the proposal to approve and adopt
the TSAT Nonemployee Director Plan and to approve all grants thereunder be
submitted to a vote of the stockholders of TSAT. The TSAT Nonemployee Director
Plan and existing automatic grants thereunder are subject to, and will become
effective upon approval of, the TSAT Nonemployee Director Plan Proposal by the
requisite vote of the stockholders at the Meeting. The following description
of the TSAT Nonemployee Director Plan is subject to, and qualified in its
entirety by reference to, the complete text of the TSAT Nonemployee Director
Plan, a copy of which is attached hereto as Appendix J.
DESCRIPTION OF THE TSAT NONEMPLOYEE DIRECTOR PLAN
The TSAT Nonemployee Director Plan provides for grants to be made of TSAT
Options to purchase a maximum of 500,000 shares of TSAT Series A Common Stock.
Shares that are subject to TSAT Options that expire or terminate for any
reason without having been exercised will return to the pool of such shares
available under the TSAT Nonemployee Director Plan.
Under the TSAT Nonemployee Director Plan, each of the individuals who were
directors of TSAT but not employees of TSAT or any subsidiary of TSAT (any
such director, a "Nonemployee Director") as of the date the TSAT Nonemployee
Director Plan was approved by the TSAT Board (the "Plan Effective Date") has
been granted, subject to stockholder approval of the TSAT Nonemployee Director
Plan Proposal, a TSAT Option to purchase 50,000 shares of TSAT Series A Common
Stock. The TSAT Nonemployee Director Plan provides that each individual who
becomes a Nonemployee Director after the Plan Effective Date automatically be
granted a TSAT Option to purchase 50,000 shares of TSAT Series A Common Stock
on the date such person first becomes a Nonemployee Director, if the number of
shares then subject to future grant under the TSAT Nonemployee Director Plan
is sufficient to make all automatic grants required to be made pursuant to the
TSAT Nonemployee Director Plan on such date of grant. As used in this
"PROPOSAL TO APPROVE THE TSAT 1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN"
section, the term "subsidiary of TSAT" means any present or future subsidiary
(as defined in Section 424(f) of the Code) of TSAT, or any business entity in
which TSAT owns, directly or indirectly, 50% or more of the voting, capital or
profits interests. An entity shall be deemed a subsidiary of TSAT for purposes
of this definition only for such periods as the requisite ownership or control
relationship is maintained. TSAT Options granted pursuant to the TSAT
Nonemployee Director Plan will be nonqualified stock options which do not
qualify under Section 422 of the Code.
The TSAT Nonemployee Director Plan provides that the per share exercise
price of each TSAT Option will be equal to the fair market value of the TSAT
Series A Common Stock on the date the TSAT Option is granted. In general, fair
market value is determined by reference to the last sale price for shares of
the TSAT Series A Common Stock as reported on the NASDAQ/NM on the date of the
grant. Such last sale price on the Plan Effective Date was $8.00 per share and
the exercise price of the TSAT Options granted on that date, subject to
stockholder approval of the TSAT Nonemployee Director Plan Proposal, is $8.00
per share.
The TSAT Nonemployee Director Plan provides that TSAT Options granted
thereunder will become exercisable in equal annual installments over a five-
year period commencing on the first anniversary of the date of the grant.
However, on November 10, 1997, the TSAT Board and the Compensation Committee
of the TSAT Board approved modifications to the vesting provisions of all TSAT
Options granted pursuant to the TSAT Nonemployee DIrector Plan, accelerating
the vesting schedules under such options from five to three years, subject to
consummation of the Restructuring Transaction. Accordingly, if the Roll-up
Proposal is approved and
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the Restructuring Transaction is consummated, such TSAT Options will vest in
three equal annual installments, commencing February 1998. If the
Restructuring Transaction is not consummated, such options will continue to
vest in five equal annual installments, commencing February 1998. The method
of payment of the exercise price of a TSAT Option may consist of (a) cash, (b)
check, (c) promissory note, (d) whole shares of TSAT Series A Common Stock or
TSAT Series B Common Stock already owned by the optionee, (e) the withholding
of shares of TSAT Series A Common Stock otherwise issuable upon such exercise
of the TSAT Option, (f) the delivery, together with a properly executed
exercise notice, of irrevocable instructions to a broker to deliver promptly
to TSAT the amount of sale or loan proceeds required to pay the purchase
price, (g) any combination of the foregoing methods of payment, or such other
consideration and method of payment as may be permitted for the issuance of
shares under the DGCL. The permitted method(s) of payment of the amounts
payable upon exercise of a TSAT Option, if other than in cash, shall be set
forth in the applicable agreement and may be subject to conditions set by the
TSAT Board. Without limiting the generality of the foregoing, if an optionee
is permitted to elect to have shares of TSAT Series A Common Stock issuable
upon exercise of a TSAT Option withheld to pay all or part of the amounts
payable in connection with such exercise, then the TSAT Board shall have the
sole discretion to approve or disapprove the election after the election is
made.
Each TSAT Option granted pursuant to the TSAT Nonemployee Director Plan will
terminate upon the earliest to occur of the following: (a) the day that
immediately precedes the tenth anniversary of the date the TSAT Option was
granted; (b) the first business day following the expiration of the one-year
period which begins on the date the optionee ceases to be a director of TSAT
for any reason other than voluntary termination of director status; or (c) the
first business day following the expiration of the three-month period which
begins on the date the optionee voluntarily terminates his director status.
If an optionee ceases to serve as a director of TSAT for any reason other
than voluntary termination of director status, the vesting and exercisability
of each unmatured outstanding TSAT Option held by such optionee shall be
accelerated. Upon the occurrence of a Change in Control (as defined below),
the vesting and exercisability of all unmatured outstanding TSAT Options will
be accelerated effective as of such Change in Control. A "Change in Control"
means the occurrence of any of the following events: (a) after the Plan
Effective Date, any person (as such term is defined in Sections 13(d)(3) and
14(d)(2) of the Exchange Act), corporation or other entity (other than TSAT,
any subsidiary, any employee benefit plan sponsored by TSAT or any subsidiary,
or any Controlling Person) shall become the "beneficial owner" (as such term
is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of TSAT representing 20% or more of the combined voting power of
the then outstanding securities of TSAT ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act
in the case of rights to acquire TSAT's securities); (b) TSAT is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the TSAT Board in office
immediately prior to such transaction or event constitute less than a majority
of the TSAT Board thereafter; or (c) during any period of two consecutive
years, individuals who at the beginning of such period constituted the entire
TSAT Board cease for any reason to constitute a majority thereof unless the
election, or the nomination for election, of each new director was approved by
a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the
President and each of the directors of TSAT as of the Plan Effective Date, (b)
John C. Malone, (c) the respective family members, estates and heirs of each
of the persons referred to in clauses (a) and (b) above, and of Bob Magness,
and any trust or other investment vehicle for the primary benefit of the
persons referred to in clauses (a) and (b) above, and of Bob Magness, or their
respective family members or heirs and (d) Kearns-Tribune, a Delaware
corporation. As used with respect to any person, the term "family member"
means the spouse, siblings and lineal descendants of such person. Consummation
of the TSAT Merger will constitute a Change of Control (as defined in the TSAT
Nonemployee Director Plan) and, accordingly, will result in the immediate
vesting and exercisability of all TSAT Options granted under the TSAT
Nonemployee Director Plan. The TSAT Merger Agreement provides that at the TSAT
Effective Time, New PRIMESTAR will assume all obligations of TSAT under the
TSAT Nonemployee Director Plan and all TSAT Options granted thereunder. See
"THE ROLL-UP PLAN--Interests of Certain Persons in the Roll-up Plan--Treatment
of TSAT Options, Stock Appreciation Rights and Restricted Stock Awards."
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If TSAT subdivides its outstanding shares of TSAT Series A Common Stock into
a greater number of shares of TSAT Series A Common Stock (by stock dividend,
stock split, reclassification or otherwise), or combines its outstanding
shares of TSAT Series A Common Stock into a smaller number of shares of TSAT
Series A Common Stock (by reverse stock split, reclassification or otherwise),
or if the TSAT Board determines that any stock dividend, extraordinary cash
dividend, reclassification, recapitalization, reorganization, split-up, spin-
off, combination, merger, consolidation, exchange of shares, warrants or
rights offering to purchase TSAT Series A Common Stock, or other similar
corporate event affects the TSAT Series A Common Stock such that an adjustment
is required in order to preserve the benefits or potential benefits intended
to be made available under the TSAT Nonemployee Director Plan, then the TSAT
Board shall, in its sole discretion and in such manner as it may deem
equitable and appropriate, make such adjustments to any or all of (a) the
number and kind of shares reserved under the TSAT Nonemployee Director Plan,
(b) the number and kind of shares subject to any outstanding TSAT Options, and
(c) the exercise price with respect to any outstanding TSAT Options, provided,
however, that the number of shares subject to any TSAT Option shall always be
a whole number. The TSAT Board may, if deemed appropriate, provide for a cash
payment to any optionee in connection with any such adjustment. In the event
of a corporate merger, consolidation, acquisition of property or stock,
reorganization, liquidation or similar transaction, the TSAT Board shall be
authorized to issue or assume stock options by means of substitution of new
options for previously issued options or an assumption of previously issued
options, or to make provision for the acceleration of the exercisability of,
or lapse of restrictions with respect to, the termination of unexercised
options in connection with such transaction.
The obligations of TSAT with respect to TSAT Options granted under the TSAT
Nonemployee Director Plan are subject to all applicable laws.
All grants of TSAT Options under the TSAT Nonemployee Director Plan will be
automatic and will not be subject to the discretion of any person. The TSAT
Nonemployee Director Plan will be administered by the TSAT Board, who will
receive no additional compensation for such service. Members of the TSAT Board
who are eligible for TSAT Options may vote on matters affecting administration
of the TSAT Nonemployee Director Plan.
The TSAT Board may amend, alter or discontinue the TSAT Nonemployee Director
Plan, except that (a) no amendment or alteration that would impair the rights
of any optionee under any TSAT Option that he has been granted shall be made
without his consent, (b) no amendment or alteration shall be effective prior
to approval by TSAT's stockholders to the extent such approval is then
required pursuant to Rule 16b-3 (or any successor provision) under the
Exchange Act in order to preserve the applicability of any exemption provided
by such Rule to any TSAT Option then outstanding (unless the holder of such
TSAT Option consents) or to the extent stockholder approval is otherwise
required by applicable legal requirements, and (c) the TSAT Nonemployee
Director Plan shall not be amended more than once every six months to the
extent such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Exchange Act as then in effect.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary generally describes the principal federal (but not
state and local) income tax consequences of the TSAT Nonemployee Director
Plan. It is general in nature and is not intended to cover all tax
consequences that may apply to a particular optionee or TSAT. The provisions
of the Code and the regulations thereunder relating to these matters are
complex and their impact in any one case may depend upon the particular
circumstances.
In general, the grant of a TSAT Option will not result in taxable income to
the optionee or a deduction to TSAT for federal income tax purposes. Upon
exercise of a TSAT Option, TSAT will be entitled, for federal income tax
purposes, to a tax deduction and the optionee will recognize ordinary income.
The amount of such deduction and income generally will equal the amount by
which the fair market value of the shares acquired on the date the TSAT Option
is exercised exceeds the TSAT Option exercise price of the shares if the
shares
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received on exercise are transferable and not subject to a substantial risk of
forfeiture at such time. In general, the shares received on exercise of a TSAT
Option will be transferable and will not be subject to a substantial risk of
forfeiture.
If a TSAT Option is exercised through the delivery of shares previously
owned by the optionee, such exercise generally will not be considered a
taxable disposition of the previously owned shares and thus no gain or loss
will be recognized with respect to such shares upon such exercise.
Any difference between the basis of the shares acquired through the exercise
of a TSAT Option (the TSAT Option exercise price plus the ordinary income
recognized) and the amount realized upon a subsequent sale of such shares will
be treated as a short-term or long-term capital gain or loss, depending on the
length of the period such shares are held prior to sale. Currently, long-term
capital gains are taxed to an individual at a maximum rate of 20% (subject to
an 18-month holding period) as opposed to a maximum rate of 39.6% for ordinary
income.
VOTE REQUIRED FOR APPROVAL; RECOMMENDATION OF THE TSAT BOARD
The affirmative vote of a majority of the combined voting power of the
outstanding shares of TSAT Series A Common Stock and TSAT Series B Common
Stock present and entitled to vote at the Meeting, voting together as a single
class, is required for approval of the TSAT Nonemployee Director Plan
Proposal. Abstentions by holders of TSAT Common Stock will have the same
effect as a vote against the TSAT Nonemployee Director Plan Proposal, while
broker non-votes by holders of TSAT Common Stock will not affect the approval
of the TSAT Nonemployee Director Plan Proposal. Approval of the TSAT
Nonemployee Director Plan Proposal is required as a condition to the
effectiveness of the TSAT Nonemployee Director Plan and existing automatic
grants thereunder. The TSAT Board believes that such approval is in the best
interests of TSAT and its stockholders because it will, among other things,
assist TSAT in retaining its independent directors prior to the consummation
of the TSAT Merger. The TSAT Board unanimously recommends that TSAT's
stockholders vote FOR the approval of the TSAT Nonemployee Director Plan
Proposal.
LEGAL MATTERS
The validity of the shares of New PRIMESTAR Class A Common Stock and New
PRIMESTAR Class B Common Stock to be issued to stockholders of TSAT in
connection with the TSAT Merger will be passed upon for New PRIMESTAR by Baker
& Botts, L.L.P. Baker & Botts, L.L.P. has delivered an opinion to TSAT as to
certain tax matters relating to the Restructuring Transaction and the TSAT
Merger.
EXPERTS
The balance sheets of TCI Satellite Entertainment, Inc. (as defined in note
1 of the financial statements) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996, have been
included in this Proxy Statement/Prospectus in reliance upon the report, dated
March 25, 1997, of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
The combined financial statements of Time Warner Satellite Services Group as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, appearing in this Proxy Statement/Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in auditing and
accounting.
The financial statements of Cox Communications, Inc. Direct Broadcast
Satellite Business as of December 31, 1995 and 1996 and for each of the three
years in the period ended December 31, 1996 included in
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this Proxy Statement/Prospectus have been audited by Deloitte & Touche, LLP,
independent auditors, as stated in their reports appearing herein, which
contains explanatory language stating that other auditors audited the
financial statements of PRIMESTAR Partners L.P., an investment of Cox
Communications, Inc. Direct Broadcast Satellite Business, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
The combined financial statements of Comcast Satellite Communications, Inc.
and Comcast DBS, Inc. as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 included in this Proxy
Statement/Prospectus have been audited by Deloitte & Touche, LLP, independent
auditors, as stated in their report appearing elsewhere herein which contains
explanatory language stating that other auditors audited the financial
statements of PRIMESTAR Partners L.P., an investment of Comcast DBS, Inc., and
is included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The combined financial statements of MediaOne, Inc.--Direct Broadcast
Satellite Business as of December 31, 1996 and the related combined statements
of operations, changes in group equity (deficiency), and cash flows for the
period November 15, 1996 through December 31, 1996, and the combined financial
statements of the Direct Broadcast Satellite Business of Continental
Cablevision, Inc. as of December 31, 1995 and the related combined statements
of operations, changes in group equity (deficiency) and cash flows for the
twelve months ended December 31, 1994 and 1995, and the period January 1, 1996
through November 14, 1996, included in this Proxy Statement/Prospectus have
been audited by Deloitte & Touche, LLP, independent auditors, as stated in
their report appearing herein, which contains explanatory language stating
that other auditors audited the financial statements of PRIMESTAR Partners
L.P., an investment of MediaOne, Inc.--Director Broadcast Satellite Business,
and have been so included in reliance upon the reports of such firms, given on
their authority as experts in auditing and accounting.
The consolidated balance sheet of PRIMESTAR, Inc. and subsidiaries as of
September 30, 1997 has been included in this Proxy Statement/Prospectus in
reliance upon the report, dated February 6, 1998, of KPMG Peat Marwick LLP,
independent certified public accountants, given on the authority of said firm
as experts in auditing and accounting.
The financial statements of the Partnership as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 included
in this Proxy Statement/Prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the Partnership's
ability to continue as a going concern as described in note 2 to the financial
statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
It is expected that representatives of KPMG Peat Marwick LLP, Ernst & Young
LLP, Deloitte & Touche, LLP, and Price Waterhouse LLP (respectively being
TSAT's, PRIMESTAR, Inc.'s, Time Warner Satellite Services Group's, Cox
Communications, Inc.'s, Comcast DBS, Inc.'s, MediaOne, Inc.'s, Continental
Cablevision, Inc.'s and the Partnership's independent certified public
accountants) will be present at the Meeting where they will have an
opportunity to respond to appropriate questions of TSAT stockholders and to
make a statement if they so desire.
STOCKHOLDER PROPOSALS
If the TSAT Merger is consummated prior to June 30, 1998, the first annual
meeting of the stockholders of New PRIMESTAR is expected to be held in 1999
and TSAT will not hold its 1998 Annual Meeting of Stockholders. If the TSAT
Merger is not consummated by June 30, 1998, the 1998 Annual Meeting of
Stockholders of TSAT is expected to be held in July 1998. Any proposal to be
included in the Proxy Statement for New PRIMESTAR's 1999 Annual Meeting of
Stockholders must have been received by New PRIMESTAR no later than January
15, 1999 in a form that complies with applicable regulations. Any proposal to
be included in the Proxy Statement for TSAT's 1998 Annual Meeting of
Stockholders must have been received by TSAT no later than May 15, 1998 in a
form that complies with applicable regulations.
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INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
PRO FORMA FINANCIAL STATEMENTS
"NEW PRIMESTAR"
Primary Condensed Pro Forma Combined Financial Statements
(unaudited)....................................................... F-4
Primary Condensed Pro Forma Combined Balance Sheet, September 30,
1997 (unaudited).................................................. F-6
Primary Condensed Pro Forma Combined Statement of Operations:
Nine months ended September 30, 1997 (unaudited)................. F-7
Year ended December 31, 1996 (unaudited)......................... F-8
Notes to Primary Condensed Pro Forma Combined Financial Statements,
September 30, 1997 (unaudited).................................... F-9
Supplemental Condensed Pro Forma Combined Financial Statements
(unaudited)....................................................... F-12
Supplemental Condensed Pro Forma Combined Balance Sheet, September
30, 1997 (unaudited).............................................. F-13
Supplemental Condensed Pro Forma Combined Statement of Operations:
Nine months ended September 30, 1997 (unaudited)................. F-14
Year ended December 31, 1996 (unaudited)......................... F-15
Notes to Supplemental Condensed Pro Forma Combined Financial
Statements, September 30, 1997 (unaudited)........................ F-16
HISTORICAL FINANCIAL INFORMATION
PRIMESTAR, INC. AND SUBSIDIARIES
Independent Auditors' Report....................................... F-20
Consolidated Balance Sheet, September 30, 1997..................... F-21
Notes to Consolidated Balance Sheet, September 30, 1997............ F-22
TCI SATELLITE ENTERTAINMENT, INC.
Selected Financial Data............................................ F-29
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. F-30
Audited Financial Statements:
Independent Auditors' Report..................................... F-43
Balance Sheets, December 31, 1996 and 1995....................... F-44
Combined Statements of Operations, Years ended December 31, 1996,
1995 and 1994................................................... F-45
Combined Statements of Equity, Years ended December 31, 1996,
1995 and 1994................................................... F-46
Combined Statements of Cash Flows, Years ended December 31, 1996,
1995 and 1994................................................... F-47
Notes to Financial Statements, December 31, 1996, 1995 and 1994.. F-48
Unaudited Financial Statements:
Consolidated Balance Sheets, September 30, 1997 and December 31,
1996 (unaudited)................................................ F-69
Statements of Operations, Nine months ended September 30, 1997
and 1996 (unaudited)............................................ F-70
Consolidated Statement of Stockholder's Equity, Nine months ended
September 30, 1997 (unaudited).................................. F-71
Statements of Cash Flows, Nine months ended September 30, 1997
and 1996 (unaudited)............................................ F-72
Notes to Financial Statements, September 30, 1997 (unaudited).... F-73
TIME WARNER SATELLITE SERVICES GROUP
Selected Financial Data............................................ F-91
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Years ended December 31, 1996, 1995 and
1994.............................................................. F-92
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Audited Financial Statements:
Report of Independent Auditors................................... F-98
Combined Balance Sheet, December 31, 1996 and 1995............... F-99
Combined Statement of Operations, Years ended December 31, 1996,
1995 and 1994................................................... F-100
Combined Statement of Group Deficit, Years ended December 31,
1996, 1995 and 1994............................................. F-101
Combined Statement of Cash Flows, Years ended December 31, 1996,
1995 and 1994................................................... F-102
Notes to Combined Financial Statements, December 31, 1996........ F-103
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Nine months ended September 30, 1997 and
1996.............................................................. F-109
Unaudited Financial Statements:
Combined Balance Sheet, September 30, 1997 and December 31, 1996
(unaudited)..................................................... F-113
Combined Statement of Operations, Nine months ended September 30,
1997 and 1996 (unaudited)....................................... F-114
Combined Statement of Group Deficit, Nine months ended September
30, 1997 and 1996 (unaudited)................................... F-115
Combined Statement of Cash Flows, Nine months ended September 30,
1997 and 1996 (unaudited)....................................... F-116
Notes to Combined Financial Statements, September 30, 1997
(unaudited)..................................................... F-117
COX COMMUNICATIONS, INC.--DIRECT BROADCAST SATELLITE BUSINESS
Selected Financial Data............................................ F-121
Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................... F-122
Independent Auditors' Report....................................... F-129
Balance Sheets, December 31, 1996 and 1995; September 30, 1997
(unaudited)....................................................... F-130
Statements of Operations, Years ended December 31, 1996, 1995 and
1994; Nine months ended September 30, 1997 and 1996 (unaudited)... F-131
Statements of Deficiency in Net Assets, Years ended December 31,
1996, 1995, 1994 and 1993; Nine months ended September 30, 1997
(unaudited)....................................................... F-132
Statements of Cash Flows, Years ended December 31, 1996, 1995 and
1994; Nine months ended September 30, 1997 and 1996 (unaudited)... F-133
Notes to Financial Statements, December 31, 1996; September 30,
1997 (unaudited).................................................. F-134
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
Selected Combined Financial and Other Data......................... F-139
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. F-140
Audited Financial Statements:
Independent Auditors' Report..................................... F-148
Combined Balance Sheet, December 31, 1996 and 1995............... F-149
Combined Statement of Operations, Years ended December 31, 1996,
1995 and 1994................................................... F-150
Combined Statement of Cash Flows, Years ended December 31, 1996,
1995 and 1994................................................... F-151
Combined Statement of Stockholder's (Deficiency) Equity, Years
ended December 31, 1996, 1995 and 1994.......................... F-152
Notes to Combined Financial Statements, Years ended December 31,
1996, 1995 and 1994............................................. F-153
Unaudited Financial Statements:
Condensed Combined Balance Sheet, September 30, 1997 and December
31, 1996 (unaudited)............................................ F-159
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBERS
-------
<S> <C>
Condensed Combined Statement of Operations, Nine and three months
ended September 30, 1997 and 1996 (unaudited)................... F-160
Condensed Combined Statement of Cash Flows, Nine months ended
September 30, 1997 and 1996 (unaudited)......................... F-161
Condensed Combined Statement of Stockholders' Deficiency, Nine
months ended September 30, 1997 (unaudited)..................... F-162
Notes to Condensed Combined Financial Statements, Quarter ended
September 30, 1997 (unaudited).................................. F-163
MEDIAONE, INC.--DIRECT BROADCAST SATELLITE BUSINESS
Selected Financial Data............................................ F-167
Management's Discussion and Analysis of Results of Operations and
Financial Condition............................................... F-168
Independent Auditors' Report....................................... F-173
Combined Balance Sheets, December 31, 1996 and 1995; September 30,
1997 (unaudited).................................................. F-174
Combined Statements of Operations, Periods ended December 31, 1996
and November 14, 1996; Years ended December 31, 1995 and 1994;
Nine months ended September 30, 1997 and 1996 (unaudited)......... F-175
Combined Statements of Cash Flows, Periods ended December 31, 1996
and November 14, 1996; Years ended December 31, 1995 and 1994;
Nine months ended September 30, 1997 and 1996 (unaudited)......... F-176
Combined Statements of Changes in Group Equity (Deficiency), period
ended December 31, 1996; Nine months ended September 30, 1997
(unaudited)....................................................... F-177
Combined Statements of Changes in Group Equity (Deficiency), period
ended November 14, 1996; Years ended December 31, 1995 and 1994... F-178
Notes to Combined Financial Statements, December 31, 1996;
September 30, 1997 (unaudited).................................... F-179
PRIMESTAR PARTNERS L.P.
Selected Financial Data............................................ F-188
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Years ended December 31, 1996, 1995 and
1994.............................................................. F-189
Audited Financial Statements:
Report of Independent Accountants................................ F-194
Balance Sheet, December 31, 1996 and 1995........................ F-195
Statement of Operations, Years ended December 31, 1996, 1995 and
1994............................................................ F-196
Statement of Changes in Partners' Capital, Years ended December
31, 1996, 1995 and 1994......................................... F-197
Statement of Cash Flows, Years ended December 31, 1996, 1995 and
1994............................................................ F-198
Notes to Financial Statements, December 31, 1996, 1995 and 1994.. F-199
Management's Discussion and Analysis of Financial Condition and
Results of Operations, Nine months ended September 30, 1997 and
1996.............................................................. F-209
Unaudited Financial Statements:
Balance Sheet, September 30, 1997 (unaudited) and December 31,
1996 ........................................................... F-212
Statement of Operations, Nine months ended September 30, 1997 and
1996 (unaudited)................................................ F-213
Statement of Changes in Partners' Capital, Nine months ended
September 30, 1997 (unaudited).................................. F-214
Statement of Cash Flows, Nine months ended September 30, 1997 and
1996 (unaudited)................................................ F-215
Notes to Financial Statements, September 30, 1997 (unaudited).... F-216
</TABLE>
F-3
<PAGE>
"NEW PRIMESTAR"
PRIMARY CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Pursuant to (i) a Merger and Contribution Agreement dated as of February 6,
1998 (together with the exhibits and schedules thereto, the "Restructuring
Agreement"), among TCI Satellite Entertainment, Inc. ("TSAT"), PRIMESTAR, Inc.
("New PRIMESTAR"), 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) the Asset Transfer
Agreement dated as of February 6, 1998 (together with the exhibits and
schedules thereto, the "TSAT Asset Transfer Agreement"), between TSAT and New
PRIMESTAR, it is contemplated that a business combination (the "Restructuring
Transaction") will be consummated whereby (a) TSAT will contribute and
transfer to New PRIMESTAR pursuant to the TSAT Asset Transfer Agreement, (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 to be received by TSAT in the Restructuring Transaction and
(III) the rights and obligations under certain agreements with New PRIMESTAR
(such contributed and transferred assets and liabilities, the "TSAT
Business"), and (b) the business of PRIMESTAR Partners L.P. (the
"Partnership") and the business of distributing the PRIMESTAR(R) programming
service ("PRIMESTAR(R)") of each of TWE, Newhouse, Comcast, Cox and affiliates
of MediaOne will be consolidated into New PRIMESTAR. New PRIMESTAR is a newly
formed wholly-owned subsidiary of TSAT. See note 1.
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(together with the exhibits and schedules thereto, the "TSAT Merger
Agreement"), between TSAT and New PRIMESTAR, it is contemplated that,
subsequent to the consummation of the Restructuring Transaction, TSAT will be
merged with and into New PRIMESTAR, with New PRIMESTAR as the surviving
corporation (the "TSAT Merger"). In connection therewith (i) each outstanding
share of Series A Common Stock, $1 par value per share, of TSAT ("TSAT Series
A Common Stock") will be converted into the right to receive one share of
Class A Common Stock, $.01 par value per share, of New PRIMESTAR ("New
PRIMESTAR Class A Common Stock") and (ii) each outstanding share of Series B
Common Stock, $1 par value per share, of TSAT ("TSAT Series B Common Stock")
will be converted into the right to receive one share of Class B Common Stock,
$.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class A Common
Stock") subject to adjustment. Each share of New PRIMESTAR's Common Stock then
held by TSAT will be cancelled. See note 2.
The Restructuring Transaction (including the TSAT Asset Transfer) and the
TSAT Merger are collectively referred to herein as the Roll-up Plan.
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement, dated as of June 11, 1997 (together with the exhibits
and schedules thereto, the "ASkyB Agreement") among the Partnership, The News
Corporation Limited ("News Corp."), MCI Telecommunications 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, New PRIMESTAR will acquire from MCI two high power communications
satellites currently under construction (the "MCI Satellites"), certain
authorizations granted to MCI by the FCC to operate a DBS business at the
110(degrees) West Longitude orbital location and certain related contracts
(the "MCI FCC Licenses"). See note 3.
The pro forma financial condition and results of operations of New PRIMESTAR
after giving effect to the Restructuring Transaction are presented in the
accompanying unaudited primary condensed pro forma combined financial
statements of New PRIMESTAR under the column heading "New PRIMESTAR pro forma
for Restructuring Transaction." The detailed pro forma effects of the
Restructuring Transaction on the financial
F-4
<PAGE>
condition and results of operations of New PRIMESTAR are presented in the
unaudited supplemental condensed pro forma combined financial statements of
New PRIMESTAR, included elsewhere herein. Such supplemental pro forma
financial information is a part of, and should be read in conjunction with,
the accompanying primary pro forma financial information of New PRIMESTAR. The
following unaudited primary condensed pro forma combined balance sheet of
TSAT, dated as of September 30, 1997, assumes that the Restructuring
Transaction, the TSAT Merger and the ASkyB Transaction had occurred as of such
date. The following unaudited primary condensed pro forma combined statements
of operations of TSAT for the nine months ended September 30, 1997 and the
year ended December 31, 1996 assume that the Restructuring Transaction, the
TSAT Merger and the ASkyB Transaction had occurred as of January 1, 1996.
The unaudited primary pro forma results do not purport to be indicative of
the results of operations that would have been obtained if the Restructuring
Transaction, the TSAT Merger and the ASkyB Transaction had occurred as of
January 1, 1996. These primary condensed pro forma combined financial
statements of New PRIMESTAR should be read in conjunction with the historical
financial statements and notes thereto of TSAT, Time Warner Satellite Services
Group, Cox Communications, Inc.--Direct Broadcast Satellite Business, Comcast
Satellite Communications, Inc. and Comcast DBS, Inc., MediaOne, Inc.--Direct
Broadcast Satellite Business and the Partnership, included elsewhere herein.
Such financial statements present historical financial information with
respect to TSAT and the PRIMESTAR Assets, the PRIMESTAR Liabilities and the
Partnership Interests (each as defined in note 1 to the unaudited supplemental
condensed pro forma combined financial statements of New PRIMESTAR, included
elsewhere herein) of each of TWE, Newhouse, Comcast, Cox and MediaOne, which
assets and liabilities, together with the Partnership Interest indirectly held
by GE Americom, will be consolidated into New PRIMESTAR pursuant to the
Restructuring Transaction.
F-5
<PAGE>
"NEW PRIMESTAR"
PRIMARY CONDENSED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ROLL-UP PLAN
---------------------------------------------------------------------------------------
RESTRUCTURING
TRANSACTION(1) TSAT MERGER(2) NEW
--------------------------- --------------------------- PRIMESTAR
NEW PRO FORMA FOR
CONTRIBUTION TSAT PRIMESTAR RESTRUCTURING
OF TSAT PRO FORMA FOR PRO FORMA FOR TRANSACTION
TSAT BUSINESS TO NEW PRO FORMA RESTRUCTURING RESTRUCTURING PRO FORMA AND
HISTORICAL PRIMESTAR(4) ADJUSTMENTS TRANSACTION TRANSACTION(5) ADJUSTMENTS TSAT MERGER
---------- --------------- ----------- ------------- --------------- ----------- -------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash, receivables
and prepaids....... $ 41,257 (41,257) -- -- 133,062 -- 133,062
Investment in, and
related advances
to, the
Partnership........ 19,952 (19,952) -- -- -- -- --
Investment in New
PRIMESTAR.......... -- 207,674 224,412(6) 432,086 -- (432,086)(7) --
Property and
equipment net of
accumulated
depreciation
Satellites........ 463,133 -- -- 463,133 543,070 (463,133)(8) 543,070
Satellite
reception and
other............. 636,225 (636,225) -- -- 1,220,061 -- 1,220,061
---------- -------- ------- --------- --------- -------- ---------
1,099,358 (636,225) -- 463,133 1,763,131 (463,133) 1,763,131
Intangible assets.. -- -- -- -- 1,196,338 -- 1,196,338
Other assets....... 28,479 (28,479) -- -- 29,760 -- 29,760
---------- -------- ------- --------- --------- -------- ---------
$1,189,046 (518,239) 224,412 895,219 3,122,291 (895,219) 3,122,291
========== ======== ======= ========= ========= ======== =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Payables, accruals
and other operating
liabilities........ $ 152,479 (152,479) -- -- 287,198 -- 287,198
Due to the
Partnership........ 463,133 -- -- 463,133 -- (463,133)(8) --
Debt............... 365,760 (365,760) -- -- 1,404,496 -- 1,404,496
Deferred income
taxes.............. -- -- -- -- 230,360 -- 230,360
---------- -------- ------- --------- --------- -------- ---------
Total
liabilities..... 981,372 (518,239) -- 463,133 1,922,054 (463,133) 1,922,054
---------- -------- ------- --------- --------- -------- ---------
Mandatorily
redeemable
preferred stock.... -- -- -- -- -- -- --
Stockholders'
equity:
Series A Common
Stock............. 58,237 -- -- 58,237 -- (58,237)(7) --
Series B Common
Stock............. 8,465 -- -- 8,465 -- (8,465)(7) --
Class A Common
Stock............. -- -- -- -- 1,833 (81)(9) 1,752
Class B Common
Stock............. -- -- -- -- 85 -- 85
Class C Common
Stock............. -- -- -- -- 138 -- 138
Additional paid-
in capital........ 523,295 -- 224,412(6) 747,707 1,198,181 (365,384)(7) 1,580,585
81 (9)
Accumulated
deficit........... (382,323) -- -- (382,323) -- -- (382,323)
---------- -------- ------- --------- --------- -------- ---------
207,674 -- 224,412 432,086 1,200,237 (432,086) 1,200,237
---------- -------- ------- --------- --------- -------- ---------
$1,189,046 (518,239) 224,412 895,219 3,122,291 (895,219) 3,122,291
========== ======== ======= ========= ========= ======== =========
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
RESTRUCTURING
TRANSACTION,
TSAT MERGER
ASKYB AND ASKYB
TRANSACTION(3) TRANSACTION
---------------- --------------
<S> <C> <C>
ASSETS
Cash, receivables
and prepaids....... -- 133,062
Investment in, and
related advances
to, the
Partnership........ -- --
Investment in New
PRIMESTAR.......... -- --
Property and
equipment net of
accumulated
depreciation
Satellites........ 432,700(10) 975,770
Satellite
reception and
other............. -- 1,220,061
---------------- --------------
432,700 2,195,831
Intangible assets.. 683,600(10) 1,879,938
Other assets....... -- 29,760
---------------- --------------
1,116,300 4,238,591
================ ==============
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Payables, accruals
and other operating
liabilities........ -- 287,198
Due to the
Partnership........ -- --
Debt............... 516,300(10) 1,920,796
Deferred income
taxes.............. -- 230,360
---------------- --------------
Total
liabilities..... 516,300 2,438,354
---------------- --------------
Mandatorily
redeemable
preferred stock.... 600,000(10) 600,000
Stockholders'
equity:
Series A Common
Stock............. -- --
Series B Common
Stock............. -- --
Class A Common
Stock............. -- 1,752
Class B Common
Stock............. -- 85
Class C Common
Stock............. -- 138
Additional paid-
in capital........ -- 1,580,585
Accumulated
deficit........... -- (382,323)
---------------- --------------
-- 1,200,237
---------------- --------------
1,116,300 4,238,591
================ ==============
</TABLE>
See accompanying notes to unaudited primary condensed pro forma combined
financial statements.
F-6
<PAGE>
"NEW PRIMESTAR"
PRIMARY CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ROLL-UP PLAN
--------------------------------------------------------------------------------------------
RESTRUCTURING
TRANSACTION(1) TSAT MERGER(2) NEW
--------------------------- --------------------------- PRIMESTAR
NEW PRO FORMA FOR
CONTRIBUTION TSAT PRIMESTAR RESTRUCTURING
OF TSAT PRO FORMA FOR PRO FORMA FOR TRANSACTION
TSAT BUSINESS TO NEW PRO FORMA RESTRUCTURING RESTRUCTURING PRO FORMA AND
HISTORICAL PRIMESTAR(4) ADJUSTMENTS TRANSACTION TRANSACTION(5) ADJUSTMENTS TSAT MERGER
---------- --------------- ----------- ------------- --------------- ----------- -------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $ 406,072 (406,072) -- -- 920,015 -- 920,015
Operating,
selling, general
and
administrative
expenses......... (351,405) 351,405 -- -- (809,289) -- (809,289)
Depreciation and
amortization..... (177,415) 177,415 -- -- (442,179) -- (442,179)
---------- -------- -------- -------- -------- ------- --------
Operating loss.. (122,748) 122,748 -- -- (331,453) -- (331,453)
Interest
expense.......... (33,965) 33,965 -- -- (83,375) -- (83,375)
Share of losses
of the
Partnership...... (11,610) 11,610 -- -- -- -- --
Share of losses
of New
PRIMESTAR........ -- -- (129,958)(11) (129,958) -- 129,958(12) --
Other, net....... 1,779 (1,779) -- -- 1,856 -- 1,856
---------- -------- -------- -------- -------- ------- --------
Loss before
income taxes.... (166,544) 166,544 (129,958) (129,958) (412,972) 129,958 (412,972)
Income tax
benefit.......... -- -- -- -- 51,977 -- 51,977
---------- -------- -------- -------- -------- ------- --------
Net loss........ (166,544) 166,544 (129,958) (129,958) (360,995) 129,958 (360,995)
Dividend
requirement on
preferred stock.. -- -- -- -- -- -- --
---------- -------- -------- -------- -------- ------- --------
Net loss
attributable to
common
stockholders..... $ (166,544) 166,544 (129,958) (129,958) (360,995) 129,958 (360,995)
========== ======== ======== ======== ======== ======= ========
Pro forma net
loss per share... $ (1.95)(16) (1.83)(17)
======== ========
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
RESTRUCTURING
TRANSACTION,
TSAT MERGER
ASKYB AND ASKYB
TRANSACTION(3) TRANSACTION
---------------- -----------------
<S> <C> <C>
Revenue.......... -- 920,015
Operating,
selling, general
and
administrative
expenses......... -- (809,289)
Depreciation and
amortization..... -- (442,179)
---------------- -----------------
Operating loss.. -- (331,453)
Interest
expense.......... (19,361)(13) (102,736)
Share of losses
of the
Partnership...... -- --
Share of losses
of New
PRIMESTAR........ -- --
Other, net....... -- 1,856
---------------- -----------------
Loss before
income taxes.... (19,361) (432,333)
Income tax
benefit.......... 7,744 (14) 59,721
---------------- -----------------
Net loss........ (11,617) (372,612)
Dividend
requirement on
preferred stock.. (22,500)(15) (22,500)
---------------- -----------------
Net loss
attributable to
common
stockholders..... (34,117) (395,112)
================ =================
Pro forma net
loss per share... (2.00)(17)
=================
</TABLE>
See accompanying notes to unaudited primary condensed pro forma combined
financial statements.
F-7
<PAGE>
"NEW PRIMESTAR"
PRIMARY CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ROLL-UP PLAN
--------------------------------------------------------------------------------------------
RESTRUCTURING
TRANSACTION(1) TSAT MERGER(2) NEW
--------------------------- --------------------------- PRIMESTAR
NEW PRO FORMA FOR
CONTRIBUTION TSAT PRIMESTAR RESTRUCTURING
OF TSAT PRO FORMA FOR PRO FORMA FOR TRANSACTION
TSAT BUSINESS TO NEW PRO FORMA RESTRUCTURING RESTRUCTURING PRO FORMA AND
HISTORICAL PRIMESTAR(4) ADJUSTMENTS TRANSACTION TRANSACTION(5) ADJUSTMENTS TSAT MERGER
---------- --------------- ----------- ------------- --------------- ----------- -------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $ 417,461 (417,461) -- -- 897,288 -- 897,288
Operating,
selling, general
and
administrative
expenses......... (410,390) 410,390 -- -- (847,885) -- (847,885)
Depreciation and
amortization..... (191,355) 191,355 -- -- (520,212) -- (520,212)
--------- -------- -------- -------- -------- ------- --------
Operating loss.. (184,284) 184,284 -- -- (470,809) -- (470,809)
Interest
expense.......... (2,023) 2,023 -- -- (51,134) -- (51,134)
Share of losses
of the
Partnership...... (3,275) 3,275 -- -- -- -- --
Share of losses
of New
PRIMESTAR........ -- -- (134,170)(11) (134,170) -- 134,170(12) --
Other, net....... 3,641 (3,641) -- -- 4,333 -- 4,333
--------- -------- -------- -------- -------- ------- --------
Loss before
income taxes.... (185,941) 185,941 (134,170) (134,170) (517,610) 134,170 (517,610)
Income tax
benefit.......... 45,937 (45,937) -- -- 144,915 -- 144,915
--------- -------- -------- -------- -------- ------- --------
Net loss........ (140,004) 140,004 (134,170) (134,170) (372,695) 134,170 (372,695)
Dividend
requirement on
preferred stock.. -- -- -- -- -- -- --
--------- -------- -------- -------- -------- ------- --------
Net loss
attributable to
common
stockholders..... $(140,004) 140,004 (134,170) (134,170) (372,695) 134,170 (372,695)
========= ======== ======== ======== ======== ======= ========
Pro forma net
loss per share... $ (2.02)(16) (1.89)(17)
======== ========
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
RESTRUCTURING
TRANSACTION,
TSAT MERGER
ASKYB AND ASKYB
TRANSACTION(3) TRANSACTION
---------------- -----------------
<S> <C> <C>
Revenue.......... -- 897,288
Operating,
selling, general
and
administrative
expenses......... -- (847,885)
Depreciation and
amortization..... -- (520,212)
---------------- -----------------
Operating loss.. -- (470,809)
Interest
expense.......... (25,815)(13) (76,949)
Share of losses
of the
Partnership...... -- --
Share of losses
of New
PRIMESTAR........ -- --
Other, net....... -- 4,333
---------------- -----------------
Loss before
income taxes.... (25,815) (543,425)
Income tax
benefit.......... 10,326 (14) 155,241
---------------- -----------------
Net loss........ (15,489) (388,184)
Dividend
requirement on
preferred stock.. (30,000)(15) (30,000)
---------------- -----------------
Net loss
attributable to
common
stockholders..... (45,489) (418,184)
================ =================
Pro forma net
loss per share... (2.12)(17)
=================
</TABLE>
See accompanying notes to unaudited primary condensed pro forma combined
financial statements.
F-8
<PAGE>
"NEW PRIMESTAR"
NOTES TO PRIMARY CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(1) As a part of the Restructuring Transaction, TSAT will consummate the TSAT
Asset Transfer whereby TSAT will contribute and transfer the TSAT
Business to New PRIMESTAR, in accordance with the terms and subject to
the conditions of the TSAT Asset Transfer Agreement. In connection with
the TSAT Asset Transfer, at the closing, New PRIMESTAR will assume all of
TSAT's indebtedness on such date, and TSAT will receive from New
PRIMESTAR such number of shares of New PRIMESTAR Class A Common Stock and
New PRIMESTAR Class B Common Stock, respectively, as equals the number of
shares of TSAT Series A Common Stock and TSAT Series B Common Stock,
respectively, issued and outstanding or deemed to be issued and
outstanding on the closing date, in accordance with the Restructuring
Agreement and the TSAT Asset Transfer Agreement. The TSAT Asset Transfer
will be recorded at TSAT's historical cost due to the fact that New
PRIMESTAR is a wholly-owned subsidiary of TSAT.
As a result of the TSAT Asset Transfer, TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of
the outstanding capital stock of Tempo, a current TSAT subsidiary that
holds certain authorizations granted by the FCC and other assets and
liabilities relating to a proposed DBS system being constructed by Tempo,
(ii) its ownership interest in New PRIMESTAR, and (iii) its rights and
obligations under certain agreements with New PRIMESTAR. If the Roll-up
Plan is approved, the Restructuring Transaction will be consummated prior
to the anticipated closing date of the TSAT Merger. As described in note
2, consummation of the TSAT Merger is subject to regulatory approval and
other conditions to closing set forth in the TSAT Merger Agreement.
Accordingly, the TSAT Merger may not be consummated even if the Roll-up
Plan is approved and the Restructuring Transaction is consummated.
Concurrent with the consummation of the TSAT Asset Transfer, the remaining
elements of the Restructuring Transaction will be consummated whereby the
business of distributing PRIMESTAR(R) of each of TWE, Newhouse, Comcast,
Cox and affiliates of MediaOne will be consolidated into New PRIMESTAR.
TSAT will own approximately 36% of the outstanding shares of common equity
of New PRIMESTAR at the closing of the Restructuring Transaction,
representing approximately 37% of the combined voting power of such common
equity. For additional information concerning the Restructuring
Transaction and the pro forma effects thereof, see the unaudited
supplemental condensed pro forma combined financial statements of New
PRIMESTAR, included elsewhere herein.
The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT. The
remaining elements of the Restructuring Transaction, as set forth above,
will be treated as the acquisition by New PRIMESTAR of the Partnership
Interests and the PRIMESTAR Assets, and the assumption by New PRIMESTAR of
the PRIMESTAR Liabilities, of the Restructuring Parties other than TSAT,
and such acquisition will be accounted for using the purchase method of
accounting. TSAT has been identified as the acquiror for accounting
purposes and the predecessor for reporting purposes due to the fact that
TSAT will own the largest interest in New PRIMESTAR immediately following
consummation of the Restructuring Transaction. Accordingly, the fair value
of the consideration paid to the Restructuring Parties other than TSAT
will be allocated to the identifiable assets acquired and liabilities
assumed based upon their respective estimated fair values.
(2) Upon the closing of the TSAT Merger, the then existing shareholders of
TSAT will become the direct owners of TSAT's ownership interest in New
PRIMESTAR. 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)
approval of the Roll-up Plan by the requisite vote of TSAT stockholders;
(b) occurrence of one of the following: (i) FCC approval of TSAT's
pending application to transfer control of Tempo to New PRIMESTAR, (ii)
divestiture by TSAT of the construction permit issued by the FCC to Tempo
authorizing construction of a high power DBS system (together with
F-9
<PAGE>
"NEW PRIMESTAR"
NOTES TO PRIMARY CONDENSEDPRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
related authorizations (the "FCC Permit")), or (iii) FCC permission to
consummate the TSAT Merger without divestiture of the FCC Permit
(including pursuant to an agreement to divest the FCC Permit within a
specific time period following the TSAT Effective Time); (c) the absence
of any legal restraint or prohibition preventing consummation of the TSAT
Merger; (d) receipt of approval for listing on the National Tier of The
Nasdaq Stock Market of the shares of New PRIMESTAR Class A Common Stock
and New 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, New PRIMESTAR 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 New
PRIMESTAR. Such acquisition will be accounted for at TSAT's historical
cost since (i) the percentage of New PRIMESTAR owned by TSAT prior to
consummation of the TSAT Merger will be approximately equal to the
percentage of New PRIMESTAR to be owned by TSAT shareholders following
consummation of the TSAT Merger and (ii) the TSAT Merger and the
Restructuring Transaction are both a part of the Roll-up Plan.
(3) Pursuant to the ASkyB Agreement, it is contemplated that the ASkyB
Transaction will be consummated whereby New PRIMESTAR will acquire from
MCI the MCI Satellites and the MCI FCC Licenses. In consideration, ASkyB
will receive non-voting convertible securities of New PRIMESTAR,
comprising, subject to closing adjustments, approximately $600 million
liquidation value of non-voting convertible preferred stock, $.01 par
value per share, of New PRIMESTAR (the "New PRIMESTAR Convertible
Preferred Stock") (convertible into approximately 52 million shares of
non-voting Series D Common Stock, $.01 par value per share, of New
PRIMESTAR (the "New PRIMESTAR Series D Common Stock," and together with
the New PRIMESTAR Series A Common Stock, the New PRIMESTAR Series B
Common Stock and the New PRIMESTAR Series C Common Stock, the "New
PRIMESTAR Common Stock"), subject to adjustment) and approximately $516
million principal amount of convertible subordinated notes of New
PRIMESTAR (the "New PRIMESTAR Convertible Subordinated Notes")
(convertible into approximately 45 million shares of New PRIMESTAR Series
D Common Stock). The New PRIMESTAR Convertible Subordinated Notes will be
due and payable, and the New PRIMESTAR Convertible Preferred Stock will
be mandatorily redeemable, on the tenth anniversary of the date of
issuance. The New PRIMESTAR Convertible Preferred Stock will accrue
cumulative dividends at the annual rate of 5% of the liquidation value of
such share and the New PRIMESTAR Convertible Subordinated Notes will have
an interest rate of 5%. Dividends on the New PRIMESTAR Convertible
Preferred Stock and interest on the New PRIMESTAR Convertible
Subordinated Notes will be payable in cash or, at the option of New
PRIMESTAR, in shares of the non-voting New PRIMESTAR Series 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 New PRIMESTAR Series D Common Stock issued to ASkyB or any
of its affiliates upon conversion of such New PRIMESTAR Convertible
Preferred Stock and New PRIMESTAR Convertible Subordinated Notes, or in
payment of dividend or interest obligations thereunder, will be non-
voting; however, shares of New PRIMESTAR Series D Common Stock will in
turn automatically convert into shares of New PRIMESTAR Series 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. The accompanying
primary condensed pro forma combined financial statements assume that
Tempo will not divest its two high-power satellites in connection with
the ASkyB Transaction. Due to regulatory and other uncertainties, no
assurance can be given that Tempo will not divest one or both of its high
power satellites in connection with the ASkyB Transaction.
(4) Represents the contribution and transfer of the TSAT Business to New
PRIMESTAR.
F-10
<PAGE>
"NEW PRIMESTAR"
NOTES TO PRIMARY CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--
(CONTINUED)
(5) Represents New PRIMESTAR's pro forma financial condition and results of
operations after giving effect to the Restructuring Transaction. The
detailed pro forma effects of the Restructuring Transaction on the
financial condition and results of operations of New PRIMESTAR are
presented in the unaudited supplemental condensed pro forma combined
financial statements of New PRIMESTAR, included elsewhere herein.
(6) Represents the adjustment of TSAT's historical basis in the TSAT Business
to reflect TSAT's proportionate share of New PRIMESTAR's pro forma equity
with a corresponding increase to TSAT's additional paid-in capital.
(7) Represents the elimination of TSAT's investment in New PRIMESTAR and
TSAT's historical common stock and additional paid-in capital.
(8) Represents the elimination of the TSAT liability and asset that arose
from advances made by the Partnership to TSAT to fund the construction of
two high-power communication satellites.
(9) Represents the cancellation of the TSAT Option Shares (as defined in note
4 to the supplemental condensed pro forma combined financial statements,
included elsewhere herein). The adjustment assumes that none of the
Issuable TSAT Shares (as defined in note 4 to the supplemental condensed
pro forma combined financial statements, included elsewhere herein) will
have been issued as of the closing date of the TSAT Merger. To the extent
any of the Issuable TSAT Shares are issued as of such closing date, such
issued shares will be exchanged for shares of New PRIMESTAR Common Stock.
(10) Represents the issuance of the New PRIMESTAR Convertible Preferred Stock
and the New PRIMESTAR Convertible Subordinated Notes in consideration for
the MCI Satellites and the MCI FCC Licenses. Such securities have been
recorded at their estimated fair values based on management's discussions
with investment bankers as of the date of the preparation of these
condensed pro forma combined financial statements. Accordingly, the
actual fair values of such securities on the date of issuance may differ
from the values reflected herein. Once the MCI Satellites and MCI FCC
Licenses are placed into service, amortization will be calculated on a
straight-line basis over an estimated useful life of 12 years and 40
years, respectively.
(11) Represents TSAT's pro forma share of New PRIMESTAR's losses.
(12) Represents the elimination of TSAT's share of New PRIMESTAR's losses.
(13) Represents assumed interest expense on the New PRIMESTAR Convertible
Subordinated Notes. The pro forma adjustment is calculated using the
stated interest rate of 5% per annum.
(14) Represents the assumed income tax effect of the pro forma adjustments.
(15) Represents dividends on the New PRIMESTAR Convertible Preferred Stock.
The pro forma adjustment is calculated using the stated dividend rate of
5% per annum.
(16) Represents pro forma loss per share for TSAT assuming 66,642,359 and
66,408,025 weighted average shares of TSAT Common Stock were issued and
outstanding during the nine months ended September 30, 1997 and the year
ended December 31, 1996, respectively.
(17) Represents pro forma loss per share assuming 197.5 million weighted
average shares of New PRIMESTAR Common Stock were outstanding during the
nine months ended September 30, 1997 and the year ended December 31,
1996. Such weighted average share amount assumes that the estimated
number of shares of New PRIMESTAR Common Stock that would have been
issued if the Restructuring Transaction and the TSAT Merger had occurred
on September 30, 1997 had been outstanding since January 1, 1996.
F-11
<PAGE>
"NEW PRIMESTAR"
SUPPLEMENTAL CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
Pursuant to (i) a Merger and Contribution Agreement dated as of February 6,
1998 (together with the exhibits and schedules thereto, the "Restructuring
Agreement"), among TCI Satellite Entertainment, Inc. ("TSAT"), PRIMESTAR, Inc.
("New PRIMESTAR"), 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) the Asset Transfer
Agreement dated as of February 6, 1998 (together with the exhibits and
schedules thereto, the "TSAT Asset Transfer Agreement"), between TSAT and New
PRIMESTAR, it is contemplated that a business combination (the "Restructuring
Transaction") will be consummated whereby (a) TSAT will contribute and
transfer to New PRIMESTAR pursuant to the TSAT Asset Transfer Agreement, (the
"TSAT Asset Transfer") all of TSAT's assets and liabilities, except (I) the
capital stock of Tempo Satellite, Inc., a wholly-owned subsidiary of TSAT
("Tempo") that holds certain authorizations granted by the Federal
Communications Commission and other assets and liabilities relating to a
proposed direct broadcast satellite system being constructed by Tempo, (II)
the consideration to be received by TSAT in the Restructuring Transaction and
(III) the rights and obligations under certain agreements with New PRIMESTAR
(such contributed and transferred assets and liabilities, the "TSAT
Business"), and (b) the business of PRIMESTAR Partners L.P. (the
"Partnership") and the business of distributing the PRIMESTAR(R) programming
service ("PRIMESTAR(R)") of each of TWE, Newhouse, Comcast, Cox and affiliates
of MediaOne will be consolidated into New PRIMESTAR. New PRIMESTAR is a newly
formed wholly-owned subsidiary of TSAT. See note 1.
The following unaudited supplemental condensed pro forma combined financial
statements of New PRIMESTAR give effect to the Restructuring Transaction but
do not give effect to certain other transactions that are reflected in the
unaudited primary condensed pro forma combined financial statements of New
PRIMESTAR, included elsewhere herein. Accordingly, the following supplemental
pro forma financial information of New PRIMESTAR is a part of, and should be
read in conjunction with, the primary pro forma financial information of New
PRIMESTAR. The following unaudited supplemental condensed pro forma combined
balance sheet of New PRIMESTAR, dated as of September 30, 1997, assumes that
the Restructuring Transaction had occurred as of such date. The following
unaudited supplemental condensed pro forma combined statements of operations
of New PRIMESTAR for the nine months ended September 30, 1997 and the year
ended December 31, 1996 assume that the Restructuring Transaction had occurred
as of January 1, 1996.
The unaudited supplemental pro forma results do not purport to be indicative
of the results of operations that would have been obtained if the
Restructuring Transaction had occurred as of January 1, 1996. The supplemental
condensed pro forma combined financial statements of New PRIMESTAR should be
read in conjunction with the historical financial statements and notes thereto
of TSAT, Time Warner Satellite Services Group ("TWSSI"), Cox Communications,
Inc.--Direct Broadcast Satellite Business ("Cox Satellite"), Comcast Satellite
Communications, Inc. and Comcast DBS, Inc. (collectively, "Comcast
Satellite"), MediaOne, Inc.--Direct Broadcast Satellite Business ("MediaOne
Satellite") and the Partnership, included elsewhere herein. Such financial
statements present historical financial information with respect to TSAT and
the PRIMESTAR Assets, the PRIMESTAR Liabilities and the Partnership Interests
(each as defined in note 1) of each of TWE, Newhouse, Comcast, Cox and
MediaOne, which assets and liabilities, together with the Partnership Interest
indirectly held by GE Americom, will be consolidated into New PRIMESTAR
pursuant to the Restructuring Transaction.
F-12
<PAGE>
"NEW PRIMESTAR"
SUPPLEMENTAL CONDENSED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------
TSAT PRO FORMA TSAT COX COMCAST MEDIAONE
HISTORICAL ADJUSTMENTS BUSINESS(1) TWSSI SATELLITE SATELLITE SATELLITE GEAS
---------- ----------- ----------- ------- --------- --------- --------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash,
receivables and
prepaids........ $ 41,257 -- 41,257 17,715 9,078 6,824 38,574 --
Investment in,
and related
advances to, the
Partnership..... 19,952 -- 19,952 28,494 10,214 9,122 31,984 13,273
Property and
equipment, net
of accumulated
depreciation:
Satellites..... 463,133 (463,133)(2) -- -- -- -- -- --
Satellite
reception and
other.......... 636,225 -- 636,225 447,898 114,823 107,929 154,398 --
---------- -------- ------- ------- ------- ------- ------- -------
1,099,358 (463,133) 636,225 447,898 114,823 107,929 154,398 --
Intangible
assets.......... -- -- -- -- -- -- 31,932 --
Other assets.... 28,479 -- 28,479 93 8,572 25,145 349 --
---------- -------- ------- ------- ------- ------- ------- -------
$1,189,046 (463,133) 725,913 494,200 142,687 149,020 257,237 13,273
========== ======== ======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables,
accruals and
other operating
liabilities..... $ 152,479 -- 152,479 74,313 17,554 41,891 46,202 --
Due to the
Partnership..... 463,133 (463,133)(2) -- -- -- -- -- --
Debt:
Due to parent.. -- -- -- 513,104 199,348 174,436 209,882 --
Other.......... 365,760 -- 365,760 -- -- -- -- --
Deferred income
taxes........... -- -- -- -- (1,956) -- 13,417 --
---------- -------- ------- ------- ------- ------- ------- -------
Total
liabilities.... 981,372 (463,133) 518,239 587,417 214,946 216,327 269,501 --
---------- -------- ------- ------- ------- ------- ------- -------
Equity:
TSAT........... 207,674 (207,674)(3) -- -- -- -- -- --
New PRIMESTAR:
Class A Common
Stock.......... -- -- -- -- -- -- -- --
Class B Common
Stock.......... -- -- -- -- -- -- -- --
Class C Common
Stock.......... -- -- -- -- -- -- -- --
Additional
paid-in
capital........ -- 207,674 (3) 207,674 -- -- 31,801 -- 56,183
Accumulated
deficit........ -- -- -- (93,217) (72,259) (99,108) (12,264) (42,910)
Partners'
capital........ -- -- -- -- -- -- -- --
---------- -------- ------- ------- ------- ------- ------- -------
207,674 -- 207,674 (93,217) (72,259) (67,307) (12,264) 13,273
---------- -------- ------- ------- ------- ------- ------- -------
$1,189,046 (463,133) 725,913 494,200 142,687 149,020 257,237 13,273
========== ======== ======= ======= ======= ======= ======= =======
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
PRO FORMA RESTRUCTURING
PARTNERSHIP COMBINED ADJUSTMENTS TRANSACTION
----------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash,
receivables and
prepaids........ 160,013 273,461 (25,560)(10) 133,062
(114,839)(11)
Investment in,
and related
advances to, the
Partnership..... -- 113,039 (113,039)(7) --
Property and
equipment, net
of accumulated
depreciation:
Satellites..... 543,070 543,070 -- 543,070
Satellite
reception and
other.......... 17,073 1,478,346 (258,285)(6) 1,220,061
----------- ---------- ---------------- -------------
560,143 2,021,416 (258,285) 1,763,131
Intangible
assets.......... -- 31,932 945,507 (6) 1,196,338
218,899 (8)
Other assets.... 96 62,734 (25,145)(6) 29,760
(7,829)(10)
----------- ---------- ---------------- -------------
720,252 2,502,582 619,709 3,122,291
=========== ========== ================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables,
accruals and
other operating
liabilities..... 81,540 413,979 (11,942)(10) 287,198
(114,839)(11)
Due to the
Partnership..... -- -- -- --
Debt:
Due to parent.. -- 1,096,770 (1,096,770)(10) --
Other.......... 555,000 920,760 483,736 (5) 1,404,496
Deferred income
taxes........... -- 11,461 218,899 (8) 230,360
----------- ---------- ---------------- -------------
Total
liabilities.... 636,540 2,442,970 (520,916) 1,922,054
----------- ---------- ---------------- -------------
Equity:
TSAT........... -- -- -- --
New PRIMESTAR:
Class A Common
Stock.......... -- -- 663 (4) 1,833
1,170 (5)
Class B Common
Stock.......... -- -- 85 (4) 85
Class C Common
Stock.......... -- -- 138 (5) 138
Additional
paid-in
capital........ -- 295,658 206,926 (4) 1,198,181
991,255 (5)
(295,658)(9)
Accumulated
deficit........ -- (319,758) 319,758 (9) --
Partners'
capital........ 83,712 83,712 (83,712)(9) --
----------- ---------- ---------------- -------------
83,712 59,612 1,140,625 1,200,237
----------- ---------- ---------------- -------------
720,252 2,502,582 619,709 3,122,291
=========== ========== ================ =============
</TABLE>
See accompanying notes to unaudited supplemental condensed pro forma combined
financial statements.
F-13
<PAGE>
"NEW PRIMESTAR"
SUPPLEMENTAL CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------
TSAT PRO FORMA TSAT COX COMCAST MEDIAONE
HISTORICAL ADJUSTMENTS BUSINESS(1) TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED
---------- ----------- ----------- -------- --------- --------- --------- ------ ----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $ 406,072 -- 406,072 276,158 78,773 81,057 77,955 -- 450,973 1,370,988
Operating,
selling, general
and
administrative
expenses......... (351,405) -- (351,405) (226,894) (70,732) (71,826) (65,591) -- (480,302) (1,266,750)
Depreciation and
amortization..... (177,415) -- (177,415) (48,724) (31,041) (21,248) (18,875) -- (2,856) (300,159)
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Operating income
(loss).......... (122,748) -- (122,748) 540 (23,000) (12,017) (6,511) -- (32,185) (195,921)
Interest
expense.......... (33,965) -- (33,965) (20,637) (8,034) (11,481) (4,591) -- (13,130) (91,838)
Share of losses
of the
Partnership...... (11,610) -- (11,610) (11,424) (4,259) (4,352) (4,886) (7,264) -- (43,795)
Other, net....... 1,779 -- 1,779 (1,097) (388) 232 (123) -- 1,453 1,856
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Loss before
income taxes.... (166,544) -- (166,544) (32,618) (35,681) (27,618) (16,111) (7,264) (43,862) (329,698)
Income tax
benefit.......... -- -- -- -- 12,621 -- 6,047 -- -- 18,668
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Net loss........ $(166,544) -- (166,544) (32,618) (23,060) (27,618) (10,064) (7,264) (43,862) (311,030)
========= === ======== ======== ======= ======= ======= ====== ======== ==========
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
PRO FORMA RESTRUCTURING
ADJUSTMENTS TRANSACTION
--------------- -------------
<S> <C> <C>
Revenue.......... (450,973)(12) 920,015
Operating,
selling, general
and
administrative
expenses......... 450,973 (12) (809,289)
6,488 (13)
Depreciation and
amortization..... (49,157)(13) (442,179)
(92,863)(14)
--------------- -------------
Operating income
(loss).......... (135,532) (331,453)
Interest
expense.......... (36,280)(15) (83,375)
44,743 (16)
Share of losses
of the
Partnership...... 43,795 (17) --
Other, net....... -- 1,856
--------------- -------------
Loss before
income taxes.... (83,274) (412,972)
Income tax
benefit.......... 33,309 (18) 51,977
--------------- -------------
Net loss........ (49,965) (360,995)
=============== =============
</TABLE>
See accompanying notes to unaudited supplemental condensed pro forma combined
financial statements.
F-14
<PAGE>
"NEW PRIMESTAR"
SUPPLEMENTAL CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------------
TSAT PRO FORMA TSAT COX COMCAST MEDIAONE
HISTORICAL ADJUSTMENTS BUSINESS(1) TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED
---------- ----------- ----------- -------- --------- --------- --------- ------ ----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $417,461 -- 417,461 277,083 68,291 65,574 68,879 -- 412,999 1,310,287
Operating
selling, general
and
administrative
expenses......... (410,390) -- (410,390) (241,566) (66,146) (62,021) (60,107) -- (426,561) (1,266,791)
Depreciation and
amortization..... (191,355) -- (191,355) (45,449) (21,704) (17,956) (14,740) -- (3,261) (294,465)
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Operating loss.. (184,284) -- (184,284) (9,932) (19,559) (14,403) (5,968) -- (16,823) (250,969)
Interest
expense.......... (2,023) -- (2,023) (20,921) (6,898) (8,442) (11,914) -- (737) (50,935)
Share of losses
of the
Partnership...... (3,275) -- (3,275) (5,314) (1,397) (1,647) (1,830) (3,212) -- (16,675)
Other, net....... 3,641 -- 3,641 (1,054) (151) 126 (87) -- 1,858 4,333
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Loss before
income taxes.... (185,941) -- (185,941) (37,221) (28,005) (24,366) (19,799) (3,212) (15,702) (314,246)
Income tax
benefit.......... 45,937 -- 45,937 -- 9,791 -- 7,842 -- -- 63,570
--------- --- -------- -------- ------- ------- ------- ------ -------- ----------
Net loss........ $(140,004) -- (140,004) (37,221) (18,214) (24,366) (11,957) (3,212) (15,702) (250,676)
========= === ======== ======== ======= ======= ======= ====== ======== ==========
<CAPTION>
NEW
PRIMESTAR
PRO FORMA FOR
PRO FORMA RESTRUCTURING
ADJUSTMENTS TRANSACTION
--------------- -------------
<S> <C> <C>
Revenue.......... (412,999)(12) 897,288
Operating
selling, general
and
administrative
expenses......... 412,999 (12) (847,885)
5,907 (13)
Depreciation and
amortization..... (101,930)(13) (520,212)
(123,817)(14)
--------------- -------------
Operating loss.. (219,840) (470,809)
Interest
expense.......... (48,374)(15) (51,134)
48,175 (16)
Share of losses
of the
Partnership...... 16,675 (17) --
Other, net....... -- 4,333
--------------- -------------
Loss before
income taxes.... (203,364) (517,610)
Income tax
benefit.......... 81,345 (18) 144,915
--------------- -------------
Net loss........ (122,019) (372,695)
=============== =============
</TABLE>
See accompanying notes to unaudited supplemental condensed pro forma combined
financial statements.
F-15
<PAGE>
"NEW PRIMESTAR"
NOTES TO SUPPLEMENTAL CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(1) The Restructuring Agreement provides for, among other things, the
following transactions to occur on the closing date of the Restructuring
Transaction:
(x) consummation of the TSAT Asset Transfer whereby TSAT will contribute
and transfer the TSAT Business to New PRIMESTAR;
(y) the merger (each a "Merger" and, collectively, the "Mergers") of
each of (I) Comcast DBS, Inc., a subsidiary of Comcast whose sole asset is
Comcast's 10.43% interest in the Partnership, (II) Comcast Satellite
Communications, Inc., a subsidiary of Comcast that holds Comcast's
PRIMESTAR(R) distribution business, (III) Cox Satellite, Inc., a
subsidiary of Cox that holds Cox's 10.43% interest in the Partnership and
Cox's PRIMESTAR(R) distribution business, and (IV) GE Americom Services,
Inc. ("GEAS"), a subsidiary of GE Americom that holds GE Americom's 16.56%
interest in the Partnership, with and into New PRIMESTAR, in each case in
accordance with the terms of a merger agreement with New PRIMESTAR; and
(z) the contribution and transfer to New PRIMESTAR by each of TWE,
Newhouse, and MediaOne (or, in the case of MediaOne, certain subsidiaries
of MediaOne) of its respective partnership interest in the Partnership
(collectively, and together with the partnership interests of the other
partners to the Partnership, the "Partnership Interests"), and its
PRIMESTAR(R) subscribers and certain other related assets (collectively,
and together with all such assets to be acquired by New PRIMESTAR in the
Restructuring Transaction, the "PRIMESTAR Assets") and related liabilities
(collectively the "PRIMESTAR Liabilities"), in each case in accordance
with the terms of an asset contribution agreement with New PRIMESTAR. The
TSAT Asset Transfer and the contribution and transfer of assets by each of
TWE, Newhouse and MediaOne are each sometimes referred to herein as an
"Asset Transfer."
In connection with the Mergers and the Asset Transfers, each of TSAT,
Comcast, Cox, MediaOne, Newhouse, TWE and GE Americom will, directly or
indirectly, receive from New PRIMESTAR (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 New PRIMESTAR,
(ii) shares of Class A Common Stock, $.01 par value per share, of New
PRIMESTAR ("New PRIMESTAR Class A Common Stock"), (iii) in the case of
TSAT only, shares of Class B Common Stock, $.01 par value per share, of
New PRIMESTAR ("New PRIMESTAR Class B Common Stock"), and (iv) except in
the case of TSAT and GE Americom, shares of Class C Common Stock, $.01 par
value per share, of New PRIMESTAR ("New PRIMESTAR Class C Common Stock"),
in each case in an amount determined pursuant to the Restructuring
Agreement.
The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
the fact New PRIMESTAR is a wholly-owned subsidiary of TSAT. The remaining
elements of the Restructuring Transaction, as set forth above, will be
treated as the acquisition by New PRIMESTAR of the Partnership Interests
and PRIMESTAR Assets, and the assumption by New PRIMESTAR of the PRIMESTAR
Liabilities, of the parties to the Restructuring Agreement other than TSAT
(the "Non-TSAT Parties"), and such acquisition will be accounted for using
the purchase method of accounting. TSAT has been identified as the
acquiror for accounting purposes and the predecessor for reporting
purposes due to the fact that TSAT will own the largest interest in New
PRIMESTAR immediately following consummation of the Restructuring
Transaction. The fair value of the consideration to be issued to the Non-
TSAT Parties will be allocated to the assets and liabilities acquired
based upon the estimated fair values of such assets and liabilities. The
estimated fair value of the consideration to be issued to the Non-TSAT
Parties and the estimated fair values of the assets and liabilities
acquired, as reflected in the accompanying supplemental condensed pro
forma combined financial statements, are based upon information available
at the date of the preparation of these
F-16
<PAGE>
"NEW PRIMESTAR"
NOTES TO SUPPLEMENTAL CONDENSEDPRO FORMA COMBINED FINANCIAL STATEMENTS--
(CONTINUED)
supplemental condensed pro forma combined financial statements, and will
be adjusted upon the final determination of such fair values. With the
exception of possible changes to the purchase price that are described in
note 3, management is not otherwise aware of any circumstances which would
cause the final purchase price allocation to be significantly different
from that which is reflected in the accompanying supplemental condensed
pro forma combined balance sheet. However, actual valuations and
allocations may differ from those reflected herein. The final purchase
price allocation will be based on an appraisal that is expected to be
completed within the 90-day period following the closing of the
Restructuring Transaction. The Restructuring Agreement provides for the
simultaneous consummation of all elements of the Restructuring Transaction
and does not provide for the possibility that one or more of the parties
to the Restructuring Agreement will not participate in the Restructuring
Transaction.
(2) Represents Tempo's historical assets and liabilities. Such assets and
liabilities will not be transferred to New PRIMESTAR in the Restructuring
Transaction.
(3) Represents the contribution of the TSAT Business to New PRIMESTAR.
(4) Represents the assumed issuance of 66,345,153 shares of New PRIMESTAR
Class A Common Stock and 8,465,324 shares of New PRIMESTAR Class B Common
Stock that will be exchanged for the TSAT Business. The value of such
common stock has been recorded at TSAT's historical basis in the TSAT
Business. The number of shares of New PRIMESTAR Class A Common Stock
assumed to be issued includes 8,108,039 shares (the "TSAT Option Shares")
to be issued to TSAT in respect of shares of TSAT Common Stock ("Issuable
TSAT Shares") issuable at September 30, 1997 pursuant to certain stock
options, restricted stock awards and other arrangements. Upon
consummation of the TSAT Merger, all shares of New PRIMESTAR Common Stock
issued to TSAT (including the TSAT Option Shares) will be cancelled, and
all outstanding shares of TSAT Common Stock will be exchanged for shares
of New PRIMESTAR Common Stock. Accordingly, the number of shares of New
PRIMESTAR Common Stock issued to TSAT stockholders in connection with the
TSAT Merger will be less than the number of shares of New PRIMESTAR
Common Stock owned by TSAT prior to the TSAT Merger to the extent
Issuable TSAT Shares are not issued and outstanding at the time of the
TSAT Merger.
(5) Represents the assumed issuance of 116,985,808 shares of New PRIMESTAR
Class A Common Stock, 13,786,687 shares of New PRIMESTAR Class C Common
Stock, and the debt that will be used to fund the cash portion of the
aggregate consideration that will be exchanged for the Partnership
Interests and PRIMESTAR Assets of the Non-TSAT Parties. Additional
information concerning the aggregate purchase price is set forth below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
AMOUNTS IN THOUSANDS
<S> <C>
New PRIMESTAR Class A Common Stock (116,985,808
shares valued at estimated fair value of $7.59 per
share).............................................. $ 887,922(a)(b)
New PRIMESTAR Class C Common Stock (13,786,687 shares
valued at estimated fair value of $7.59 per share).. 104,641(a)(b)
Cash consideration (or assumption of debt in lieu of
cash consideration)................................. 463,736(c)
Bank debt of the Partnership to be assumed by New
PRIMESTAR........................................... 555,000
Other liabilities of Non-TSAT Parties to be assumed
by New PRIMESTAR.................................... 134,719
TSAT's investment in the Partnership at carryover
basis............................................... 19,952
Estimated direct costs of acquisition (to be funded
by debt of New PRIMESTAR)........................... 20,000
----------
Aggregate purchase price to be allocated to net
assets acquired................................... $2,185,970
==========
</TABLE>
F-17
<PAGE>
"NEW PRIMESTAR"
NOTES TO SUPPLEMENTAL CONDENSEDPRO FORMA COMBINED FINANCIAL STATEMENTS--
(CONTINUED)
--------
(a) For purposes of the accompanying supplemental condensed pro forma
combined financial statements, the new PRIMESTAR Common Stock to be
issued to the Non-TSAT Parties has been preliminarily valued at $7.59
per share. The actual valuation will be determined after considering
the per share market value of TSAT Common Stock and other relevant
factors during a reasonable period before and after the closing date
of the Restructuring Transaction, which is the date that the amount of
cash and number of shares to be received by the Non-TSAT Parties will
become fixed. Assuming no change in the number of shares of New
PRIMESTAR Common Stock to be issued to the Non-TSAT Parties from
September 30, 1997 to the closing date, each $1 increase (decrease)
from the assumed per share valuation will result in an increase
(decrease) of approximately $130.8 million to the value attributed to
the New PRIMESTAR Common Stock to be received by the Non-TSAT Parties.
(b) The aggregate number of shares of New PRIMESTAR Common Stock to be
received by the Non-TSAT Parties, as reflected in the foregoing table,
is based on (i) approximately 1,055,000 subscribers served by the Non-
TSAT Parties at September 30, 1997, (ii) a calculation of TSAT Debt
Per Sub (as defined in the Restructuring Agreement) of $426 as of
September 30, 1997 and (iii) a per share value of $7.59 for TSAT
Common Stock, computed as of September 30, 1997 in accordance with the
methodology set forth in the Restructuring Agreement (the "Assigned
TSAT Stock Value"). The actual number of shares of New PRIMESTAR
Common Stock to be received by the Non-TSAT Parties will be based on
(i) the actual number of subscribers served by the Non-TSAT Parties at
the closing date, (ii) the actual TSAT Debt Per Sub at the closing
date and (iii) the actual Assigned TSAT Stock Value at the closing
date. Assuming no change in the TSAT Debt Per Sub and the Assigned
TSAT Stock Value from September 30, 1997 to the closing date, each
subscriber added by the Non-TSAT Parties will result in the receipt by
the Non-TSAT Parties of approximately 89 additional shares of New
PRIMESTAR Common Stock.
(c) The cash consideration to be paid to, or debt to be assumed from, the
Non-TSAT Parties, as reflected in the foregoing table, is based on (i)
approximately 1,055,000 subscribers served by the Non-TSAT Parties on
September 30, 1997, and (ii) a calculation of TSAT Debt Per Sub (as
defined in the Restructuring Agreement) of $426 as of September 30,
1997. The actual cash consideration to be paid to, or debt to be
assumed from, the Non-TSAT Parties will be based on the number of
subscribers served by the Non-TSAT Parties at the closing date and the
TSAT Debt Per Sub calculated at the closing date. Assuming no change
in the number of subscribers served by the Non-TSAT Parties from
September 30, 1997 to the closing date, each $1 increase (decrease) in
the TSAT Debt Per Sub calculation will result in an approximate
$1,055,000 increase (decrease) to the aggregate cash consideration to
be paid to, or debt to be assumed from, the Non-TSAT Parties. Assuming
no change in the TSAT Debt Per Sub calculation from September 30, 1997
to the closing date, each additional subscriber added by the Non-TSAT
Parties from September 30, 1997 to the closing date will result in
additional cash consideration to be paid to, or debt to be assumed
from, the Non-TSAT Parties of $426.
(6) Represents increases (decreases) to the Non-TSAT Parties' satellite
reception and other property and equipment, intangible assets and other
assets of $(258,285,000), $945,507,000 and $(25,145,000) to reflect the
preliminary allocation of the Restructuring Transaction purchase price.
The adjustment to the property and equipment is based on a $583,836,000
estimated depreciated replacement cost for the satellite reception and
other property and equipment of the Non-TSAT Parties. Such amount is
computed using the depreciation policies and useful lives of TSAT. The
adjusted intangible assets balance represents the excess of the
Restructuring Transaction purchase price over the estimated fair values of
the identifiable net assets of the Non-TSAT Parties. New PRIMESTAR's
intangible assets are
F-18
<PAGE>
"NEW PRIMESTAR"
NOTES TO SUPPLEMENTAL CONDENSEDPRO FORMA COMBINED FINANCIAL STATEMENTS--
(CONTINUED)
assumed to be primarily associated with its customer relationships,
tradenames and goodwill, and, for pro forma purposes, have been amortized
over useful lives of 4 years, 20 years and 20 years, respectively.
The decrease to other assets represents the reclassification of the
subscriber installation costs of Comcast Satellite. Such subscriber
installation costs were reclassified to conform to New PRIMESTAR's
classification of such costs as a component of property and equipment.
(7) Represents the elimination of the investment in, and related advances to,
the Partnership.
(8) Represents the assumed increase in the deferred income tax liability as a
result of the preliminary purchase price allocation. The actual deferred
tax liability that will result from the final purchase price allocation
may differ from such assumed deferred tax liability.
(9) Represents the elimination of the historical equity of TSAT and the Non-
TSAT Parties.
(10) Represents the elimination of all amounts due to or from the respective
parents of the Non-TSAT Parties.
(11) Represents the elimination of all amounts payable by TSAT and the Non-
TSAT Parties to the Partnership with respect to programming, satellite,
national marketing and distribution fees.
(12) Represents the elimination of programming, satellite, national marketing
and distribution fees received by the Partnership from TSAT and the Non-
TSAT Parties.
(13) Adjusts depreciation expense to reflect the preliminary purchase price
allocation and to conform the depreciation policies and depreciable lives
of the Non-TSAT Parties to those of TSAT. TSAT computes depreciation on a
straight-line basis using estimated useful lives of 4 to 6 years for
satellite reception equipment; 3 to 10 years for support equipment and 4
years for subscriber installation costs. Also reclassifies amounts
included in Comcast Satellite's operating, selling, general and
administrative expenses that will be included in depreciation expense
under New PRIMESTAR's accounting policies.
(14) Represents amortization of the intangible assets that result from the
preliminary purchase price allocation. Such amortization is calculated
using useful lives for intangible assets related to customer
relationships, tradenames and goodwill of 4 years, 20 years and 20 years,
respectively.
(15) Represents assumed interest expense on the debt to be incurred or assumed
by New PRIMESTAR in connection with the Restructuring Transaction. The
pro forma adjustment has been calculated using an assumed interest rate
of 10% per annum. A 1/8% change in the assumed interest rate would have
resulted in a $454,000 and $605,000 change to New PRIMESTAR's pro forma
interest expense for the nine months ended September 30, 1997 and the
year ended December 31, 1996, respectively.
(16) Represents the elimination of interest expense incurred on amounts owed
to the respective parents of the Non-TSAT Parties.
(17) Represents the elimination of each partner's share of the losses of the
Partnership.
(18) Represents the assumed income tax effect of the pro forma adjustments.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PRIMESTAR, Inc.
We have audited the accompanying consolidated balance sheet of PRIMESTAR,
Inc. and subsidiaries as of September 30, 1997. This financial statement is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a consolidated balance sheet includes
examining, on a test basis, evidence supporting the amounts and disclosures in
that balance sheet. An audit of a consolidated balance sheet also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated balance sheet
presentation. We believe that our audit of the consolidated balance sheet
provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of PRIMESTAR, Inc.
and subsidiaries as of September 30, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 6, 1998
F-20
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash........................................................................ $10
===
STOCKHOLDER'S EQUITY
Common stock, $1 par value.
Authorized 1,000 shares; issued and outstanding 10 shares.................. $10
===
Commitments and Contingencies (note 2)
</TABLE>
See accompanying notes to consolidated balance sheet.
F-21
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(1)ORGANIZATION
PRIMESTAR, Inc. ("New PRIMESTAR") and certain of its subsidiaries were
incorporated on August 27, 1997, and subsequently, ten shares of New
PRIMESTAR common stock were issued to TCI Satellite Entertainment, Inc.
("TSAT") for a capital contribution of $10. Since its formation, New
PRIMESTAR has not conducted any significant activities other than those
incident to its formation, the Restructuring Transaction, the TSAT Merger
and the ASkyB Transaction (each as defined below).
Pursuant to (i) a Merger and Contribution Agreement dated as of February 6,
1998 (together with the exhibits and schedules thereto, the "Restructuring
Agreement"), among TSAT, New PRIMESTAR, Time Warner Entertainment Company,
L.P. ("TWE"), Advance/Newhouse Partnership ("Newhouse"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox"), MediaOne of
Delaware, Inc. ("MediaOne"), US West Media Group, Inc. ("US West") and GE
American Communications, Inc. ("GE Americom"), and (ii) the Asset Transfer
Agreement dated as of February 6, 1998, (together with the exhibits and
schedules thereto, the "TSAT Asset Transfer Agreement") between, TSAT and
New PRIMESTAR, it is contemplated that a business combination (the
"Restructuring Transaction") will be consummated whereby (a) TSAT will
contribute and transfer to New PRIMESTAR pursuant to the TSAT Asset
Transfer Agreement (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
to be received by TSAT in the Restructuring Transaction and (III) the
rights and obligations under agreements with New PRIMESTAR related to the
Restructuring Transaction (such contributed and transferred assets and
liabilities, the "TSAT Business") and (b) the business of PRIMESTAR
Partners L.P. (the "Partnership") and the business of distributing the
PRIMESTAR(R) programming service ("PRIMESTAR(R)") of each of TWE, Newhouse,
Comcast, Cox and affiliates of MediaOne will be consolidated into New
PRIMESTAR.
The Restructuring Agreement provides for, among other things, the following
transactions to occur on the closing date of the Restructuring Transaction:
(x) consummation of the TSAT Asset Transfer whereby TSAT will contribute
and transfer the TSAT Business to New PRIMESTAR;
(y) the merger (each a "Merger" and, collectively, the "Mergers") of such
of (I) Comcast DBS, Inc., a subsidiary of Comcast whose sole asset is
Comcast's 10.43% interest in the Partnership, (II) Comcast Satellite
Communications, Inc., a subsidiary of Comcast that holds Comcast's
PRIMESTAR(R) distribution business, (III) Cox Satellite, Inc., a subsidiary
of Cox that holds Cox's 10.43% interest in the Partnership and Cox's
PRIMESTAR(R) distribution business, and (IV) GE American Services, Inc.
("GEAS"), a subsidiary of GE Americom that holds GE Americom's 16.56%
interest in the Partnership, with and into New PRIMESTAR, in each case in
accordance with the terms of a merger agreement with New PRIMESTAR; and
(z) the contribution and transfer to New PRIMESTAR by each of TWE,
Newhouse, and MediaOne (or, in the case of MediaOne, certain subsidiaries
of MediaOne) of its respective partnership interest in the Partnership
(collectively, and together with the partnership interests of the other
partners to the Partnership, the "Partnership Interests"), and its
PRIMESTAR(R) subscribers and certain other related assets (collectively,
and together with all such assets to be acquired by New PRIMESTAR in the
Restructuring Transaction, the "PRIMESTAR Assets") and related liabilities
(collectively the "PRIMESTAR Liabilities"), in each case in accordance with
the terms of an asset contribution agreement with New
F-22
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
PRIMESTAR. The TSAT Asset Transfer and the contribution and transfer of
assets by each of TWE, Newhouse and MediaOne are each sometimes referred to
herein as an "Asset Transfer."
In connection with the Mergers and the Asset Transfers, each of TSAT,
Comcast, Cox, MediaOne, Newhouse, TWE and GE Americom will, directly or
indirectly, receive from New PRIMESTAR (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 New PRIMESTAR, (ii) shares of
Class A Common Stock, $.01 par value per share, of New PRIMESTAR, ("New
PRIMESTAR Class A Common Stock"), (iii) in the case of TSAT only, shares of
Class B Common Stock, $.01 par value per share, of New PRIMESTAR ("New
PRIMESTAR Class B Common Stock"), and (iv) except in the case of TSAT and
GE Americom, shares of Class C Common Stock, $.01 par value per share, of
New PRIMESTAR ("New PRIMESTAR Class C Common Stock"), in each case in an
amount determined pursuant to the Restructuring Agreement.
As a result of the TSAT Asset Transfer, TSAT will become a holding company,
with no substantial assets or liabilities other than (i) 100% of the
outstanding capital stock of Tempo, a current TSAT subsidiary that holds
certain authorizations granted by the FCC and other assets and liabilities
relating to a proposed DBS system being constructed by Tempo, (ii) its 36%
ownership interest in New PRIMESTAR, and (iii) its rights and obligations
under certain agreements with New PRIMESTAR.
Immediately following the closing of the Restructuring Transaction, New
PRIMESTAR will transfer and assign all of its assets to a wholly-owned
subsidiary of New PRIMESTAR ("PRIMESTAR Satellite"), as a contribution to
capital, and PRIMESTAR Satellite will assume certain indebtedness of New
PRIMESTAR.
The respective obligations of the parties to the Restructuring Agreement to
consummate the Restructuring Transaction are subject to the satisfaction or
waiver of a number of conditions, including, among others, (a) approval of
a five year strategic plan and budget of New PRIMESTAR for the fiscal years
1998 and 1999, in each case by a Super-Majority Vote (as defined in the
Partnership's Limited Partnership Agreement, as amended) of the
Partnership's Partners Committee; (b) approval of the Restructuring
Agreement and the TSAT Merger Agreement (as described below) by the
requisite vote of TSAT stockholders; (c) receipt of all orders and
approvals of the FCC required in connection with the consummation of the
transactions contemplated by the Restructuring Agreement, if any; (d) the
absence of any legal restraint or prohibition preventing consummation of
the Restructuring Transaction; and (e) receipt of approval for listing on
the National Market tier of the Nasdaq Stock Market of the shares of New
PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock
issuable to the stockholders of TSAT pursuant to the TSAT Merger Agreement,
subject to official notice of issuance. In July 1997, TSAT and the other
parties to the Restructuring Transaction filed Notification and Report
Forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the waiting periods under the HSR Act with
respect to the transactions described therein have since expired.
The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT. The
remaining elements of the Restructuring Transaction, as set forth above,
will be treated as the acquisition by New PRIMESTAR of the Partnership
Interests and PRIMESTAR Assets, and the assumption by New PRIMESTAR of the
PRIMESTAR Liabilities, of the parties to the Restructuring Agreement other
than TSAT (the "Non-TSAT Parties"), and such acquisition will be accounted
for using the purchase method of accounting. The fair value of the
consideration to be issued to the Non-TSAT Parties will be allocated to the
assets and liabilities acquired based upon the estimated fair values of
such assets and liabilities. TSAT has been identified as the acquiror for
accounting purposes and the predecessor for reporting purposes due to the
fact that TSAT will own the largest interest in New PRIMESTAR immediately
following the consummation of the Restructuring Transaction.
If the Restructuring Agreement had occurred on September 30, 1997, the
total amount of funds required to be paid by New PRIMESTAR as cash
consideration (or assumption of debt in lieu of cash consideration) in the
Restructuring Transaction would have been approximately $464 million,
comprised of (i) approximately
F-23
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
$66 million and $70 million in cash to be paid in the aggregate to Cox and
MediaOne, respectively and (ii) approximately $242 million, $72 million and
$14 million, of debt to be assumed by New PRIMESTAR in the aggregate in
respect of TWE and Newhouse (collectively), Comcast and G.E. Americom,
respectively. In addition, New PRIMESTAR would have assumed indebtedness of
TSAT and the Partnership aggregating approximately $921 million if the
Restructuring Transaction had occurred on September 30, 1997. The actual
cash consideration to be paid to, or debt to be assumed from, the Non-TSAT
Parties will be based on, among other things, subscriber counts and TSAT's
debt balance at the closing date. In order to fund such cash consideration
and repay such assumed debt, New PRIMESTAR intends to obtain debt
financing. No assurance can be given that New PRIMESTAR will successfully
complete such debt financing.
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(together with the exhibits and schedules thereto, the "TSAT Merger
Agreement"), between TSAT and New PRIMESTAR, it is contemplated that,
subsequent to the consummation of the Restructuring Transaction, TSAT will
be merged with and into New PRIMESTAR, with New PRIMESTAR as the surviving
corporation (the "TSAT Merger"). In connection therewith (i) each
outstanding share of Series A Common Stock, $1 par value per share, of TSAT
("TSAT Series A Common Stock") will be converted into the right to receive
one share of New PRIMESTAR Class A Common Stock, and (ii) each outstanding
share of Series B Common Stock, $1 par value per share, of TSAT ("TSAT
Series B Common Stock") will be converted into the right to receive one
share of New PRIMESTAR Class B Common Stock, subject to adjustment. Each
share of New PRIMESTAR's Common Stock then held by TSAT will be cancelled.
The Restructuring Transaction (including the TSAT Asset Transfer) and the
TSAT Merger are collectively referred to herein as the Roll-up Plan. If the
Roll-up Plan is approved, the Restructuring Transaction will be consummated
prior to the anticipated closing date of the TSAT Merger. 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.
Accordingly, the TSAT Merger may not be consummated even if the Roll-up
Plan is approved and the Restructuring Transaction is consummated.
Upon the closing of the TSAT Merger, the then existing shareholders of TSAT
will become the direct owners of TSAT's ownership interest in New
PRIMESTAR. 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) approval of
the Roll-up Plan by the requisite vote of TSAT stockholders; (b) occurrence
of one of the following: (i) FCC approval of TSAT's pending application to
transfer control of Tempo to New PRIMESTAR, (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 (including pursuant to an agreement to divest
the FCC Permit within a specific time period following the TSAT Effective
Time); (c) the absence of any legal restraint or prohibition preventing
consummation of the TSAT Merger, (d) receipt of approval for listing on the
National Tier of The Nasdaq Stock Market of the shares of New PRIMESTAR
Class A Common Stock and New 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, New PRIMESTAR 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 New
PRIMESTAR. Such acquisition will be accounted for at TSAT's historical cost
since (i) the percentage of New PRIMESTAR owned by TSAT prior to
consummation of the TSAT Merger will be approximately equal to the
percentage of New PRIMESTAR to be owned by TSAT shareholders following
consummation of the TSAT Merger and (ii) the TSAT Merger and the
Restructuring Transaction are both a part of the Roll-up Plan.
F-24
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement, dated as of June 11, 1997 (together with the
exhibits and schedules thereto, the "ASkyB Agreement") 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, New PRIMESTAR will acquire
from MCI two high power communications satellites currently under
construction (the "MCI Satellites"), certain authorizations granted to MCI
by the FCC to operate a direct broadcast satellite business at the
110(degrees) West Longitude orbital location using 28 transponder channels,
and certain related contracts (the "MCI FCC Licenses"). In consideration,
ASkyB will receive non-voting convertible securities of New PRIMESTAR,
comprising, subject to closing adjustments, approximately $600 million
liquidation value of non-voting convertible preferred stock, $.01 par value
per share, of New PRIMESTAR (the "New PRIMESTAR Convertible Preferred
Stock") (convertible into approximately 52 million shares of non-voting
Series D Common Stock, $.01 par value per share, of New PRIMESTAR (the "New
PRIMESTAR Class D Common Stock"), subject to adjustment) and approximately
$516 million principal amount of convertible subordinated notes of New
PRIMESTAR (the "New PRIMESTAR Convertible Subordinated Notes") (convertible
into approximately 45 million shares of New PRIMESTAR Class D Common
Stock). The New PRIMESTAR Convertible Subordinated Notes will be due and
payable, and the New PRIMESTAR Convertible Preferred Stock will be
mandatorily redeemable, on the tenth anniversary of the date of issuance.
The New PRIMESTAR Convertible Preferred Stock will accrue cumulative
dividends at the annual rate of 5% of the liquidation value of such shares
and the New PRIMESTAR Convertible Subordinated Notes will have an interest
rate of 5%. Dividends on the New PRIMESTAR Convertible Preferred Stock and
interest on the New PRIMESTAR Convertible Subordinated Notes will be
payable in cash or, at the option of New PRIMESTAR, in shares of the non-
voting New 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 New PRIMESTAR Class D Common
Stock issued to ASkyB or any of its affiliates upon conversion of such New
PRIMESTAR Convertible Preferred Stock and New PRIMESTAR Convertible
Subordinated Notes, or in payment of dividend or interest obligations
thereunder, will be non-voting; however, shares of New PRIMESTAR Class D
Common Stock will in turn automatically convert into shares of New
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.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the ASkyB Transaction may not be consummated until
(i) applicable Notification and Report Forms have been submitted and
certain information has been furnished to the FTC and the Antitrust
Division, and (ii) required waiting periods have expired or terminated.
Each of the Partnership, on behalf of New PRIMESTAR or, alternatively, on
behalf of itself in the event the Restructuring Transaction is not
consummated, Rupert Murdoch, News Corp. and MCI have filed Notification and
Report Forms with the FTC and the Antitrust Division of the Department of
Justice (the "Antitrust Division"). All of such filings were made on July
18, 1997. On August 15, 1997, the Antitrust Division asked for further
information about the ASkyB Transaction, and that information is in the
process of being supplied. Until all recipients of the Antitrust Division's
request for additional information substantially comply with the request,
the waiting period under the HSR Act is suspended. Each of News Corp., MCI,
ASkyB and the Partnership has agreed, pursuant to the ASkyB Agreement, to
use its commercially reasonable efforts to obtain all approvals from
regulatory authorities, including, without
F-25
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
limitation, the FCC, the Department of Justice and the FTC, necessary to
consummate the transactions contemplated by the ASkyB Agreement.
Consummation of the ASkyB Transaction is also subject to either (i) the
receipt of an order adopted by the FCC which has not been reversed,
reconsidered, stayed, enjoined set aside, annulled or suspended and the
expiration of the 30 day period for any such action on the FCC's own motion
with respect to the grant of the license to MCI for the authorization to
construct, launch and operate satellites in the DBS service at 110(degrees)
W.L. providing 28 transponder channels of service and assignment of such
license to New PRIMESTAR or its designee or (ii) the implementation of an
Acceptable Alternative Arrangement (as defined). On August 15, 1997, the
Partnership (on behalf of New PRIMESTAR) and MCI filed an application with
the FCC for consent to the assignment to New PRIMESTAR 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. Specifically,
MCI must file evidence demonstrating that it has completed contracting for
the construction of the satellites by December 20, 1997; however, the
Partnership cannot guarantee that MCI will make such a filing. If it does
not file its contract, the FCC may revoke MCI's DBS authorizations, thereby
endangering the ASkyB Transaction and the pending Assignment Application.
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 New PRIMESTAR holding the 110(degrees) W.L.
authorization; (2) opposition to the Partnership or New PRIMESTAR
simultaneously holding authorizations for both 110(degrees) W.L. orbital
position (28 transponders) and the 119(degrees) W.L. orbital position (11
transponders), which together represent about 40% of the total transponder
capacity in the three orbital positions allocated to the U.S. for DBS
service that provide full CONUS visibility; (2) requests for extension of
the FCC's rules governing access to satellite delivered programming to News
Corp. and expansion of those rules to programming not delivered by
satellite (such as broadcast television stations), and (3) 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 New PRIMESTAR, MCI, ASkyB or News Corp. in
connection with its review.
The ASkyB Agreement provides that if the Restructuring Transaction has not
closed by March 8, 1998, and the closing conditions set forth in the ASkyB
Agreement have all been satisfied, then News Corp., MCI and ASkyB
(collectively, the "ASkyB Transferors") shall have the right to transfer to
the Partnership the assets contemplated to be transferred to New PRIMESTAR
under the ASkyB Transaction, in exchange for such consideration, having an
aggregate fair market value equal to the aggregate consideration to have
been received by the ASkyB Transferors pursuant to the ASkyB Transaction,
as the Partnership and the ASkyB Transferors shall mutually agree.
(2)COMMITMENTS AND CONTINGENCIES
In connection with (i) the contribution to New PRIMESTAR (by asset transfer
or merger) by each Class C Stockholder (or its subsidiaries or affiliates)
of its Partnership Interest and PRIMESTAR Assets, as part of the
Restructuring Transaction, and (ii) the prior arrangement by each Class C
Stockholder for the issuance
F-26
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
of an irrevocable transferable letter of credit (collectively, the "GE-2
Letters of Credit") for the benefit of GE Americom to provide collateral
security for certain obligations of the Partnership to GE Americom, and
each Class C Stockholder's related obligation to reimburse the issuing bank
for any drawings made under such GE-2 Letter of Credit pursuant to an
existing reimbursement agreement and/or other existing documentation
between such Class C Stockholder and the issuing bank (collectively, the
"Reimbursement Documentation"), and as a condition to the Restructuring
Transaction, New PRIMESTAR will enter into a reimbursement agreement with
each Class C Stockholder (collectively, the "Reimbursement Agreements").
The Reimbursement Agreements will provide for, among other things, the
assumption by New PRIMESTAR of all the obligations of the Class C
Stockholders under the Reimbursement Documentation and the GE-2 Letters of
Credit, including all existing and future payment obligations of the Class
C Stockholders thereunder, and the indemnification by New PRIMESTAR of the
Class C Stockholders for any and all losses, claims, damages, liabilities,
deficiencies, obligations, costs and expenses of the Class C Stockholders
relating thereto.
Pursuant to the Restructuring Agreement, if the closing of the
Restructuring Transaction (the "Closing") occurs, New PRIMESTAR and its
subsidiaries, jointly and severally, will indemnify each Class C
Stockholder, 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 PRIMESTAR
Liabilities of any Class C Stockholder or GE Americom, (ii) any and all
losses, liabilities, claims, damages, costs and expenses arising out of or
resulting from the operation by New PRIMESTAR, its subsidiaries, or any of
their respective predecessors of the digital satellite business or the
ownership by New PRIMESTAR, 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 New PRIMESTAR and its subsidiaries,
whether arising before, on or after the date on which the Closing occurs
(the "Closing Date").
The Restructuring Agreement also provides that, if the Closing occurs, each
of Comcast, Cox, MediaOne, TWE, Newhouse and GE Americom, severally and not
jointly, will indemnify New PRIMESTAR, 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, assets or liabilities, other
than PRIMESTAR Liabilities, of such indemnitor after the Closing Date.
In addition, the Restructuring Agreement provides that, if the Closing
occurs, each of Comcast, Cox, MediaOne and GE Americom, severally and not
jointly, will indemnify New PRIMESTAR, 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
PRIMESTAR Subs. "PRIMESTAR Sub" means (i) with respect to Comcast, Comcast
DBS and Comcast SCI, (ii) with respect to Cox, Cox SI, (iii) with respect
to GE Americom GEAS and (iv) with respect to MediaOne, each subsidiary of
MediaOne that is a party to the Asset Transfers.
Pursuant to the Restructuring Agreement, each of Comcast, Cox and GE (each,
in such capacity, a "Merger Indemnitor") will indemnify New PRIMESTAR, its
affiliates and each of their respective officers, directors, employees,
stockholders, agents and representatives against and hold them harmless
from (i) all liability for
F-27
<PAGE>
PRIMESTAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET--(CONTINUED)
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"). Taxes of the Merger
Indemnitor's PRIMESTAR Sub for 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 New PRIMESTAR 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 New 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.
The Restructuring Agreement also provides that each of MediaOne, Newhouse
and TWE (each, in such capacity, a "Contribution Indemnitor") will
indemnify New PRIMESTAR, 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 New 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 New PRIMESTAR 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, 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 will not be required to indemnify and hold harmless New
PRIMESTAR and its affiliates and each of their respective officers,
directors, employees, stockholders, agents and representatives, and New
PRIMESTAR will 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 New 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 (the
"Post-Closing Tax Period"), (ii) all liability for Covered Taxes resulting
from the merger of the Merger Indemnitor's PRIMESTAR Sub with and into New
PRIMESTAR failing to qualify under Section 368(a) of the Code if such
failure is attributable to any action taken after the Closing by New
PRIMESTAR 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, New PRIMESTAR will also assume
certain obligations under certain specified contracts and other
arrangements binding upon ASkyB, News Corp. and/or MCI, which will require
New PRIMESTAR to make payments, subject to the terms and conditions of such
contracts and arrangements. At September 30, 1997, the remaining
commitments under such obligations to be assumed aggregated approximately
$187 million.
F-28
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
SELECTED FINANCIAL DATA
Selected financial data related to the financial condition and results of
operations of TCI Satellite Entertainment, Inc. ("TSAT") for the indicated
periods are summarized as follows (such information should be read in
conjunction with the accompanying financial statements of TSAT) (amounts in
thousands, except per share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- -------- -------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue................. $ 406,072 300,249 417,461 208,903 30,279 11,679 4,614
Operating, selling,
general and
administrative
expenses............... (351,405) (294,310) (410,390) (214,117) (25,106) (7,069) (2,268)
Depreciation(1)......... (177,415) (87,205) (191,355) (55,488) (14,317) (6,513) (2,602)
--------- -------- -------- -------- ------- ------ ------
Operating loss........ (122,748) (81,266) (184,284) (60,702) (9,144) (1,903) (256)
Interest expense........ (33,965) -- -- -- -- -- --
Share of losses of
PRIMESTAR Partners L.P.
("PRIMESTAR
Partners")............. (11,610) (1,445) (3,275) (8,969) (11,722) (5,524) (4,561)
Other, net.............. 1,779 311 1,618 306 306 88 --
Income tax benefit...... -- 25,806 45,937 21,858 6,872 2,505 1,581
--------- -------- -------- -------- ------- ------ ------
Net loss.............. $(166,544) (56,594) (140,004) (47,507) (13,688) (4,834) (3,236)
========= ======== ======== ======== ======= ====== ======
Net loss per common
share:
Historical............ $ (2.50)
=========
Pro forma(2).......... $ (.85) (2.11) (.72)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Investment in, and
related advances to,
PRIMESTAR Partners..... $ 19,952 32,240 17,963 9,793 19,625 485
Property and equipment,
net.................... $1,099,358 1,107,654 889,220 397,798 95,323 15,791
Total assets............ $1,189,046 1,180,273 933,443 410,105 116,495 18,583
Due to PRIMESTAR
Partners............... $ 463,133 457,685 382,900 278,772 71,164 --
Debt.................... $ 365,760 247,230 -- -- -- --
Equity.................. $ 207,674 372,358 483,584 120,526 43,349 17,537
</TABLE>
- --------
(1) Effective October 1, 1996, TSAT (i) changed the method used to depreciate
its subscriber installation costs, and (ii) reduced the estimated useful
life of certain satellite reception equipment. The inception-to-date
effect of the change in depreciation method aggregated $55,304,000 and was
recorded during the fourth quarter of 1996. The effect of the reduction in
estimated useful life was accounted for on a prospective basis. For
additional information concerning the nature and quantified effects of
such accounting changes, see note 3 to the Audited Financial Statements of
TSAT.
(2) In connection with the December 4, 1996 consummation of the distribution
by Tele-Communications, Inc. ("TCI") on December 4, 1996 (the "TSAT Spin-
off Date") to certain of its stockholders of all the issued and
outstanding shares of Series A Common Stock, $1.00 par value per share, of
TSAT ("TSAT Series A Common Stock") and Series B Common Stock, $1.00 par
value per share, of TSAT ("TSAT Series B Common Stock," and together with
the TSAT Series A Common Stock, TSAT Common Stock") (the "TSAT Spin-off"),
TSAT issued 66,407,608 shares of TSAT Common Stock. The pro forma net loss
per common share amounts assume that the shares issued pursuant to the
TSAT Spin-off were issued and outstanding since January 1, 1995.
Accordingly the calculation of the pro forma net loss per share assumes
weighted average shares outstanding of 66,407,608, 66,408,025 and
66,407,608 for the nine months ended September 30, 1996 and the years
ended December 31, 1996 and 1995, respectively.
F-29
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following discussion and analysis provides information concerning the
financial condition and results of operations of TSAT and should be read in
conjunction with the accompanying financial statements of TSAT.
Results of Operations
TSAT has entered into binding agreements with respect to the Restructuring
Transaction, TSAT Merger and ASkyB Transaction (each as defined in note 2 to
the accompanying Unaudited Financial Statements of TSAT). Upon consummation of
the Restructuring Transaction, TSAT Merger and the ASkyB Transaction, TSAT
will be consolidated into PRIMESTAR, Inc. ("New PRIMESTAR"). New PRIMESTAR
will be a significantly larger entity than TSAT, and it is anticipated that
New PRIMESTAR will initially incur significantly greater losses than TSAT due
primarily to disproportionately higher levels of depreciation, amortization
and interest expense. In addition, it is anticipated that New PRIMESTAR will
develop a proposed high-power direct broadcast satellite ("DBS") service, and
that New PRIMESTAR may determine to migrate some or all of the existing
medium-power PRIMESTAR(R) customers to such high-power service. Under such
circumstances, New PRIMESTAR would necessarily be operating under a different
cost structure than that of TSAT's medium-power business. No assurance can be
given that the Restructuring Transaction, TSAT Merger and ASkyB Transaction
will be consummated. The following discussion focuses on the results of
operations of TSAT as a stand-alone entity without giving effect to the
pending Restructuring Transaction, TSAT Merger and ASkyB Transaction.
As described in greater detail below, TSAT reported net losses of
$166,544,000 and $56,594,000 during the nine months ended September 30, 1997
and 1996, respectively, and $140,004,000, $47,507,000 and $13,688,000 during
the years ended December 31, 1996, 1995 and 1994, respectively. Improvements
in TSAT's results of operations are largely dependent upon its ability to
increase its customer base while maintaining its pricing structure, reducing
subscriber churn and effectively managing TSAT's costs. No assurance can be
given that any such improvements will occur. In addition, TSAT incurs
significant sales commission and installation costs when its customers
initially subscribe to the service. Management expects that the costs of
acquiring subscribers will continue to be significant. The high cost of
obtaining new subscribers also magnifies the negative effects of subscriber
churn.
During the nine months ended September 30, 1997 and 1996, and the years
ended December 31, 1996, 1995 and 1994, (i) TSAT's annualized subscriber churn
rate (which represents the annualized number of subscriber terminations
divided by the weighted average number of subscribers during the period) was
32.2%, 38.9%, 38.5%, 24.7% and 16.1%, respectively, and (ii) the average
subscriber life implied by such subscriber churn rate was 3.1 years, 2.6
years, 2.6 years, 4.1 years and 6.2 years, respectively.
As set forth above, TSAT experienced a higher rate of subscriber churn in
1996, as compared to the first nine months of 1997 and prior periods. TSAT
believes that the higher 1996 churn rate is primarily attributable to the fact
that subscribers were allowed to initiate service with no credit approval
during the fourth quarter of 1995 and the first six months of 1996. Service to
a significant number of such subscribers was terminated during 1996 after
their accounts became delinquent. Such delinquent accounts contributed to a
significant increase in TSAT's bad debt expense during 1996. TSAT has
addressed this issue by implementing more stringent credit policies. In this
regard, TSAT began to institute more selective credit policies during the
third quarter of 1996 and further tightened such policies during the fourth
quarter of 1996. TSAT believes that a significant percentage of the
subscribers whose service was terminated during 1996 would not have been
allowed to initiate service if the credit policies that are currently in
effect had been in place during 1995.
Although no assurance can be given, TSAT expects that churn rates for the
remainder of 1997 and future periods will be lower than the levels experienced
in 1996. If TSAT's churn rates were to return to, or increase
F-30
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
from, such 1996 levels, TSAT believes that its financial condition and results
of operations would be adversely affected.
TSAT currently offers a marketing program that allows subscribers to
purchase TSAT's proprietary satellite reception equipment at a price that is
less than TSAT's cost. Losses incurred by TSAT on such sales of satellite
reception equipment are charged to operations in the periods such sales are
consummated. To date, the number of customers selecting this marketing program
has been insignificant. TSAT cannot presently predict whether a significant
number of customers will take advantage of this marketing program in the
future.
Since July 1994, when PRIMESTAR Partners completed its conversion from an
analog to a digital signal, TSAT has experienced significant growth in the
number of customers and active authorized satellite receivers or integrated
receiver/decoders ("Authorized Units"). In this regard, the numbers of
customers and Authorized Units were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
----------------- -------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Customers 769,000 644,000 702,000 472,000 89,000
Authorized Units 888,000 735,000 805,000 535,000 100,000
</TABLE>
To the extent not otherwise described, increases in TSAT's revenue and
operating, selling, general and administrative expenses, as detailed below,
are primarily related to growth in customers and Authorized Units, as
reflected in the foregoing table. TSAT is operating in an increasingly
competitive environment. No assurance can be given that such increasing
competition will not adversely affect TSAT's ability to continue to achieve
significant growth in Authorized Units and revenue.
As further described in note 11 to the accompanying Unaudited Financial
Statements of TSAT, TCI Communications, Inc. ("TCIC"), a subsidiary of TCI,
has historically provided TSAT with certain fulfillment services with respect
to customers of the PRIMESTAR(R) programming service. From January 1, 1997
through July 21, 1997, charges for customer fulfillment services provided by
TCIC were made pursuant to the fulfillment agreement as originally executed by
TSAT and TCIC in connection with the TSAT Spin-off (the "Original Fulfillment
Agreement"). The scheduled rates for the services provided by TCIC under the
Original Fulfillment Agreement exceeded the scheduled rates upon which
charges, historically, were allocated to TSAT for such services. Effective
July 22, 1997, the Original Fulfillment Agreement was amended (as amended, the
"Fulfillment Agreement") to, among other items, (i) change the termination
date to December 31, 1997 and, (ii) reduce the scheduled rates for the
customer fulfillment services provided by TCIC to rates that are comparable to
those that were used to allocate fulfillment charges to TSAT prior to the TSAT
Spin-off. In September and October 1997, TSAT entered into agreements with
eight regional fulfillment companies (none of which is affiliated with TSAT or
any other party to the Restructuring Transaction) to perform the services that
will no longer be performed by TCIC following the termination of the
Fulfillment Agreement. TSAT's management believes that the terms and
conditions of such new third party fulfillment agreements are in the aggregate
no less favorable to TSAT than the terms and conditions of the Original
Fulfillment Agreement or the amended Fulfillment Agreement. The transition
from TCIC to the third party contractors was completed in December 1997.
Installation charges from TCIC include direct and indirect costs of
performing installations. Through the TSAT Spin-off Date, TSAT capitalized a
portion of such charges as subscriber installation costs based upon amounts
charged by unaffiliated third parties to perform similar services. Subsequent
to the TSAT Spin-off Date, TSAT has capitalized the full amount of
installation fees paid to TCIC with respect to customers who have elected to
lease satellite reception equipment.
F-31
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nine Months Ended September 30, 1997 and 1996
Certain financial information concerning TSAT's operations is presented
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1997 1996
--------------------- --------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenue:
Programming and equipment rental.. $ 374,182 92% $249,439 83%
Installation...................... 31,890 8 50,810 17
--------- --- -------- ---
Total revenue................. 406,072 100 300,249 100
--------- --- -------- ---
Operating costs and expenses:
Charges from PRIMESTAR Partners:
Programming..................... (126,681) (31) (88,007) (29)
Satellite, national marketing
and distribution............... (61,568) (15) (46,781) (16)
--------- --- -------- ---
(188,249) (46) (134,788) (45)
Other operating: (18,992) (5) (23,909) (8)
--------- --- -------- ---
(207,241) (51) (158,697) (53)
--------- --- -------- ---
Selling, general and administrative:
Selling and regional marketing.... (80,844) (20) (87,073) (29)
Bad debt.......................... (14,929) (3) (14,179) (5)
Other general and administrative.. (43,784) (11) (34,914) (11)
--------- --- -------- ---
(139,557) (34) (136,166) (45)
--------- --- -------- ---
Operating Cash Flow (1)........... 59,274 15 5,386 2
Stock compensation.................. (4,607) (1) 553 ---
Depreciation........................ (177,415) (44) (87,205) (29)
--------- --- -------- ---
Operating loss.................... $(122,748) (30)% $(81,266) (27)%
========= === ======== ===
</TABLE>
- --------
(1) Operating Cash Flow, which represents operating income before depreciation
and stock compensation, is a commonly used measure of value and borrowing
capacity. Operating Cash Flow is not intended to be a substitute for a
measure of performance in accordance with generally accepted accounting
principles and should not be relied upon as such. 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 Liquidity and
Capital Resources below and the statements of cash flows included in the
accompanying Audited and Unaudited Financial Statements of TSAT.
Revenue increased $105,823,000 or 35% during the nine months ended September
30, 1997, as compared to the corresponding prior year period. Such increase
represents the net effect of a $124,723,000 or 50% increase in programming and
equipment rental revenue and a $18,920,000 or 37% decrease in installation
revenue. The increase in programming and equipment rental revenue is primarily
the result of an increase from the 1996 period to the 1997 period in the
average number of Authorized Units. Additionally, TSAT's average monthly
programming and equipment rental revenue per Authorized Unit increased from
$44 ($50 per customer) during the 1996 period to $49 ($57 per customer) during
the 1997 period. Such increase was primarily the result of rate
F-32
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
increases implemented in May 1997 as well as an increase in the average
monthly revenue derived from pay-per-view services. The decrease in
installation revenue is primarily attributable to a reduction from the 1996
period to the 1997 period in the number of installations performed and a
decrease from $132 during the 1996 period to $114 during the 1997 period in
the average installation revenue from each Authorized Unit installed.
PRIMESTAR Partners provides programming services to TSAT and other
authorized PRIMESTAR(R) distributors ("Distributors"), each of which is
currently affiliated with one or more of the partners of PRIMESTAR Partners,
in exchange for a fee based upon the number of customers receiving programming
services. PRIMESTAR Partners also arranges for satellite capacity and uplink
services, and provides national marketing and administrative support services,
in exchange for a separate authorization fee from each authorized PRIMESTAR(R)
Distributor, including TSAT, based on such Distributor's total number of
Authorized Units. The aggregate charges for such services increased
$53,461,000 or 40% during the nine months ended September 30, 1997, as
compared to the corresponding prior year period. The average aggregate monthly
amount per Authorized Unit charged by PRIMESTAR Partners was $25 ($28 per
customer) and $24 ($27 per customer) during each of the nine month periods
ended September 30, 1997 and 1996. For additional information concerning the
operations of PRIMESTAR Partners, see related discussion below.
Other operating costs and expenses, which are primarily comprised of amounts
related to customer fulfillment activities, decreased $4,917,000 or 21% during
the nine months ended September 30, 1997, as compared to the corresponding
prior year period. Such decrease is primarily attributable to the fact that
TSAT's other operating costs and expenses for the nine months ended September
30, 1996 included $7,844,000 of installation fees paid to TCIC that were not
capitalized. Other operating costs and expenses for the nine months ended
September 30, 1997 do not include a similar amount since TSAT has capitalized
the full amount of installation fees paid to TCIC subsequent to the TSAT Spin-
off Date. As described above, the charges for installation and other customer
fulfillment services provided by TCIC have been made pursuant to the Original
Fulfillment Agreement and the amended Fulfillment Agreement since January 1,
1997.
Selling, general and administrative expenses increased $3,391,000 or 2%
during the nine months ended September 30, 1997, as compared to the
corresponding prior year period. Selling and regional marketing expenses,
which represented 20% of revenue during the 1997 period, include sales
commissions, marketing and advertising expenses, and costs associated with the
operation of TSAT's national customer service call center ("National Call
Center") and five regional sales offices. Bad debt expense represented 3% of
revenue during the 1997 period. In total, selling, general and administrative
expenses represented 34% and 45% of revenue during the nine months ended
September 30, 1997 and 1996, respectively. The decrease in such percentage is
primarily attributable to (i) lower sales commissions due to a 27% decrease in
installations in 1997 as compared to 1996, and (ii) the relatively fixed
nature of certain components of TSAT's selling, general and administrative
expenses.
The selling, general and administrative charges from TCIC during the nine
months ended September 30, 1997 include $8,611,000 that was charged to TSAT
pursuant to a transition services agreement between TCI and TSAT (the
"Transition Services Agreement"), $3,457,000 that was charged to TSAT by TCIC
for certain telephony services and $5,939,000 that was charged to TSAT
pursuant to a March 1997 agreement to use TCIC's Boise, Idaho Call Center to
respond to calls that exceed the capacity of TSAT's National Call Center.
Through the TSAT Spin-off Date, general and administrative allocations from
TCIC (including telephone services) were based upon the estimated cost of such
services provided to TSAT. The amounts charged to TSAT pursuant to the
Transition Services Agreement are in excess of the amounts that would have
been allocated by TCIC to TSAT under the arrangement that was in effect
through the TSAT Spin-off Date. If the Transition Services Agreement had been
effective as of January 1, 1996, general and administrative expenses would
have been approximately $139,995,000 for the nine months ended September 30,
1996. For additional information, see note 11 to the accompanying Unaudited
Financial Statements of TSAT.
F-33
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The $90,210,000 or 103% increase in depreciation expense during the nine
months ended September 30, 1997, as compared to the corresponding prior year
period, is the result of an increase in TSAT's depreciable assets due
primarily to capital expenditures with respect to TSAT's satellite reception
equipment and subscriber installation costs. Changes in TSAT's depreciation
policies also contributed to the increase. Effective October 1, 1996, TSAT (i)
changed the method used to depreciate its subscriber installation costs, and
(ii) reduced the estimated useful life of certain satellite reception
equipment. The inception-to-date effect on depreciation expense of the change
in depreciation method was recorded during the fourth quarter of 1996. The
effect of the reduction in estimated useful life was accounted for on a
prospective basis. For additional information concerning such accounting
changes, see note 4 to the accompanying Unaudited Financial Statements of
TSAT.
TSAT incurred interest expense of $33,965,000 during the nine months ended
September 30, 1997. Substantially all of such interest was attributable to the
December 31, 1996 completion of the bank credit agreement with respect to a
senior secured reduced revolving credit facility that, subject to TSAT's
compliance with certain covenants and conditions, provides for aggregate
commitments of up to $750 million (the "Bank Credit Facility") and the
February 1997 issuance of the $200 million aggregate principal amount of 10
7/8% senior subordinated notes (the "Senior Subordinated Notes") and $275
million aggregate principal amount at maturity of 12 1/4% senior subordinated
discount notes (the "Senior Subordinated Discount Notes" and, together with
the Senior Subordinated Notes, the "Notes"). TSAT expects that it will
continue to incur significant levels of interest expense in future periods.
TSAT's share of PRIMESTAR Partners' net losses increased $10,165,000 or 703%
during the nine months ended September 30, 1997, as compared to the
corresponding prior year period. Such increase is primarily attributable to
increases in PRIMESTAR Partners' interest expense and operating loss. The
increase in interest expense is attributable to interest incurred on
borrowings under the bank credit facility (the "PRIMESTAR Credit Facility")
that was obtained by PRIMESTAR Partners to finance advances to Tempo
Satellite, Inc. ("Tempo") a subsidiary of TSAT, that were in turn used to fund
the construction of the Tempo satellite ("Tempo DBS-2") which presently serves
as a ground spare for the satellite which was launched into TSAT's high-power
slot at 119(degrees) West Longitude ("W.L.") on March 8, 1997 ("Tempo DBS-1,"
together with Tempo DBS-2, the "Tempo Satellites"). Prior to the January 1,
1997 determination that construction of Tempo DBS-2 was substantially
complete, interest incurred on the applicable borrowings under the PRIMESTAR
Credit Facility had been capitalized. The increase in PRIMESTAR Partners'
operating loss occurred as the increase in PRIMESTAR Partners' revenue did not
fully offset increases in selling, marketing and certain other expenses.
Historically, PRIMESTAR Partners' operating deficits have been funded by
capital contributions from TSAT and the other partners of PRIMESTAR Partners.
To the extent that future Authorized Unit growth does not generate increases
in PRIMESTAR Partners' revenue sufficient to offset its operating costs and
expenses, TSAT anticipates that any such operating deficit would be funded by
PRIMESTAR Partners' then existing external sources of liquidity (which may
include capital contributions from TSAT and PRIMESTAR Partners' other
partners), or by increases in the above-described programming and
authorization fees charged by PRIMESTAR Partners to TSAT and other authorized
Distributors.
TSAT recognized no income tax benefit during the nine months ended September
30, 1997 and an income tax benefit of $25,806,000 during the nine months ended
September 30, 1996. The effective tax rate associated with the 1996 benefit
was 31%. TSAT's income tax benefit for the nine months ended September 30,
1996 includes intercompany allocations from TCI of current income tax benefits
of $44,454,000. As a result of the TSAT Spin-off, TSAT is no longer a part of
the TCI consolidated tax group, and accordingly, is only able to realize
income tax benefits for financial reporting purposes to the extent that such
benefits offset TSAT's income tax liabilities or TSAT generates taxable
income. For financial reporting purposes, all of TSAT's income tax liabilities
had been fully offset by income tax benefits at December 31, 1996 and
September 30, 1997. Additionally, during the first several years following the
TSAT Spin-off, TSAT believes that it will incur net
F-34
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
losses for income tax purposes, and accordingly, will not be in a position to
realize income tax benefits on a current basis. In connection with the TSAT
Spin-off, TSAT became a party to the Tax Sharing Agreement that currently
exists among TCI, TCIC and certain other subsidiaries of TCI (the "Tax Sharing
Agreement"). For additional information, see note 11 to the accompanying
Unaudited Financial Statements of TSAT.
Years ended December 31, 1996, 1995 and 1994
Certain financial information concerning TSAT's operations is presented
below (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- --------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Programming and
equipment rental..... $ 351,548 84% $ 133,688 64% $ 18,641 62%
Installation.......... 65,913 16 75,215 36 11,638 38
--------- --- --------- --- -------- ---
Total revenue..... 417,461 100 208,903 100 30,279 100
--------- --- --------- --- -------- ---
Operating costs and
expenses:
Programming,
satellite, national
marketing and
distribution charges
from PRIMESTAR
Partners............. (188,724) (45) (78,250) (37) (11,632) (38)
Other operating:
Allocations from
TCIC............... (20,365) (5) (15,916) (8) (4,367) (14)
Other............... (8,181) (2) (1,884) (1) -- --
--------- --- --------- --- -------- ---
(28,546) (7) (17,800) (9) (4,367) (14)
--------- --- --------- --- -------- ---
Selling, general and
administrative:
Selling and regional
marketing............ (106,562) (25) (79,189) (38) (1,777) (6)
Bad debt.............. (19,235) (5) (10,549) (5) (1,529) (5)
Allocations from
TCIC................. (18,661) (4) (7,817) (4) (1,080) (4)
Other general and
administrative....... (49,108) (12) (20,512) (9) (4,721) (16)
--------- --- --------- --- -------- ---
(193,566) (46) (118,067) (56) (9,107) (31)
--------- --- --------- --- -------- ---
Operating Cash Flow
(deficit)............ 6,625 2 (5,214) (2) 5,173 17
Stock Compensation...... 446 -- -- -- -- --
Depreciation............ (191,355) (46) (55,488) (27) (14,317) (47)
--------- --- --------- --- -------- ---
Operating loss........ $(184,284) (44)% $ (60,702) (29)% $ (9,144) (30)%
========= === ========= === ======== ===
</TABLE>
Revenue increased $208,558,000 or 100% and $178,624,000 or 590% during 1996
and 1995, as compared to the corresponding prior year. Exclusive of
installation revenue, TSAT's average monthly revenue per Authorized Unit was
$44, $41 and $28 during 1996, 1995 and 1994, respectively. The 7% increase
from 1995 to 1996 in the average monthly revenue per Authorized Unit was
primarily a result of the positive effects of (i) an increase in the average
monthly revenue derived from premium and pay-per-view services, and (ii) a
March 1995 increase in the monthly equipment rental fee. Such positive effects
more than offset the effects of a 1996 promotional campaign that provided
certain new customers with one month of free service. The 46% increase from
1994 to 1995 in the average monthly revenue per Authorized Unit is primarily
attributable to (i) the full year effect of the
F-35
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
higher basic service rates and the increased availability of premium and pay-
per-view services that followed the July 1994 completion of the conversion
from an analog to a digital signal, and (ii) a March 1995 increase in the
monthly equipment rental fee. The average installation revenue from each
Authorized Unit installed was $127, $161 and $175 during 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 is primarily attributable to
certain promotional campaigns that were in effect during 1996. See related
discussion above.
As described above, PRIMESTAR Partners provides various services to TSAT and
other authorized Distributors in exchange for a fee. The aggregate charges for
such services increased $110,474,000 or 141% and $66,618,000 or 573% during
1996 and 1995, respectively, as compared to the corresponding prior year. The
average aggregate monthly amount per Authorized Unit charged by PRIMESTAR
Partners was $23, $24 and $17 during 1996, 1995 and 1994, respectively. The
increase in the amount charged per Authorized Unit from 1994 to 1995 reflects
higher programming expenses that PRIMESTAR Partners began to incur following
the July 1994 completion of the conversion from an analog to a digital signal.
For additional information concerning the operations of PRIMESTAR Partners,
see related discussion below.
Other operating expenses, which are primarily comprised of amounts related
to customer fulfillment activities, increased $10,746,000 or 60% and
$13,433,000 or 308% during 1996 and 1995, respectively, as compared to the
corresponding prior year. Most of such operating costs and expenses were
allocated from TCIC to TSAT based upon a standard charge for each of the
various customer fulfillment activities performed by TCIC.
Selling, general and administrative expenses increased $75,053,000 or 64%
and $108,960,000 or 1,196% during 1996 and 1995, respectively, as compared to
the corresponding prior year. During 1996 and 1995, selling and marketing
expenses represented 25% and 38%, respectively, of revenue and bad debt
expense represented 5% and 5%, respectively, of revenue. Such relatively high
percentages are attributable to TSAT's efforts to increase its subscriber
base. See related discussion above.
Through the TSAT Spin-off Date, general and administrative allocations from
TCIC were generally based upon the estimated cost of the general and
administrative services provided to TSAT. Since the TSAT Spin-off Date,
charges for administrative services provided by TCIC have been made pursuant
to the Transition Services Agreement. The amounts charged to TSAT pursuant to
the Transition Services Agreement are expected to exceed the amounts that were
allocated by TCIC to TSAT during 1996. If the Transition Services Agreement
had been effective as of January 1, 1996, the general and administrative
charges from TCIC would have been approximately $23,200,000 for the year ended
December 31, 1996.
The $135,867,000 or 245% and $41,171,000 or 288% increases in depreciation
during 1996 and 1995, respectively, as compared to the corresponding prior
year, are the result of changes in TSAT's depreciation policies (as described
below) and increases in TSAT's depreciable assets due primarily to capital
expenditures with respect to TSAT's satellite reception equipment. Effective
October 1, 1996, TSAT (i) changed the method used to depreciate its subscriber
installation costs, and (ii) reduced the estimated useful life of certain
satellite reception equipment. The inception-to-date effect on depreciation
expense of the change in depreciation method aggregated $55,304,000, and was
recorded during the fourth quarter of 1996. The effect of the reduction in
estimated useful life was accounted for on a prospective basis. For additional
information concerning the nature and quantified effects of such accounting
changes, see note 3 to the accompanying Audited Financial Statements of TSAT.
TSAT's 20.86% share of PRIMESTAR Partners' net losses decreased $5,694,000
or 63% and $2,753,000 or 23% during 1996 and 1995, respectively, as compared
to the corresponding prior year periods. Such decrease is primarily
attributable to a significant increase in the revenue derived by PRIMESTAR
Partners from TSAT and other Distributors of the PRIMESTAR(R) service. For
additional information concerning PRIMESTAR Partners' operations, see related
discussion above.
F-36
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
TSAT incurred interest expense of $2,023,000 during 1996. Substantially all
of such interest expense was incurred on the borrowings outstanding pursuant
to a promissory note to TCIC (the "TSAT Note"), in the principal amount of
$250,000,000, representing a portion of TSAT's intercompany balance owed to
TCIC on the TSAT Spin-off Date. As a result of the December 31, 1996
completion of the Bank Credit Facility and February 1997 issuance of the
Notes, TSAT expects that its interest expense in 1997 and future periods will
significantly exceed the amount incurred during 1996. See "Liquidity and
Capital Resources" below.
TSAT recognized interest income of $2,648,000, $306,000 and $306,000 during
1996, 1995 and 1994, respectively. The 1996 amount is primarily comprised of
interest income from PRIMESTAR Partners.
TSAT's income tax benefit was $45,937,000, $21,858,000 and $6,872,000 during
1996, 1995 and 1994, respectively. The effective tax rates associated with
such benefits were 25%, 32% and 33% respectively. In connection with the TSAT
Spin-off, TSAT became a party to the Tax Sharing Agreement. For additional
information, see note 11 to the accompanying Audited Financial Statements of
TSAT. TSAT's income tax benefits include intercompany allocations from TCI of
current income tax benefits of $70,645,000, $36,530,000 and $9,611,000 for
1996, 1995 and 1994, respectively. As discussed above, during the first
several years following the TSAT Spin-off, TSAT believes that it will not be
in a position to realize current income tax benefits.
Liquidity and Capital Resources
As described in note 2 to the accompanying Unaudited Financial Statements of
TSAT, TSAT has entered into binding agreements with respect to the
Restructuring Transaction, TSAT Merger and the ASkyB Transaction. Upon
consummation of the Restructuring Transaction and TSAT Merger, TSAT will be
consolidated into New PRIMESTAR. New PRIMESTAR will be a significantly larger
entity than TSAT and will have significant financial obligations. In this
regard, New PRIMESTAR will incur or assume significant indebtedness in
connection with the Restructuring Transaction and will issue approximately
$600 million liquidation value of preferred stock and $516 million
subordinated convertible notes in connection with the ASkyB Transaction. The
debt to be incurred and assumed by New PRIMESTAR in connection with the
Restructuring Transaction will include the Notes and any amounts outstanding
under the Bank Credit Facility. In addition to the foregoing obligations, New
PRIMESTAR will be responsible for payments due under (i) the Amended and
Restated Memorandum of Agreement (the "GE-2 Agreement") effective as of
October 18, 1996, between PRIMESTAR Partners and GE American Communications,
Inc. ("GE Americom"), which provides for PRIMESTAR Partners' use of
transponders on the medium power satellite currently used to provide the
PRIMESTAR(R) service ("GE-2"), (ii) certain specified contracts and other
obligations that will be assumed by New PRIMESTAR in connection with the ASkyB
Transaction, and (iii) various other commitments and contingent liabilities
associated with the businesses and assets that will comprise New PRIMESTAR
following consummation of the Restructuring Transaction and the ASkyB
Transaction. To the extent not earlier refinanced by TSAT and/or PRIMESTAR
Partners, it is anticipated that New PRIMESTAR will also be required to
refinance the Bank Credit Facility and the PRIMESTAR Credit Facility. New
PRIMESTAR will also require significant capital in order to fund its business
strategies, including the development of a proposed high-power DBS service,
and any possible migration of some or all of the existing medium-power
PRIMESTAR(R) customers to such high-power service. No assurance can be given
that the Restructuring Transaction, TSAT Merger and the ASkyB Transaction will
be consummated or that, if consummated, New PRIMESTAR will be able to obtain
sufficient financial resources in order to satisfy its short-term and long-
term liquidity requirements. The following discussion focuses on the liquidity
and capital resources of TSAT as a stand-alone entity without giving effect to
the pending Restructuring Transaction, TSAT Merger and the ASkyB Transaction.
Prior to the TSAT Spin-off Date, TSAT relied upon non-interest bearing
advances from TCIC in order to fund the majority of TSAT's working capital
requirements and capital expenditures. On the TSAT Spin-off Date, TSAT issued
the TSAT Note to TCIC and TCIC agreed to provide TSAT with financing pursuant
to a credit
F-37
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
facility entered into by TSAT and TCIC in connection with the TSAT-Spin-off
(the "TCIC Credit Facility"). The TCIC Credit Facility provided for TCIC's
commitment to make revolving loans to TSAT (the "TCIC Revolving Loans") and
TSAT's obligations with respect to the TCIC Revolving Loans and the TSAT Note,
including TSAT's best efforts obligations to refinance the TCIC Credit
Facility. On December 31, 1996, TSAT entered into the Bank Credit Facility and
used proceeds therefrom to repay the TSAT Note in full. In connection with the
February 1997 issuance of the Notes and the March 1997 determination that GE-2
was commercially operational, borrowing availability pursuant to the TCIC
Credit Facility was terminated. Accordingly, TCI is not expected to be a
source of financing for TSAT in future periods.
TSAT also has relied upon advances from PRIMESTAR Partners to finance the
cost of constructing the Tempo Satellites. Such advances, which aggregated
$463,133,000 at September 30, 1997, are reflected as a liability in the
balance sheets in the accompanying Audited and Unaudited Financial Statements
of TSAT. See related discussion below.
On February 20, 1997, TSAT issued the Senior Subordinated Notes and the
Senior Subordinated Discount Notes. The net proceeds from the issuance of the
Notes (approximately $340,500,000 after deducting offering expenses) were
initially held in escrow and were subsequently released to TSAT on March 17,
1997. TSAT initially used $244,404,000 of such net proceeds to repay amounts
outstanding under the Bank Credit Facility.
Cash interest on the Senior Subordinated Notes is payable semi-annually in
arrears on February 15 and August 15, commencing August 15, 1997. Cash
interest will not accrue or be payable on the Senior Subordinated Discount
Notes prior to February 15, 2002. Thereafter cash interest will accrue at a
rate of 12 1/4% per annum and will be payable semi-annually in arrears on
February 15 and August 15, commencing August 15, 2002; provided however, that
at any time prior to February 15, 2002, TSAT may make a Cash Interest Election
(as defined) on any interest payment date to commence the accrual of cash
interest from and after the Cash Interest Election Date (as defined). The
Notes mature February 15, 2007. The Notes will be redeemable at the option of
TSAT, in whole or in part, at any time after February 15, 2002 at specified
redemption prices. In addition, prior to February 15, 2000, TSAT may use the
net cash proceeds from certain specified equity transactions to redeem up to
35% of the Notes at specified redemption prices.
The Notes were not originally registered under the Securities Act of 1933,
as amended (the "Securities Act"), but contained a covenant requiring TSAT to
file with the Securities and Exchange Commission (the "SEC") a registration
statement with respect to an offer to exchange (the "Exchange Offer") the
Notes for substantially identical notes that are so registered (the "Exchange
Notes"), or, alternatively, to register the Notes under the Securities Act.
Although TSAT filed a registration statement in connection with the Exchange
Offer with the SEC on April 11, 1997, such registration statement has not been
declared effective, and accordingly, the Exchange Offer has not been
commenced. As a result, effective July 5, 1997, TSAT began to incur additional
interest on the Notes. During the 90-day period ended October 3, 1997,
additional interest on the Notes accrued at the rate of $0.05 per $1000
principal amount per week. For each subsequent 90-day period in which the
Notes are not registered under the Securities Act, or exchanged for registered
Exchange Notes, the additional interest on the Notes will be increased by
$0.05 per $1000 principal amount per week up to a maximum of $0.50 per $1000
principal amount per week. Such additional interest aggregated $252,000
through September 30, 1997, TSAT currently expects that, due to the pendency
of the Restructuring Transaction, it may not be able to comply with the
registration requirements under the Notes, and accordingly, will not be able
to cease the accrual of additional interest, until the first quarter of 1998.
At September 30, 1997, there were no outstanding borrowings under the Bank
Credit Facility. As a result of the February 1997 issuance of the Notes and
the March 1997 determination that GE-2 was commercially operational, the
maximum available commitments under the Bank Credit Facility were increased
from $350,000,000 to $750,000,000. At September 30, 1997, $720,000,000 of such
maximum commitments were
F-38
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
unused. The availability of such commitments for borrowing is subject to
TSAT's compliance with operating and financial covenants and other customary
conditions. Commencing March 31, 2001, aggregate commitments under the Bank
Credit Facility will be reduced quarterly in accordance with a schedule, until
final maturity at June 30, 2005. TSAT anticipates that it will be required to
refinance and/or amend the Bank Credit Facility prior to the consummation of
the Restructuring Transaction described in note 2 to the accompanying
Unaudited Financial Statements of TSAT. No assurance can be given that any
such refinancing and/or amendment will be completed on terms acceptable to
TSAT. For additional information concerning the Bank Credit Facility, see note
10 to the accompanying Unaudited Financial Statements of TSAT.
During the nine months ended September 30, 1997 and 1996, TSAT's operating
activities provided cash of $74,715,000 and $58,219,000, respectively. A
significant portion of the cash provided by TSAT's operating activities during
the 1996 period is attributable to the $44,454,000 intercompany allocation of
current income tax benefits from TCI. During the first several years following
the TSAT Spin-off, TSAT believes that it will not be in a position to realize
income tax benefits on a current basis. Additionally, changes in TSAT's
receivables, prepaids, accruals and payables and subscriber advance payments
("Operating Assets and Liabilities") accounted for $31,896,000 and $8,068,000
of the cash provided by TSAT's operating activities during the nine months
ended September 30, 1997 and 1996, respectively. The timing and amount of
changes in the balances of TSAT's Operating Assets and Liabilities are subject
to a variety of factors, certain of which are outside the control of, or not
easily predicted by, TSAT. Exclusive of the effects of intercompany
allocations of current income tax benefits, and changes in TSAT's Operating
Assets and Liabilities, TSAT's operating activities provided cash of
$42,819,000 and $5,697,000 during the nine months ended September 30, 1997 and
1996, respectively.
During the nine months ended September 30, 1997 and 1996, TSAT used cash of
$5,448,000 and $69,930,000, respectively, to fund the cost of constructing the
Tempo Satellites and $151,062,000 and $258,907,000, respectively, to fund (i)
the acquisition and installation of satellite reception equipment, and (ii)
certain other capital expenditures. TSAT expects that the majority of future
capital expenditures with respect to TSAT's medium-power business will be used
to fund the acquisition and installation of satellite reception equipment. The
actual amount of capital to be required will be primarily a function of (i)
subscriber growth and churn rates, and (ii) the actual cost of purchasing and
installing satellite reception equipment.
TSAT currently intends to operate Tempo DBS-1 as a platform to provide high-
power digital video and audio programming services to residential customers,
as well as multiple dwelling units, commercial customers and resellers. TSAT
presently is unable to reasonably estimate the amount of capital expenditures
that would be required in connection with any high-power strategy that might
be pursued by TSAT. As discussed above, TSAT's capital expenditure
requirements would be significantly impacted by the consummation of the
Restructuring Transaction and the ASkyB Transaction. In addition, TSAT's
capital expenditure requirements would be impacted if TSAT were to complete
any significant acquisitions or enter into any other significant business
activities.
At September 30, 1997, TSAT's future minimum commitments to purchase
satellite reception equipment aggregated approximately $20,000,000.
Upon Delivery of each of the Tempo Satellites, Tempo is obligated to make a
$10 million incentive payment to Loral. Tempo is eligible to receive a pro
rata warranty payback of each such incentive payment to the extent that
transponder failures occur during the twelve-year period following Delivery.
Satellite incentive payments and any related warranty paybacks are treated as
adjustments of the cost of the applicable Tempo Satellite.
As part of the compensation paid to TSAT's four master sales agents, TSAT
has agreed to pay certain residual sales commissions equal to a percentage of
the programming collected from subscribers installed by such
F-39
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
master sales agents during specified periods following the initiation of
service (generally five years). During the nine months ended September 30,
1997 and 1996, residual sales commissions to such master sales agents
aggregated $11,518,000 and $7,887,000, respectively, and were charged to
expense in the accompanying statements of operations of TSAT.
In connection with the TSAT Spin-off, TSAT entered into an indemnification
agreement with each of TCIC and TCI UA 1, Inc. ("TCI UA 1"), an indirect
subsidiary of TCIC (collectively the "Indemnification Agreements"). The
Indemnification Agreement with TCIC provides for TSAT to reimburse TCIC for
any amounts drawn under an irrevocable transferable letter of credit for the
account of TCIC to support TSAT's share of PRIMESTAR Partners' obligations
under the GE-2 Agreement. The drawable amount of such letter of credit is
$25,000,000. Although TCIC's obligations under such letter of credit expire on
February 14, 1998, TCIC has agreed to extend such letter of credit through
June 30, 1999.
The Indemnification Agreement with TCI UA 1 provides for TSAT to reimburse
TCI UA 1 for any amounts drawn under an irrevocable transferable letter of
credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter of Credit"),
which supports the PRIMESTAR Credit Facility. At September 30, 1997, the
drawable amount of the TCI UA 1 Letter of Credit was $141,250,000.
During the first quarter of 1997, two additional irrevocable transferable
letters of credit were issued pursuant to the Bank Credit Facility for the
account of TSAT, one to support TSAT's share of PRIMESTAR Partners'
obligations under the GE-2 Agreement, and the second to support the PRIMESTAR
Credit Facility. The initial drawable amount of the first letter of credit is
$25,000,000, increasing to $50,000,000 if PRIMESTAR Partners exercises the
End-of-Life Option, the initial drawable amount of the second letter of credit
is $5,000,000.
The Indemnification Agreements provide for TSAT to indemnify and hold
harmless TCIC and TCI UA 1 and certain related persons from and against any
losses, claims, and liabilities arising out of the respective letters of
credit or any drawings thereunder. The payment obligations of TSAT to TCIC and
TCI UA 1, respectively, under such Indemnification Agreements are subordinated
in right of payment with respect to the obligations of TSAT under the Bank
Credit Facility.
The amounts advanced by PRIMESTAR Partners to TSAT to fund the cost of
constructing the Tempo Satellites ($463,133,000 at September 30, 1997) have
been financed by PRIMESTAR Partners' borrowings under the PRIMESTAR Credit
Facility, which is in turn supported by letters of credit arranged for by
affiliates of all but one of the partners of PRIMESTAR Partners. At September
30, 1997, PRIMESTAR Partners' indebtedness under the PRIMESTAR Credit Facility
aggregated $555,000,000, including amounts borrowed to pay interest charges.
The maturity date of the PRIMESTAR Credit Facility has been extended to
September 30, 1998. Long-term financing alternatives with respect to the Tempo
Satellites are currently being evaluated. No assurance can be given that any
such long-term financing will be available on acceptable terms.
TCI has caused TCI UA 1 to renew the letter of credit arranged by it on
TSAT's behalf, through June 30, 1999. TSAT believes (but cannot assure) that
during such period TSAT and/or PRIMESTAR Partners will be able to obtain
permanent financing for the Tempo Satellites (to the extent not sold to a
person other than PRIMESTAR Partners) on a basis that does not require TSAT to
post a letter of credit with respect thereto. If such permanent financing is
not available, under certain maintenance covenants contained in the Bank
Credit Facility, TSAT would be unable to provide or arrange for such a letter
of credit unless (i) the lenders under the Bank Credit Facility were to agree
to amend or waive such covenants to permit the posting of such letter of
credit by TSAT, (ii) TCI were to agree to renew the TCI UA 1 Letter of Credit
for an additional period, or (iii) TSAT were to achieve a greater than
anticipated increase in Operating Cash Flow. If TSAT and/or PRIMESTAR Partners
are unable to refinance the Tempo Satellites (to the extent not sold to a
person other than PRIMESTAR Partners) without a letter of credit and is unable
to post (or arrange for the posting of) such a letter of credit (a "Letter of
Credit Event"), TSAT could be adversely affected.
F-40
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Under PRIMESTAR Partners' Limited Partnership Agreement, as amended, TSAT
has agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the partners
of PRIMESTAR Partners. Additionally, those subsidiaries of TSAT that are
general partners of PRIMESTAR Partners are liable as a matter of partnership
law for all debts of PRIMESTAR Partners in the event the liabilities of
PRIMESTAR Partners were to exceed its assets. TSAT has additional contingent
liabilities related to PRIMESTAR Partners. See notes 7 and 12 to the
accompanying Unaudited Financial Statements of TSAT.
The International Bureau ("the International Bureau") of the Federal
Communications Commision (the "FCC") has granted EchoStar Satellite
Corporation, a subsidiary of EchoStar Communications Corporation (together
with its consolidated subsidiaries, "EchoStar"), a conditional authorization
to construct, launch and operate a Ku-band domestic fixed satellite into the
orbital position at 83(degrees) W.L., immediately adjacent to that occupied by
GE-2. Contrary to previous FCC policy, 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 PRIMESTAR Partners 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,
are currently 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 PRIMESTAR Partners have attempted to resolve potential
coordination problems directly with EchoStar. However, it is uncertain whether
any agreement in respect of such coordination between PRIMESTAR Partners and
EchoStar will be reached, or that even if such agrement is reached, that
coordination will resolve such interference.
At September 30, 1997, approximately 9,813,000 shares of TSAT Series A
Common Stock were reserved for issuance pursuant to certain option and
restricted stock agreements, and certain arrangements with TCIC.
Effective as of June 4, 1997, TCI Satellite MDU, Inc. ("TSAT-MDU"), a
wholly-owned subsidiary of TSAT, and ResNet Communications, Inc., ("ResNet
Corp."), a wholly-owned subsidiary of LodgeNet Entertainment Corporation
("LodgeNet"), formed ResNet Communications, LLC ("ResNet LLC"), TSAT-MDU
acquired a 4.99% ownership interest in ResNet LLC, and ResNet Corp. acquired a
95.01% ownership interest in ResNet LLC. ResNet LLC was formed to own and
operate the business owned and operated by ResNet Corp. prior to the formation
of RestNet LLC. ResNet Corp. was formed by LodgeNet in February 1996 to engage
in the business of providing video services to subscribers in multiple
dwelling units (the "ResNet Business"). Effective as of October 21, 1996,
TSAT-MDU had acquired 4.99% of the issued and outstanding capital stock of
ResNet Corp. for a purchase price of $5,396,000. In connection with the
formation of ResNet LLC, ResNet Corp. redeemed all of its capital stock
previously issued to TSAT-MDU. ResNet LLC agreed to purchase from TSAT-MDU up
to $40,000,000 in satellite reception equipment, to be used in connection with
the ResNet Business exclusively over a five-year period (subject to a one-year
extension at the option of ResNet LLC if ResNet LLC has not purchased the full
$40,000,000 in equipment during the five-year initial term).
TSAT-MDU 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 TSAT-MDU. The term of the loan is five
years with an option by ResNet LLC to extend the term for one additional year.
The
F-41
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. TSAT-MDU's only recourse
with respect to repayment of the loan is conversion into ownship 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 TSAT-MDU television services in certain areas, TSAT-
MDU could be prohibited from holding 5% or more of the ownership interest in
ResNet LLC and consequently could not exercise the conversion rights under the
convertible loan agreement. TSAT-MDU is required to convert the convertible
loan at such time as conversion would not violate such currently applicable
regulatory restrictions.
The above-described transaction between TSAT-MDU and ResNet LLC supercede in
their entirety substantially similar transactions entered into between TSAT-
MDU and ResNet Corp. effective as of October 21, 1996.
At September 30, 1997, TSAT held aggregate cash and cash equivalents of
$19,279,000. TSAT believes that such cash and cash equivalents, together with
borrowing availability pursuant to the Bank Credit Facility and any funds
generated by TSAT's operating activities will be sufficient through December
31, 1998, to fund TSAT's working capital, debt service and currently projected
capital expenditure requirements associated with its medium-power satellite
distribution business. However, to the extent that TSAT (i) funds all or any
significant portion of the cost of the Tempo Satellites, (ii) pursues a
strategy with respect to the high power segment of the digital satellite
industry that requires significant capital expenditures, (iii) completes any
significant acquisitions, (iv) enters into any other business activities that
require significant capital investments, (v) suffers a Letter of Credit Event
or is required to meet other significant future liquidity requirements in
addition to those described above, TSAT anticipates that it would be required
to obtain additional debt or equity financing. No assurance can be given,
however, that TSAT would be able to obtain additional financing on terms
acceptable to it, or at all. As described above, TSAT's liquidity and capital
resources would be significantly impacted by the consummation of the pending
Restructuring Transaction, TSAT Merger and ASkyB Transaction. See also note 2
of the accompanying Unaudited Financial Statements of TSAT.
TSAT is highly leveraged. The degree to which TSAT is leveraged may
adversely affect TSAT'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 TSAT and its stockholders.
TSAT's ability to repay or refinance its debt will require TSAT to increase
its Operating Cash Flow or to obtain additional debt or equity financing.
There can be no assurance that TSAT will be successful in increasing its
Operating Cash Flow by a sufficient magnitude or in a timely manner or in
raising sufficient additional debt or equity financing to enable it to repay
or refinance its debt. See related discussion above and note 2 to the
accompanying Unaudited Financial Statements of TSAT.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders TCI Satellite Entertainment, Inc.:
We have audited the accompanying balance sheets of TCI Satellite
Entertainment, Inc., (as defined in note 1) as of December 31, 1996 and 1995
and the related combined statements of operations, equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TCI Satellite
Entertainment, Inc., as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1997
F-43
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 6,560 1,801
Accounts receivable.................................... 24,731 29,192
Less allowance for doubtful accounts................... 4,666 4,819
----------- --------
20,065 24,373
----------- --------
Prepaid expenses....................................... 927 86
Investment in, and related advances to, PRIMESTAR
Partners L.P., ("PRIMESTAR Partners") (note 6)........ 32,240 17,963
Property and equipment, at cost:
Satellite reception equipment........................ 595,249 422,070
Subscriber installation costs........................ 175,553 128,870
Support equipment.................................... 28,332 12,395
Cost of satellites under construction (note 7)....... 457,685 382,900
----------- --------
1,256,819 946,235
Less accumulated depreciation........................ 149,165 57,015
----------- --------
1,107,654 889,220
----------- --------
Other assets (note 8).................................. 12,827 --
----------- --------
$ 1,180,273 933,443
=========== ========
LIABILITIES AND EQUITY
Accounts payable....................................... $ 18,860 11,378
Accrued charges from PRIMESTAR Partners (note 6)....... 37,943 26,420
Accrued charges from TCI Communications, Inc. ("TCIC")
(note 12)............................................. 8,381 --
Accrued advertising.................................... 6,000 3,800
Other accrued expenses................................. 9,567 7,683
Subscriber advance payments............................ 22,249 13,244
Due to PRIMESTAR Partners (note 7)..................... 457,685 382,900
Debt (note 9).......................................... 247,230 --
Deferred income taxes (note 11)........................ -- 4,434
----------- --------
Total liabilities.................................. 807,915 449,859
----------- --------
Equity:
Preferred stock, $.01 par value; authorized
5,000,000; none issued.............................. -- --
Series A common stock, $1 par value; authorized
185,000,000; issued 57,946,044 in 1996.............. 57,946 --
Series B common stock, $1 par value; authorized
10,000,000 shares; issued 8,466,564 in 1996......... 8,467 --
Additional paid-in capital........................... 521,724 --
Accumulated deficit.................................. (215,779) (75,775)
Due to TCIC (notes 2 and 12)......................... -- 559,359
----------- --------
Total equity....................................... 372,358 483,584
----------- --------
Commitments and contingencies (notes 2, 6, 7, 8, 9, 10,
12 and 13)............................................
$ 1,180,273 933,443
=========== ========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------- -------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C>
Revenue:
Programming and equipment rental................ $ 351,548 133,688 18,641
Installation.................................... 65,913 75,215 11,638
--------- ------- -------
417,461 208,903 30,279
--------- ------- -------
Operating costs and expenses:
Programming and other charges from PRIMESTAR
Partners (note 6).............................. 188,724 78,250 11,632
Other operating:
TCIC (note 12)................................ 20,365 15,916 4,367
Other......................................... 8,181 1,884 --
Selling, general and administrative:
TCIC (note 12)................................ 18,120 7,817 1,080
Other......................................... 175,000 110,250 8,027
Depreciation (note 3)........................... 191,355 55,488 14,317
--------- ------- -------
601,745 269,605 39,423
--------- ------- -------
Operating loss.............................. (184,284) (60,702) (9,144)
--------- ------- -------
Other income (expense):
Interest expense:
TCIC (note 9)................................. (1,946) -- --
Other......................................... (77) -- --
Interest income................................. 2,648 306 306
Share of losses of PRIMESTAR Partners (note 6).. (3,275) (8,969) (11,722)
Other, net...................................... 993 -- --
--------- ------- -------
(1,657) (8,663) (11,416)
--------- ------- -------
Loss before income taxes.................... (185,941) (69,365) (20,560)
Income tax benefit (note 11)...................... 45,937 21,858 6,872
--------- ------- -------
Net loss.................................... $(140,004) (47,507) (13,688)
========= ======= =======
Pro forma net loss per common share (note 4)...... $ (2.11) (.72)
========= =======
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED TOTAL
SERIES A SERIES B CAPITAL DEFICIT DUE TO TCIC EQUITY
-------- -------- ---------- ----------- ----------- --------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... $ -- -- -- (14,580) 57,929 43,349
Net loss.............. -- -- -- (13,688) -- (13,688)
Allocation of TCIC
expenses............. -- -- -- -- 5,447 5,447
Allocation of TCIC
installation costs... -- -- -- -- 15,369 15,369
Intercompany income
tax allocation....... -- -- -- -- (9,611) (9,611)
Net cash transfers
from TCIC............ -- -- -- -- 79,660 79,660
------- ----- ------- --------- -------- --------
Balance at December 31,
1994................... -- -- -- (28,268) 148,794 120,526
Net loss.............. -- -- -- (47,507) -- (47,507)
Allocation of TCIC
expenses............. -- -- -- -- 23,733 23,733
Allocation of TCIC
installation costs... -- -- -- -- 57,058 57,058
Intercompany income
tax allocation....... -- -- -- -- (36,530) (36,530)
Recognition of
deferred tax assets
in connection with
Intercompany transfer
of certain property
and equipment........ -- -- -- -- 12,136 12,136
Net cash transfers
from TCIC............ -- -- -- -- 354,168 354,168
------- ----- ------- --------- -------- --------
Balance at December 31,
1995................... -- -- -- (75,775) 559,359 483,584
Net loss.............. -- -- -- (140,004) -- (140,004)
Allocation of TCIC
expenses............. -- -- -- -- 38,485 38,485
Allocation of TCIC
installation costs... -- -- -- -- 53,169 53,169
Intercompany income
tax allocation....... -- -- -- -- (70,645) (70,645)
Net cash transfers
from TCIC............ -- -- -- -- 228,622 228,622
Recognition of
deferred tax assets
upon transfer of
PRIMESTAR Partners
investment in
connection with
Distribution (note
11).................. -- -- -- -- 29,142 29,142
Adjustment to reflect
consummation of
Distribution (note
2)................... 57,941 8,467 521,724 -- (838,132) (250,000)
Issuance of Series A
Common Stock upon
conversion of
convertible notes of
a TCIC subsidiary.... 5 -- -- -- -- 5
------- ----- ------- --------- -------- --------
Balance at December 31,
1996................... $57,946 8,467 521,724 $(215,779) -- 372,358
======= ===== ======= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 5)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(140,004) (47,507) (13,688)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation................................ 191,355 55,488 14,317
Share of losses of PRIMESTAR Partners....... 3,275 8,969 11,722
Deferred income tax expense................. 24,708 14,672 2,739
Other non-cash charges (credits)............ (311) 901 (87)
Changes in operating assets and liabilities:
Change in receivables..................... 4,364 (21,859) (1,809)
Change in prepaids........................ (841) (86) --
Change in accruals and payables........... 23,650 42,135 5,624
Change in subscriber advance payments..... 9,005 11,480 1,304
--------- -------- --------
Net cash provided by operating
activities............................. 115,201 64,193 20,122
--------- -------- --------
Cash flows from investing activities:
Capital expended for construction of
satellites................................... (74,785) (104,128) (207,608)
Capital expended for property and equipment... (326,621) (442,782) (109,184)
Additional investments, in and related
advances to, PRIMESTAR Partners.............. (17,552) (17,139) (32,082)
Investment in ResNet Communications, Inc...... (5,458) -- --
Repayment of advances to PRIMESTAR Partners... -- 30,192
--------- -------- --------
Net cash used in investing activities... (424,416) (564,049) (318,682)
--------- -------- --------
Cash flows from financing activities:
Increase in due to PRIMESTAR Partners......... 74,785 104,128 207,608
Increase in due to TCIC....................... 250,189 397,529 90,952
Borrowings of debt............................ 259,000 -- --
Repayments of debt............................ (263,000) -- --
Payment of deferred financing costs........... (7,000) -- --
--------- -------- --------
Net cash provided by financing
activities............................. 313,974 501,657 298,560
--------- -------- --------
Net increase in cash and cash
equivalents............................ 4,759 1,801 --
Cash and cash equivalents:
Beginning of period.................... 1,801 -- --
--------- -------- --------
End of period.......................... $ 6,560 1,801 --
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1)BASIS OF PRESENTATION
The accompanying financial statements of TCI Satellite Entertainment, Inc.
("TSEI") include the historical financial information of (i) certain
satellite television assets (collectively, "TCI SATCO") of TCIC, a
subsidiary of Tele-Communications, Inc. ("TCI") for periods prior to the
December 4, 1996 consummation of the distribution transaction (the
"Distribution") described in note 2, and (ii) TSEI and its consolidated
subsidiaries for the period following such date. Upon consummation of the
Distribution, TSEI became the owner of the assets that comprise TCI SATCO,
which assets include (i) a 100% ownership interest in the TCIC business
that distributed the PRIMESTAR(R) programming service to subscribers
within specified areas of the continental United States (the "U.S."), (ii)
a 100% ownership interest in Tempo Satellite, Inc. ("Tempo"), and (iii) a
20.86% aggregate ownership interest in PRIMESTAR Partners.
Tempo holds a permit (the "FCC Permit") issued by the Federal
Communications Commission ("FCC") authorizing the construction, launch and
operation of a direct broadcast satellite ("DBS") system. Tempo is also a
party to a construction agreement (the "Satellite Construction Agreement")
with Space Systems/Loral, Inc. ("Loral"), pursuant to which Tempo arranged
for the construction of two high power communications satellites (the
"Tempo Satellites") and has an option to purchase up to three additional
satellites. PRIMESTAR Partners, which was formed as a limited partnership
in 1990 by subsidiaries of TCIC, several other cable operators, and
General Electric Company, broadcasts satellite entertainment services that
are delivered to the home through TSEI and certain other authorized
distributors.
In the following text, "TSAT" may, as the context requires, refer to "TCI
SATCO" (prior to the December 4, 1996 completion of the Distribution),
TSEI and its consolidated subsidiaries (subsequent to the December 4, 1996
completion of the Distribution) or both. See note 2. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are
to TCI and TCIC and their respective consolidated subsidiaries (other than
TSAT).
All significant inter-entity and intercompany transactions have been
eliminated.
As further discussed in note 12, the accompanying combined statements of
operations include allocations of certain costs and expenses of TCI.
Although such allocations are not necessarily indicative of the costs that
would have been incurred by TSAT on a stand-alone basis, management
believes the resulting allocated amounts are reasonable.
(2)DISTRIBUTION TRANSACTION
General
On June 17, 1996, the Board of Directors of TCI (the "TCI Board")
announced its intention to distribute all the capital stock of TSAT to the
holders of Tele-Communications, Inc. Series A TCI Group Common Stock (the
"Series A TCI Group Common Stock") and Tele-Communications, Inc. Series B
TCI Group Common Stock (the "Series B TCI Group Common Stock" and,
together with the Series A TCI Group Common Stock, the "TCI Group Common
Stock"). On December 4, 1996, the Distribution was effected as a
distribution by TCI to holders of record of its TCI Group Common Stock as
of the close of business on November 12, 1996 (the "Record Date") of
shares of the Series A Common Stock of TSAT (the "Series A Common Stock")
and Series B Common Stock of TSAT (the "Series B Common Stock", and
together with the Series A Common Stock, the "TSAT Common Stock"). The
Distribution did not involve
F-48
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the payment of any consideration by the holders of TCI Group Common Stock
(such holders, the "TCI Group Stockholders"), and is intended to qualify
as a tax-free spinoff.
Stockholders of record of TCI Group Common Stock on the Record Date
received one share of Series A Common Stock for each ten shares of Series
A TCI Group Common Stock owned of record at the close of business on the
Record Date and one share of Series B Common Stock for each ten shares of
Series B TCI Group Common Stock owned of record as of the close of
business on the Record Date. Fractional shares were not issued. Fractions
of one-half or greater of a share were rounded up and fractions of less
than one-half of a share were rounded down to the nearest whole number of
shares of Series A Common Stock and Series B Common Stock. Immediately
following the Distribution, 57,941,044 shares of Series A Common Stock and
8,466,564 shares of Series B Common Stock were issued and outstanding.
Subsequent to the Distribution, TSAT and TCI have operated independently,
and neither has any stock ownership, beneficial or otherwise, in the
other. For the purposes of governing certain of the ongoing relationships
between TSAT and TCI after the Distribution, and to provide mechanisms for
an orderly transition, TSAT and TCI have entered into various agreements,
including the "Reorganization Agreement (see below)," the "Fulfillment
Agreement (see note 12)," the "Indemnification Agreements (see note 13),"
the "TCIC Credit Facility (see note 9)," the "Transition Services
Agreement (see note 12)," and an amendment to TCI's existing "Tax Sharing
Agreement (see note 11)."
Reorganization Agreement
The Reorganization Agreement provided for, among other things, the
transfer to TSAT of the assets of TCI SATCO, and for the assumption by
TSAT of related liabilities. No consideration was payable by TSAT for
these transfers, except that two subsidiaries of TSAT purchased TCIC's
partnership interests in PRIMESTAR Partners for consideration payable by
delivery of promissory notes issued by such subsidiaries, which notes were
assumed by TCI on or before the Distribution Date, in the form of a
capital contribution to TSAT. The Reorganization Agreement also provides
for certain cross-indemnities designed to make TSAT financially
responsible for all liabilities relating to the digital satellite business
conducted by TCI prior to the Distribution, as well as for all liabilities
incurred by TSAT after the Distribution, and makes TCI financially
responsible for all potential liabilities of TSAT which are not related to
the digital satellite business, including, for example, liabilities
arising as a result of TSAT having been a subsidiary of TCI.
Pursuant to the Reorganization Agreement, on the Distribution Date, TSAT
issued to TCIC a promissory note (the "TSAT Note"), in the principal
amount of $250,000,000, representing a portion of TSAT's intercompany
balance owed to TCIC on such date. On December 31, 1996, TSAT entered into
a bank credit agreement with respect to a senior secured reducing
revolving credit facility (the "Bank Credit Facility") and used a portion
of the borrowing availability thereunder to repay in full all principal
and interest due to TCIC pursuant to the TSAT Note. See note 9 and related
discussion below.
Pursuant to the Reorganization Agreement, the remainder of TSAT's
intercompany balance owed to TCIC on the Distribution Date (other than
certain advances made to TSAT by TCIC in 1996 to fund certain construction
and related costs associated with the Tempo Satellites, as described in
note 7) was assumed by TCI in the form of a capital contribution to TSAT.
In addition, TSAT (i) assumed TCI's obligations under options to be
granted on the Distribution Date to certain key employees of TCI (who are
not employees of TSAT) representing, in aggregate, 2.5% of the shares of
TSAT Common Stock issued and outstanding on the Distribution Date, after
giving effect to the Distribution, and (ii) granted to TCI an option to
purchase up to 4,765,000 shares of Series A Common Stock, at an exercise
price of $1.00 per
F-49
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
share, as required by TCI from time to time to meet its obligations under
the conversion features of certain convertible securities of TCI as such
conversion features were adjusted as a result of the Distribution. See
note 10 for related discussion.
(3)CHANGES IN ACCOUNTING
During the fourth quarter of 1996, TSAT re-evaluated certain of its
depreciation policies. After considering relevant accounting literature,
current accounting practices in similar industries, and other factors,
TSAT concluded that the most appropriate depreciation policy for its
subscriber installation costs was to depreciate subscriber installation
costs on a straight line basis over the estimated average life of a
subscriber, and charge to depreciation expense the unamortized balance of
installation costs associated with customers who have terminated service
with TSAT. TSAT believes the new policy is more appropriate than the prior
method since, under the new policy, subscriber installation costs
associated with subscribers whose service has been terminated are no
longer carried on TSAT's balance sheet after the date of termination. This
change was adopted effective October 1, 1996 and was treated as a change
in accounting policy that was inseparable from a change in estimate.
Accordingly, the cumulative effect of such change for periods prior to
October 1, 1996, together with the fourth quarter 1996 effect of such
change, was included in TSAT's depreciation expense for the fourth quarter
of 1996. Consequently, this change in policy resulted in increases to
TSAT's depreciation expense, net loss and pro forma net loss per share for
the year ended December 31, 1996 of $55,304,000 ($8,754,000 of which
relates to periods prior to January 1, 1996) $41,478,000 ($6,566,000 of
which relates to periods prior to January 1, 1996) and $.62 ($.10 of which
relates to periods prior to January 1, 1996), respectively.
In connection with the aforementioned discussion of TSAT's accounting
policies with respect to subscriber installation costs, TSAT also
determined that a reduction in the estimated useful life of certain
satellite reception equipment was appropriate in light of certain changes
in TSAT's expectations with respect to technological and other factors.
This change in estimate was given effect on a prospective basis as of
October 1, 1996. This change in estimate resulted in increases to TSAT's
depreciation expense, net loss and pro forma net loss per share for the
year ended December 31, 1996 of $7,796,000, $5,847,000 and $.09,
respectively.
(4)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
TSAT considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
Investment in PRIMESTAR Partners
TSAT uses the equity method to account for its investment in PRIMESTAR
Partners. Under this method, the investment, originally recorded at cost,
is adjusted to recognize TSAT's share of the net earnings or losses of
PRIMESTAR Partners as they occur, rather than as dividends or other
distributions are received, limited to the extent of TSAT's investment in,
and advances and commitments to, PRIMESTAR Partners. TSAT's share of net
earnings or losses of PRIMESTAR Partners includes the amortization of the
difference between TSAT's investment and its share of the net assets of
PRIMESTAR Partners.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed on a
straight-line basis using estimated useful lives of 4 to 6 years (4 to 8
years through September 30, 1996) for satellite reception equipment
F-50
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and 3 to 10 years for support equipment. Subscriber installation costs are
depreciated over the estimated average life of a subscriber (4 years). Any
subscriber installation costs that have not been fully depreciated at the
time service to a subscriber is terminated are charged to depreciation
expense during the period in which such termination occurs. See note 3.
Installation charges from TCIC include direct and indirect costs of
performing installations. Through the Distribution Date, TSAT capitalized
a portion of such charges as subscriber installation costs based upon
amounts charged by unaffiliated third parties to perform similar services.
Subsequent to the Distribution Date, TSAT has capitalized the full amount
of installation fees paid to TCIC.
Repairs and maintenance are charged to operations, and betterments and
additions are capitalized. At the time of ordinary retirements of
satellite reception equipment, sales or other dispositions of property,
the original cost and cost of removal of such property are charged to
accumulated depreciation, and salvage, if any, is credited thereto.
Costs associated with the construction, launch and deployment of the
satellites are capitalized. The cost of the Tempo Satellites under
construction is comprised of amounts paid by TSAT pursuant to the
Satellite Construction Agreement. See note 7.
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of ("Statement No. 121") requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. TSAT adopted Statement
No. 121 effective January 1, 1996. Such adoption did not have a
significant effect on the financial position or results of operations of
TSAT. In accordance with Statement No. 121, TSAT periodically reviews the
carrying amount of its long-lived assets (including satellites) to
determine whether current events or circumstances warrant adjustments to
such carrying amounts. TSAT considers historical and expected future net
operating losses to be its primary indicators of potential impairment.
Satellites ("Satellites") are evaluated for impairment on a satellite-by-
satellite basis. Other assets are grouped and evaluated for impairment at
the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets
("Assets"). TSAT deems Satellites and Assets to be impaired if TSAT is
unable to recover the carrying value of its Satellites and Assets over
their expected remaining useful life through a forecast of undiscounted
future operating cash flows directly related to the Satellites and Assets.
If Satellites and Assets are deemed to be impaired, the loss is measured
as the amount by which the carrying amount of the Satellites and Assets
exceeds their fair values. TSAT generally measures fair value by
considering sales prices for similar assets or by discounting estimated
future cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could
vary significantly from such estimates.
Revenue Recognition
Monthly programming and equipment rental revenue is recognized in the
period that services are delivered. Installation revenue is recognized in
the period the installation services are provided to the extent of direct
selling costs. To date, direct selling costs have exceeded installation
revenue.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
F-51
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Residual Sales Commissions
Residual sales commissions, which become payable upon the collection of
programming revenue from certain subscribers, are expensed during the
period in which such commissions become payable. See note 13.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("Statement No. 123") was issued by the Financial
Accounting Standards Board in October 1995. Statement No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees. As
allowed by Statement No. 123, TSAT continued to account for stock-based
employee compensation pursuant to Accounting Principles Board Opinion No.
25. For the year ended December 31, 1996, TSAT estimates that stock
compensation expense would not be materially different under Statement No.
123.
Pro Forma Net Loss Per Common Share
As described in note 2, TSAT issued 66,407,608 shares of TSAT Common Stock
pursuant to the Distribution. The pro forma net loss per share amounts set
forth in the accompanying combined statements of operations assume that
the shares issued pursuant to the Distribution were issued and outstanding
since January 1, 1995. Accordingly, the calculation of the pro forma net
loss per share assumes weighted average shares outstanding of 66,408,025
and 66,407,608 for the years ended December 31, 1996 and 1995,
respectively.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
(5)SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest was $1,946,000 during the year ended December 31,
1996, and was not significant during the years ended December 31, 1995 and
1994. Cash paid for income taxes was not material during the years ended
December 31, 1996, 1995 and 1994.
With the exception of certain non-cash transactions described in notes 11
and 12, transactions effected through the intercompany account with TCIC
for periods prior to the Distribution have been considered to be
constructive cash receipts and payments for purposes of the accompanying
combined statements of cash flows.
The non-cash effects of the Distribution are set forth in the accompanying
combined statements of equity.
Accrued capital expenditures of $7,713,000 at December 31, 1996 have been
excluded from the accompanying combined statements of cash flows.
F-52
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6)INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited financial information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
--------- --------
<S> <C> <C> <C>
Financial Position
Current assets.............................. $ 137,048 72,638
Property and equipment, net................. 18,131 9,990
Cost of satellites under construction....... 525,746 419,256
Other assets, net........................... 7,348 14,078
--------- --------
Total assets.............................. $ 688,273 515,962
========= ========
PRIMESTAR Credit Facility expected to be
refinanced................................. $ 521,000 419,000
Other current liabilities................... 63,907 37,911
Other liabilities........................... 4,227 7,210
Partners' capital........................... 99,139 51,841
--------- --------
Total liabilities and partners' capital... $ 688,273 515,962
========= ========
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- -------
<S> <C> <C> <C>
Results of Operations
Revenue..................................... $ 412,999 180,595 27,841
Operating, selling, general and
administrative expenses.................... (426,561) (216,100) (78,175)
Depreciation and amortization............... (3,261) (2,890) (2,700)
--------- -------- -------
Operating loss............................ (16,823) (38,395) (53,034)
Other, net.................................. 1,121 (3,642) (2,682)
--------- -------- -------
Net loss.................................. $ (15,702) (42,037) (55,716)
========= ======== =======
</TABLE>
The bank credit facility of PRIMESTAR Partners (the "PRIMESTAR Credit
Facility") was obtained by PRIMESTAR Partners to finance advances to Tempo
for payments due in respect of the construction of the Tempo Satellites,
and is supported by letters of credit arranged for by affiliates of all
but one of the partners of PRIMESTAR Partners. The PRIMESTAR Credit
Facility matures on June 30, 1997. PRIMESTAR is currently seeking to
extend the maturity date of, or otherwise refinance the PRIMESTAR Credit
Facility. See notes 7 and 13.
Since March 10, 1997, PRIMESTAR Partners has broadcast from a medium power
satellite ("GE-2") that was launched on January 30, 1997 by GE American
Communications, Inc. ("GE Americom"). Pursuant to an Amended and Restated
Memorandum of Agreement, effective as of October 18, 1996, between
PRIMESTAR Partners and GE Americom, with respect to PRIMESTAR Partners'
use of transponders on GE-2 (the "GE-2 Agreement"), it is anticipated that
PRIMESTAR Partners will be required to make minimum lease payments for an
initial term of six years from the date of commercial operation,
extendible, at the option of PRIMESTAR Partners for the remainder of the
operational life of GE-2 (the "End-Of-Life Option"). The End-Of-Life
Option expires if not exercised by December 31, 1997.
F-53
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PRIMESTAR Partners provides programming services to TSAT and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving programming services. In addition, PRIMESTAR
Partners arranges for satellite capacity and uplink services, and provides
national marketing and administrative support services in exchange for a
separate authorization fee. In April 1994, PRIMESTAR Partners began to
separately identify charges which relate to programming services from
those which relate to other items. During the year ended December 31, 1996
and 1995, the charges from PRIMESTAR Partners included approximately
$124,074,000 and $53,006,000, respectively, for programming services, and
$64,650,000 and $25,244,000, respectively, for other items.
Under the PRIMESTAR Partners limited partnership agreement, TSAT has
agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the
partners of PRIMESTAR Partners. Additionally, those subsidiaries of TSAT
that are general partners of PRIMESTAR Partners are liable as a matter of
partnership law for all debts of PRIMESTAR Partners in the event the
liabilities of PRIMESTAR Partners were to exceed its assets. PRIMESTAR
Partners has contingent liabilities related to legal and other matters
arising in the ordinary course of business. Management of PRIMESTAR
Partners is unable at this time to assess the impact, if any, of such
matters on PRIMESTAR Partners' results of operations, financial position,
or cash flows.
(7)SATELLITES UNDER CONSTRUCTION
Tempo DBS System
TSAT, through Tempo, holds the FCC Permit authorizing construction of a
high power DBS system consisting of two or more satellites delivering DBS
service in 11 frequencies at the 119(degrees) West Longitude ("W.L.")
orbital position and 11 frequencies at the 166(degrees) W.L. orbital
position. The 119(degrees) W.L. orbital position is generally visible to
home satellite dishes throughout the entire continental U.S.; the
166(degrees) W.L. orbital position is visible only in the western half of
the continental U.S. as well as Alaska and Hawaii.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has arranged for the construction of the Tempo
Satellites at a fixed contract price of $487,159,500, and has an option to
purchase up to three additional satellites. The cost of constructing the
Tempo Satellites is reflected in "Cost of satellites under construction"
in the accompanying balance sheets.
As constructed, each Tempo Satellite can operate in either "single
transponder" mode (with 32 transponders broadcasting at 113 watts per
channel) or in "paired transponder" mode (with 16 transponders
broadcasting at 220 watts per channel). Either such configuration can be
selected at any time, either before or after launch.
One of the Tempo Satellites ("Tempo DBS-1") was outfitted with an antenna
designed for operation at the 119(degrees) W.L. orbital location, and was
launched into geosynchronous orbit on March 8, 1997. The satellite is
currently undergoing in-orbit testing pursuant to the Satellite
Construction Agreement. Assuming the successful in-orbit testing of Tempo
DBS-1, TSAT intends to operate such satellite in "paired transponder"
mode, broadcasting on 11 of the 16 available transponder pairs, in
accordance with the FCC Permit. The remaining five transponder pairs would
be available as in-orbit spares. Operating in paired transponder mode, at
current levels of digital compression, Tempo DBS-1 would be able to
deliver 70 to 85 channels of digital video and music programming,
depending on the mix of programming content, to home satellite dishes of
less than 14 inches in diameter. If advances in compression technology
currently being tested become commercially available, Tempo DBS-1 would be
able to deliver up to 150 channels of programming. TSAT intends, directly
or through PRIMESTAR Partners, to operate Tempo DBS-1 as a
F-54
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
complementary service to basic cable and other channel-constrained analog
services, providing DBS services to those system operators wishing to
avoid the high cost of digital plant upgrades, or, subject to future
advances in high compression digital statistical multiplexing technology,
as a stand-alone DBS service.
TSAT has had discussions regarding the possible sale of the other Tempo
Satellite ("Tempo DBS-2"), but has not reached agreement regarding any
such transaction. Any such transaction would be subject to the successful
commercial operation of Tempo DBS-1 (for which Tempo DBS-2 serves as
ground spare), the prior approval of PRIMESTAR Partners, prior regulatory
approvals, definitive documentation, and other conditions. Pursuant to an
option agreement between Tempo and PRIMESTAR Partners (the "Tempo Option
Agreement"), any proceeds received by TSAT from the sale of Tempo DBS-2
would be paid to PRIMESTAR Partners to satisfy certain advances by
PRIMESTAR Partners to TSAT to fund construction of the Tempo Satellites.
There can be no assurance that TSAT will be able to sell Tempo DBS-2 on
terms acceptable to TSAT.
Satellite Launches
Pursuant to the Satellite Construction Agreement, Loral must conduct in-
orbit testing. As noted above, Tempo DBS-1 was launched on March 8, 1997
and is currently in the process of in-orbit testing. Delivery of a
satellite takes place upon Tempo's acceptance of such satellite after
completion of in-orbit testing ("Delivery"). Subject to certain limits,
Loral must reimburse Tempo for Tempo's actual and reasonable expenses
directly incurred as a result of any delays in the Delivery of satellites.
The in-orbit useful life of each satellite is designed to be a minimum of
12 years. If in-orbit testing confirms that the satellite conforms fully
to specifications and the service life of the satellite will be at least
12 years, Tempo is required to accept the satellite. If in-orbit testing
determines that the satellite does not fully conform to specifications but
at least 50% of its transponders are functional and the service life of
the satellite will be at least six years, Tempo is required to accept the
satellite but is entitled to receive a proportionate decrease in the
purchase price. If Loral fails to deliver a satellite, it has 29 months to
deliver, at its own expense, a replacement satellite. Loral may make four
attempts to launch the two Tempo Satellites; however, if the two Tempo
Satellites are not delivered in such four attempts, Tempo may terminate
the Satellite Construction Agreement. Tempo also may terminate the
contract in the event of two successive satellite failures.
Loral has warranted that, until the satellites are launched, the
satellites will be free from defects in materials or workmanship and will
meet the applicable performance specifications. In addition, Loral has
warranted that all items other than the satellites delivered under the
Satellite Construction Agreement will be free from defects in materials or
workmanship for one year from the date of their acceptance and will
perform in accordance with the applicable performance specifications.
Loral bears the risk of loss of the Tempo Satellites until Delivery. Upon
Delivery, title and risk of loss pass to Tempo. However, Loral is
obligated to carry risk insurance on each satellite covering the period
from the launch of the satellite through an operating period of 180 days.
Such risk insurance will cover (i) the cost of any damages due under the
Satellite Construction Agreement; (ii) the cost of delivery of a
replacement satellite in the event of a satellite failure; and (iii) the
refund of the full purchase price for each undelivered Tempo Satellite if
Loral fails to deliver both Tempo Satellites after four attempts. Loral is
also required to obtain insurance indemnifying Tempo from any third party
claims arising out of the launch of a satellite.
Upon Delivery of each of the Tempo Satellites, Tempo is obligated to make
a $10 million incentive payment to Loral. Tempo is eligible to receive a
pro rata warranty payback of each such incentive payment
F-55
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
to the extent that transponder failures occur during the twelve-year
period following Delivery. Satellite incentive payments and any related
warranty paybacks are treated as adjustments of the cost of the applicable
Tempo Satellite.
Tempo Option
In February 1990, Tempo entered into the Tempo Option Agreement with
PRIMESTAR Partners granting PRIMESTAR Partners the right and option (the
"Tempo Option"), upon exercise, to purchase or lease 100% of the capacity
of the DBS system to be built, launched and operated by Tempo pursuant to
the FCC Permit. Under the Tempo Option Agreement, upon the exercise of the
Tempo Option, PRIMESTAR Partners is obligated to pay Tempo $1,000,000 (the
"Exercise Fee") and to lease or purchase the entire capacity of the DBS
system with the purchase price (or aggregate lease payments) being
sufficient to cover the costs of constructing, launching and operating
such DBS system. In connection with the Tempo Option and certain related
matters, Tempo and PRIMESTAR Partners subsequently entered into two letter
agreements (the "Tempo Letter Agreements"), which provided for, among
other things, the funding by PRIMESTAR Partners of milestone and other
payments due under the Satellite Construction Agreement, and certain
related costs, through advances by PRIMESTAR Partners to Tempo. PRIMESTAR
Partners financed such advances to Tempo through borrowings under the
PRIMESTAR Credit Facility, which is supported by letters of credit
arranged for by affiliates of all but one of the partners of PRIMESTAR
Partners. The aggregate funding provided to Tempo by PRIMESTAR Partners
($457,685,000 at December 31, 1996) is reflected in "Due to PRIMESTAR
Partners" in the accompanying balance sheets. At December 31, 1996, the
amount borrowed by PRIMESTAR Partners under the PRIMESTAR Credit Facility
was $521,000,000, including amounts borrowed to pay interest charges. See
note 6.
During 1996, TCIC made intercompany advances to TSAT to fund the majority
of the construction and related costs associated with the Tempo
Satellites. Prior to 1996, PRIMESTAR Partners had funded substantially all
of the construction and related costs associated with the Tempo
Satellites. In connection with the Distribution, a determination was made
that such 1996 advances from TCIC would be repaid by TSAT to TCIC, to the
extent (and only to the extent) that Tempo received corresponding advances
from PRIMESTAR Partners. As a result of negotiations between TSAT and
PRIMESTAR Partners to resolve a disagreement concerning the Tempo
Satellites, PRIMESTAR Partners advanced $73,786,000 to Tempo in December
1996 to reimburse Tempo for all of the 1996 costs which previously had
been funded by TCIC. Upon receipt, such advance was paid to TCIC by Tempo
in repayment of such 1996 advances by TCIC.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its
advances to Tempo against any payments (other than the Exercise Fee) due
under the Tempo Option (which TSAT believes has been exercised) and would
not require Tempo to repay such advances. In the event that it is
determined that the Tempo Option has not been exercised in accordance with
its terms, Tempo, in lieu of repaying such advances, could elect to assign
all of its rights relating to the Tempo Satellites to PRIMESTAR Partners.
On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted
a resolution (i) affirming that PRIMESTAR Partners had unconditionally
exercised the Tempo Option, (ii) approving the proposed launch of Tempo
DBS-1 into the 119(degrees) W.L. orbital position and the use of Satellite
No. 2 as a spare or back-up for Tempo DBS-1, pending other deployment or
disposition as determined by PRIMESTAR Partners, and (iii) authorizing the
payment by PRIMESTAR Partners to Tempo of the Exercise Fee and other
amounts in connection with the Tempo Option and the Tempo Letter
Agreements, including funding of substantially all construction and
related costs relating to the Tempo Satellites not previously funded by
PRIMESTAR Partners.
F-56
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TSAT currently intends to pursue its high power strategy through PRIMESTAR
Partners, consistent with such resolution. Although TSAT and PRIMESTAR
Partners have not entered into an agreement with respect to the lease or
purchase of 100% of the capacity of Tempo DBS-1 pursuant to the Tempo
Option, and there can be no assurances that potential disagreements will
not arise as such agreements are negotiated, TSAT does not currently
believe that any such potential disagreement is reasonably likely to have
a material adverse effect on TSAT.
(8)OTHER ASSETS
The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred financing costs(a).................................. $ 7,000
Investment in, and advances to, ResNet Communications, Inc.
("ResNet")(b)............................................... 5,827
-------
$12,827
=======
</TABLE>
(a) Represents deferred financing costs incurred in connection with the
Bank Credit Facility. Such costs are amortized over the term of the
Bank Credit Facility. See note 9.
(b) Effective as of October 21, 1996, TSAT acquired 4.99% of the issued
and outstanding capital stock of ResNet for a purchase price of
$5,396,000. ResNet was formed by LodgeNet Entertainment Corporation
("LodgeNet"), a Delaware corporation, in February 1996 to engage in
the business of providing video services to subscribers in multiple
dwelling units (the "ResNet Business"). ResNet agreed to purchase from
TSAT, at a price that approximates TSAT's cost, up to $40 million in
satellite reception equipment to be used in connection with the ResNet
Business exclusively, over a five year period (subject to a one-year
extension at the option of ResNet if ResNet has not purchased the full
$40 million in equipment during the five-year initial term). TSAT uses
the cost method to account for its investment in ResNet.
TSAT also agreed to make a subordinated convertible term loan to
ResNet, in the principal amount of $34,604,000, the proceeds of which
can be used only to purchase such equipment from TSAT. The term of the
loan is five years with an option by ResNet to extend the term for one
additional year. The total principal and accrued and unpaid interest
under the loan is convertible over a four-year period into shares of
common stock of ResNet representing an additional 32% of the issued and
outstanding common stock of ResNet. TSAT's only recourse with respect
to repayment of the loan is conversion into ResNet stock or warrants as
described below. Under current interpretations of the FCC rules and
regulations related to restrictions on the provision of cable and
satellite master antenna television services in certain areas, TSAT
could be prohibited from holding 5% or more of the stock of ResNet and
consequently could not exercise the conversion rights under the
convertible loan agreement. TSAT is required to convert the convertible
loan at such time as conversion would not violate such currently
applicable regulatory restrictions.
In addition, ResNet granted TSAT an option to acquire an additional
13.01% of the issued and outstanding common stock of ResNet at
appraised fair market value at the time of exercise of the option. The
option is exercisable between December 21, 1999 and the maturity of the
convertible loan.
TSAT also entered into a long-term signal availability agreement with
ResNet, pursuant to which TSAT is committed to transport for a fee to
certain defined private cable systems owned and operated by ResNet, the
satellite signal used by PRIMESTAR Partners to transmit the
PRIMESTAR(R) programming service (the "PRIMESTAR Satellite Signal") or
the signal of a substantially
F-57
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
comparable service. TSAT is acting solely to make the PRIMESTAR
Satellite Signal available to ResNet and is not acting as a distributor
of any PRIMESTAR(R) programming services to ResNet. ResNet must obtain
its own rights from the applicable programming networks to receive the
programming services and to distribute them to ResNet's subscribers.
The National Digital Television Center of TCI ("NDTC") has the right
from PRIMESTAR Partners to use the PRIMESTAR Satellite Signal for
delivery of programming for the benefit of third parties, including
private cable systems (the "Simultaneous Use Rights"). NDTC has agreed
with TSAT that private cable systems designated by TSAT, including the
ResNet private cable systems, will receive the transport of the
PRIMESTAR Satellite Signal by NDTC in exchange for the payment by TSAT
of a per subscriber per video program signal. The agreement between
TSAT and NDTC is coextensive with the agreement between NDTC and
PRIMESTAR Partners, expiring on March 31, 2001, and there is no
assurance that TSAT will continue to have the ability to make the
PRIMESTAR Satellite Signal available after that date.
In its agreement with ResNet, TSAT has committed to make the PRIMESTAR
Satellite Signal or the signal of a substantially comparable service
available for a term that extends substantially beyond March 31, 2001.
If TSAT loses its contractual ability to make the PRIMESTAR Satellite
Signal available and is not able to make the signal of a substantially
comparable service available, TSAT is obligated to reimburse ResNet for
its costs in obtaining a digital signal from another source, including
the cost of replacement equipment if the new digital signal is not
compatible with ResNet's equipment. While it is not possible at this
time to quantify the amount that TSAT would be obligated to pay to
ResNet under the circumstances described above, TSAT believes that the
costs could be significant, particularly if it were to lose its ability
to make a signal available towards the end of its agreement with
ResNet.
Counsel to PRIMESTAR Partners has advised TSAT of the Partnership's
position that there are certain preconditions to NDTC's Simultaneous
Use Rights which have not yet been satisfied and that such rights are
not assignable by NDTC to TSAT. TSAT believes that its transaction with
ResNet and similar transactions are permitted under the agreements
between NDTC and PRIMESTAR Partners. TSAT does not believe that any
potential dispute with the Partnership regarding this issue is likely
to have a material adverse effect on TSAT.
(9)DEBT
The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Bank Credit Facility (a)....................................... $246,000
TCIC Credit Facility (b)....................................... --
Other.......................................................... 1,230
--------
$247,230
========
</TABLE>
(a)Bank Credit Facility
On December 31, 1996, TSAT entered into the Bank Credit Facility. As a
result of the February 1997 issuance of the Notes and the March 1997
determination that GE-2 was commercially operational, the available
commitments under the Bank Credit Facility were increased from
$350,000,000 to $750,000,000, subject to TSAT's compliance with
operating and financial covenants and other customary conditions.
Commencing March 31, 2001, aggregate commitments will be reduced
quarterly
F-58
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
in accordance with a schedule, until final maturity at June 30, 2005.
TSAT's initial borrowings under the Bank Credit Facility were used to
repay in full the principal amount of and accrued interest on the TSAT
Note and to fund financing costs associated with the arrangement of the
facility.
Borrowings under the Bank Credit Facility bear interest at variable
rates (9.75% at December 31, 1996). In addition, TSAT is required to
pay a commitment fee equal to 0.250% on unavailable commitments and
0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Aggregate
commitment fees during the year ended December 31, 1996 were not
significant.
Borrowings under the Bank Credit Facility are guaranteed by TSEI's
restricted subsidiaries (currently all of TSEI's subsidiaries except
Tempo) (the "Restricted Subsidiaries"), and secured by collateral
assignments or other security interests in (i) all capital stock of
certain of TSEI's Restricted Subsidiaries and (ii) substantially all of
TSAT's assets (other than the Tempo Satellites). The Bank Credit
Facility contains affirmative covenants regarding minimum subscribers,
revenue per subscriber and debt service coverage, as well as negative
covenants that restrict TSEI and its Restricted Subsidiaries from,
among other things, (i) incurring indebtedness, (ii) creating liens and
other encumbrances, (iii) entering into merger or consolidation
transactions, (iv) entering into transactions with affiliates, (v)
making investments, (vi) making capital expenditures, (vii) paying
dividends and other distributions, (viii) redeeming stock, (ix)
redeeming or purchasing of subordinated debt (except under certain
limited circumstances) (x) paying interest on or principal of
subordinated debt during the continuation of (A) an event of default
under the Bank Credit Facility or (B) a default under the Bank Credit
Facility of which management of TSAT has actual or constructive notice,
(xi) entering into sale and leaseback transactions and (xii) engaging
in non-designated activities. The Bank Credit Facility also contains
customary events of default and provisions for mandatory prepayments
and commitment reductions in the event of certain asset sales.
Subsequent to December 31, 1996, two letters of credit with an
aggregate drawable amount of $30,000,000 were issued for the account of
TSAT pursuant to the Bank Credit Facility. See note 13.
(b)TCIC Credit Facility
In connection with the Distribution, TSAT and TCIC entered into the
TCIC Credit Facility to provide for the terms of the TSAT Note and to
provide for a revolving credit facility (the "TCIC Revolving Loans").
The TCIC Credit Facility required TSAT to use its best efforts to
obtain external debt or equity financing after the Distribution Date
and provided for mandatory prepayment of the TCIC Revolving Loans and
the TSAT Note from the proceeds thereof. As described in (a) above, the
initial borrowings under the Bank Credit Facility were used to repay
the TSAT Note in full. In connection with the February 1997 issuance of
the Notes (see below) and the March 1997 determination that GE-2 was
commercially operational, borrowing availability pursuant to the TCIC
Credit Facility was terminated.
As of December 31, 1996, annual maturities of TSAT's debt for each of the
next five years were as follows (amounts in thousands):
<TABLE>
<S> <C>
1997................................................................. $321
1998................................................................. 324
1999................................................................. 578
2000................................................................. --
2001................................................................. --
</TABLE>
F-59
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TSAT believes that the fair value and the carrying value of TSAT's debt
were approximately equal at December 31, 1996.
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"). The net proceeds from the issuance of
the Notes (approximately $340,500,000 after deducting offering expenses)
were initially held in escrow and were subsequently released to TSAT on
March 17, 1997. TSAT initially used $244,404,000 of such net proceeds to
repay amounts outstanding under the Bank Credit Facility and expects to
use the remaining net proceeds to fund capital expenditures and operations
and to provide for working capital and for other general corporate
purposes.
Cash interest on the Senior Subordinated Notes will be payable semi-
annually in arrears on February 15 and August 15, commencing August 15,
1997. Cash interest will not accrue or be payable on the Senior
Subordinated Discount Notes prior to February 15, 2002. Thereafter cash
interest will accrue at a rate of 12 1/4% per annum and will be payable
semi-annually in arrears on February 15 and August 15, commencing August
15, 2002, provided however, that at any time prior to February 15, 2002,
TSAT 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 TSAT, in whole or in part, at any time after February 15, 2002
at specified redemption prices. In addition, prior to February 15, 2000,
TSAT may use the net cash proceeds from certain specified equity
transactions to redeem up to 35% of the Notes at specified redemption
prices. The Notes were not originally registered under the Securities Act
of 1933, as amended (the "Securities Act") and TSAT may incur interest
penalties in the event that the Notes are not exchanged by July 5, 1997
for securities that are registered under the Securities Act, and under
certain other circumstances relating to such exchange.
(10)STOCKHOLDERS' EQUITY
Common Stock
The Series A Common Stock has one vote per share and the Series B Common
Stock has ten votes per share. Each share of Series B Common Stock is
convertible, at the option of the holder, into one share of Series A
Common Stock.
Preferred Stock
TSAT is authorized to issue 5,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time as determined by the Board
of Directors, without stockholder approval. Such Preferred Stock may be
issued in such series and with such designations, preferences, conversion
or other rights, voting powers, qualifications, limitations, or
restrictions as shall be stated or expressed in a resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors. The Board of Directors has not authorized the issuance of any
shares of Preferred Stock and has no current plans for the issuance of any
shares of Preferred Stock.
Employee Benefit Plans
TSAT's Employee Stock Purchase Plan (the "TSAT ESPP"), which became
effective on January 1, 1997, provides eligible employees with an
opportunity to invest in TSAT and to create a retirement fund. Terms of
the TSAT ESPP provide for eligible employees to contribute up to 10% of
their compensation to a trust
F-60
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
for investment in TSAT common stock. TSAT, by annual resolution of the
TSAT Board of Directors, may elect to contribute up to 100% of the amount
contributed by employees.
Stock Options
On the Distribution Date, the TSAT Board adopted, and TCI as the sole
stockholder of TSAT prior to the Distribution, approved, the TCI Satellite
Entertainment, Inc. 1996 Stock Incentive Plan (the "1996 Plan"). The 1996
Plan provides for awards to be made in respect of a maximum of 3,200,000
shares of Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock options, stock
appreciation rights ("SARs"), restricted shares, stock units, performance
awards or any combination thereof (collectively, "Awards"). Awards may be
made to employees and to consultants and advisors to TSAT who are not
employees. Shares of Series A Common Stock that are subject to Awards that
expire, terminate or are annulled for any reason without having been
exercised (or deemed exercised, by virtue of the exercise of a related
SAR), or are forfeited prior to becoming vested, will return to the pool
of such shares available for grant under the 1996 Plan.
In June 1996, the TCI Board authorized TCI to permit certain of its
executive officers to acquire equity interests in certain of TCI's
subsidiaries. In connection therewith, the TCI Board approved the
acquisition by each of two executive officers of TCI who are not employees
of TSAT (the "TCI Officers"), of 1.0% of the net equity of TSAT. The TCI
Board also approved the acquisition by a former executive officer of TCIC
who is also the chief executive officer and a director of TSAT (the "TSAT
Officer"), of 1.0% of the net equity of TSAT and the acquisition by an
executive officer of certain TCI subsidiaries who is also a director, but
not an employee, of TSAT (the "TCI Subsidiary Officer"), of 0.5% of the
net equity of TSAT. The TCI Board determined to structure such
transactions as grants by TSAT to such persons of options to purchase
shares of Series A Common Stock representing 1.0% (in the case of each of
the TCI Officers and the TSAT Officer) and 0.5% (in the case of the TCI
Subsidiary Officer) of the shares of Series A Common Stock and Series B
Common Stock issued and outstanding on the Distribution Date, determined
immediately after giving effect to the Distribution, but before giving
effect to any exercise of such options (the "Distribution Date Options").
The aggregate exercise price for each such option is equal to 1.0% (in the
case of each of the TCI Officers and the TSAT Officer) and 0.5% (in the
case of the TCI Subsidiary Officer) of TCI's Net Investment (as defined
below) as of the first to occur of the Distribution Date and the date on
which such option first becomes exercisable, but excluding any portion of
TCI's Net Investment that as of such date is represented by a promissory
note or other evidence of indebtedness from TSAT to TCI. TCI's Net
Investment is defined for this purpose as the cumulative amount invested
by TCI and its predecessor in TSAT and its predecessors prior to and
including the applicable date of determination, less the aggregate amount
of all dividends and distributions made by TSAT and its predecessors to
TCI and its predecessor prior to and including such date. Distribution
Date Options to purchase 2,324,266 shares of Series A Common Stock at a
per share price of $8.86 were granted on the Distribution Date, will vest
in 20% cumulative increments in each of the first five anniversaries of
February 1, 1996, and will be exercisable for up to ten years following
February 1, 1996.
The TSAT Officer received 664,076 of the Distribution Date Options and
such options were granted pursuant to the 1996 Plan. As of the grant date,
the Distribution Date Options received by the TSAT Officer had an
estimated aggregate fair value of $5,806,000. Such estimated fair value is
based on the Black-Scholes model and is stated in current annualized
dollars on a present value basis. The key assumptions used in the model
for purposes of this calculation include the following: (a) a 6.22%
discount rate; (b) a 35% volatility factor, (c) the 10-year option term;
(d) the closing price of Series A Common Stock on December 5, 1996; and
(e) a per share exercise price of $8.86. The actual value that the TSAT
Officer may realize will depend upon the extent to which the stock price
exceeds the exercise price on the
F-61
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
date the option is exercised. Accordingly, the value realized by the TSAT
Officer will not necessarily be the value determined by the model.
Compensation expense with respect to the Distribution Date Options held by
the TSAT Officer aggregated $95,000 during the year ended December 31,
1996.
Pursuant to the Reorganization Agreement, and (in the case of the TCI
Officers and the TCI Subsidiary Officer) in partial consideration for the
capital contribution made by TCI to TSAT in connection with the
Distribution, TSAT agreed, effective as of the Distribution Date, to bear
all obligations under such options and to enter into stock option
agreements with respect to such options with each of the TCI Officers, the
TSAT Officer and the TCI Subsidiary Officer.
Subsequent to December 31, 1996, certain key employees of TSAT were
granted, pursuant to the 1996 Plan, an aggregate of 820,000 options in
tandem with stock appreciation rights to acquire shares of Series A Common
Stock at a per share exercise price of $8.00, and an aggregate of 325,000
restricted shares of Series A Common Stock. Each such grant of options
with tandem appreciation rights vests evenly over five years with such
vesting period beginning January 1, 1997, first become exercisable on
January 1, 1998 and expires on December 31, 2006. Each such grant of
restricted shares vests as to 50% on January 1, 2001, and as to the
remaining 50% on January 1, 2002.
Other
In connection with the Distribution, TCI and TSAT also entered into a
"Share Purchase Agreement" to sell to each other from time to time, at the
then current market price, shares of Series A TCI Group Common Stock and
Series A Common Stock, respectively, as necessary to satisfy their
respective obligations after the Distribution Date under certain stock
options and SARS held by their respective employees and non-employee
directors.
At December 31, 1996, there were 2,324,266, 1,938,173 and 4,765,000 shares
of Series A Common Stock reserved for issuance pursuant to the
Distribution Date Options, the Share Purchase Agreements and the
Reorganization Agreement, respectively, (see note 2). In addition, as a
result of the above-described convertibility feature of the Series B
Common Stock, one share of Series A Common Stock is reserved for each
share of outstanding Series B Common Stock.
(11)INCOME TAXES
Prior to the Distribution, TSAT was included in the consolidated Federal
and state income tax returns of TCI. Income tax benefit for TSAT was based
on those items in TCI's consolidated calculation applicable to TSAT.
Intercompany tax allocation represented an apportionment of tax expense or
benefit (other than deferred taxes) among subsidiaries of TCI in relation
to their respective amounts of taxable earnings or losses. The payable or
receivable arising from the intercompany tax allocation was recorded as an
increase or decrease in "Due to TCIC," as reflected in the accompanying
balance sheets. Effective as of the Distribution Date, TSAT became a
separate tax paying entity, and accordingly, is no longer a part of the
TCI consolidated tax group.
A tax sharing agreement (the "Tax Sharing Agreement") among TCI, TCIC and
certain other subsidiaries of TCI was implemented effective July 1, 1995.
The Tax Sharing Agreement formalizes certain of the elements of a pre-
existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. The Tax Sharing Agreement encompasses U.S.
Federal, state, local and foreign tax consequences and relies upon the
U.S. Internal Revenue Code of 1986 as
F-62
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amended, and any applicable state, local and foreign tax law and related
regulations. Beginning on the July 1, 1995 effective date, TCIC is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to TCIC to the extent that TCIC's income
tax attributes generated after the effective date are utilized by TCI to
reduce its consolidated income tax liabilities. Accordingly, all tax
attributes generated by TCIC's operations after the effective date
including, but not limited to, net operating losses, tax credits, deferred
intercompany gains, and the tax basis of assets are inventoried and
tracked for the entities comprising TCIC. TSAT's intercompany income tax
allocation has been calculated in accordance with the Tax Sharing
Agreement. In connection with the Distribution, the Tax Sharing Agreement
was amended to provide that TSAT will be treated as if it had been a party
to the Tax Sharing Agreement, effective July 1, 1995.
Income tax benefit (expense) for the years ended December 31, 1996, 1995
and 1994 consists of (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1996:
Intercompany allocation........................ $70,645 -- 70,645
Federal........................................ -- (17,699) (17,699)
State and local................................ -- (7,009) (7,009)
------- ------- -------
$70,645 (24,708) 45,937
======= ======= =======
Year ended December 31, 1995:
Intercompany allocation........................ $36,530 -- 36,530
Federal........................................ -- (11,040) (11,040)
State and local................................ -- (3,632) (3,632)
------- ------- -------
$36,530 (14,672) 21,858
======= ======= =======
Year ended December 31, 1994:
Intercompany allocation........................ $ 9,611 -- 9,611
Federal........................................ -- (2,254) (2,254)
State and local................................ -- (485) (485)
------- ------- -------
$ 9,611 (2,739) 6,872
======= ======= =======
</TABLE>
Income tax benefit (expense) differs from the amounts computed by applying
the Federal income tax rate of 35% as a result of the following (amounts
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax benefit............... $ 65,079 24,278 7,196
State and local income taxes, net of Federal
income tax benefit........................... (2,672) (2,361) (315)
Change in valuation allowance................. (16,371) -- --
Other......................................... (99) (59) (9)
--------- ------- ------
$ 45,937 21,858 6,872
========= ======= ======
</TABLE>
F-63
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards........................ $21,628 6,668
Investment in PRIMESTAR Partners:
Due to an increase in tax basis upon transfer from TCIC
to TSAT............................................... 29,142 --
Due principally to losses recognized for financial
statement purposes in excess of losses recognized for
tax purposes.......................................... 957 1,049
Future deductible amounts principally due to accruals
deductible in later periods............................. 1,631 1,906
------- ------
Total deferred tax assets................................ 53,358 9,623
Less-valuation allowance............................... (16,371) --
------- ------
Net deferred tax assets.................................. 36,987 9,623
Deferred tax liability--
Property and equipment, principally due to differences in
depreciation net of increase in tax basis resulting from
intercompany transfer................................... 36,987 14,057
------- ------
Net deferred tax liability................................. $ -- 4,434
======= ======
</TABLE>
On February 22, 1995, the assets (primarily property and equipment) and
liabilities comprising the TCIC business that distributed the PRIMESTAR(R)
programming service were transferred from certain subsidiaries of TCIC to
the predecessor of TSAT. Such transfer, which resulted in an increased tax
basis for such assets, was recorded at TCIC's carryover basis for
financial reporting purposes. In connection with such transfers, TSAT
recorded an $12,136,000 non-cash increase to the intercompany amount owed
to TCIC, and an $12,136,000 non-cash decrease to TSAT's deferred tax
liability.
Immediately prior to the Distribution, the investment in PRIMESTAR
Partners was transferred from TCIC to TSAT. Such transfer, which resulted
in an increased tax basis for the investment in PRIMESTAR Partners, was
recorded at TCIC's carryover basis for financial reporting purposes. In
connection with such transfer, TSAT recorded a $29,142,000 non-cash
increase to the intercompany account owed to TCIC and $29,142,000 non-cash
decrease to TSAT's deferred tax liability.
TSAT has analyzed the sources and expected reversal periods of its
deferred tax assets. TSAT believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.
At December 31, 1996, TSAT had net operating loss carry forwards for
income tax purposes aggregating approximately $59,790,000 of which, if not
utilized to reduce taxable income in future periods, $13,967,000 expire in
2009, $39,278,000 expire in 2010 and $6,545,000 expire in 2011.
(12)TRANSACTIONS WITH RELATED PARTIES
Through the Distribution Date, the effects of all transactions between
TSAT and TCI were reflected as adjustments to a non-interest bearing
intercompany account. As described in note 2, all but $250,000,000 of this
intercompany account was forgiven in connection with the Distribution.
Subsequent to the
F-64
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Distribution Date, the effects of all transactions (other than those
related to the TCIC Credit Facility) will be reflected in a non-interest
bearing account between TSAT and TCIC to be settled periodically in cash.
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to TSAT. The costs associated with such
services have been allocated to TSAT based upon a standard charge for each
of the various customer fulfillment activities performed by TCIC. During
the years ended December 31, 1996, 1995 and 1994, TSAT's capitalized
installation costs included amounts allocated from TCIC of $53,169,000,
$57,058,000 and $15,369,000, respectively. Maintenance, retrieval and
other operating expenses allocated from TCIC to TSAT aggregated
$20,365,000, $15,916,000 and $4,367,000 during the years ended December
31, 1996, 1995 and 1994, respectively.
Effective January 1, 1997, charges for customer fulfillment services
provided by TCI will be made pursuant to the Fulfillment Agreement entered
into by TSAT and TCIC in connection with the Distribution. Pursuant to the
Fulfillment Agreement, TCIC has continued to provide fulfillment services
on an exclusive basis to TSAT following the Distribution with respect to
customers of the PRIMESTAR(R) medium power service. Such services, which
include installation, maintenance, retrieval, inventory management and
other customer fulfillment services, are to be performed in accordance
with specified performance standards. The Fulfillment Agreement has an
initial term of two years and is terminable, on 180 days notice to TCIC,
by TSAT at any time during the first six months following the Distribution
Date. The cost to TSAT of the services provided by TCIC under the
Fulfillment Agreement will exceed the standard charges allocated to TSAT
for such services through December 31, 1996. TSAT and TCIC are currently
discussing certain proposed changes to the Fulfillment Agreement, but
there can be no assurance that any such changes will be agreed to or that
TSAT will not exercise its right to terminate the Fulfillment Agreement if
an acceptable amendment is not agreed to prior to the end of TSAT's six-
month termination window. There can be no assurance that the terms of the
Fulfillment Agreement are not more or less favorable than those which
could be obtained by TSAT from third parties, or that comparable services
could be obtained by TSAT from third parties on any terms if the
Fulfillment Agreement is terminated.
TCIC also provides corporate administrative services to TSAT. Such
administrative expenses, which were allocated from TCIC to TSAT based
primarily on the estimated cost of providing the service, aggregated
$18,120,000, $7,817,000 and $1,080,000 during the years ended December 31,
1996, 1995 and 1994, respectively.
Effective on the Distribution Date, charges for administrative services
provided by TCIC are made pursuant to the Transition Services Agreement
entered into by TSAT and TCI in connection with the Distribution. Pursuant
to the Transition Services Agreement between TCI and TSAT, TCI is
obligated to provide to TSAT certain services and other benefits,
including certain administrative and other services that were provided by
TCI prior to the Distribution. Pursuant to the Transition Services
Agreement, TCI has also agreed to provide TSAT with certain most-favored-
customer rights to programming services that TCI or a wholly-owned
subsidiary of TCI may own in the future and access to any volume discounts
that may be available to TCI for purchase of home satellite dishes,
satellite receivers and other equipment. As compensation for the services
rendered and for the benefits made available to TSAT pursuant to the
Transition Services Agreement, TSAT is required to pay TCI a monthly fee
of $1.50 per qualified subscribing household or other residential or
commercial unit (counted as one subscriber regardless of the number of
satellite receivers), up to a maximum of $3,000,000 per month, and to
reimburse TCI quarterly for direct, out-of-pocket expenses incurred by TCI
to third parties in providing the services. The Transition Services
Agreement continues in effect until the close of business on December 31,
1999, and will be renewed automatically for successive one-year periods
thereafter, unless earlier terminated by (i) either
F-65
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
party at the end of the initial term or the then current renewal term, as
applicable, on not less than 180 days' prior written notice to the other
party, (ii) TCI upon written notice to TSAT following certain changes in
control of TSAT, and (iii) either party if the other party is the subject
of certain bankruptcy or insolvency-related events.
Certain key employees of TSAT hold stock options in tandem with SARs with
respect to certain common stock of TCI. In connection with the
Distribution, TSAT assumed the stock compensation liability with respect
to such TCI options and SARs. Estimates of the compensation related to the
options and/or SARs granted to employees of TSAT have been recorded in the
accompanying financial statements, but are subject to future adjustment
based upon the market value of the underlying TCI common stock and,
ultimately, on the final determination of market value when the rights are
exercised. Non-cash increases (decreases) to such estimated stock
compensation liability, which are included in the above-described TCIC
administrative expense allocations, aggregated $(541,000), $901,000 and
($87,000) during the years ended December 31, 1996, 1995 and 1994,
respectively.
TSAT has entered into indemnification agreements with TCIC. See note 13.
(13)COMMITMENTS AND CONTINGENCIES
At December 31, 1996, TSAT's future minimum commitments to purchase
satellite reception equipment aggregated approximately $10,600,000.
In 1994, TSAT began to engage master sales agents to recruit, train and
maintain a network of sub-agents to sell services on behalf of TSAT and to
install, service and maintain equipment located at the premises of
subscribers. As part of the compensation for such services, TSAT pays
certain residual sales commissions equal to a percentage of the
programming revenue collected from a subscriber installed by a master
sales agent during specified periods following the initiation of service
(generally five years). Residual payments to master sales agents
aggregated $11,848,000 and $2,178,000 during 1996 and 1995, respectively
and were not significant in 1994.
TSAT leases business offices and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to
$2,095,000 and $1,257,000 in 1996 and 1995 and was not significant in
1994. It is expected that, in the normal course of business, expiring
leases will be renewed or replaced by leases on other properties; thus, it
is anticipated that future minimum lease commitments will not be less than
the rental expense incurred during 1995.
On the Distribution Date, TSAT entered into Indemnification Agreements
(the "Indemnification Agreements") with TCIC and TCI UA 1, Inc., an
indirect subsidiary of TCIC, ("TCI UA 1"). The Indemnification Agreement
with TCIC provides for TSAT to reimburse TCIC for any amounts drawn under
an irrevocable transferable letter of credit issued for the account of
TCIC to support TSAT's share of PRIMESTAR Partners' obligations under the
GE-2 Agreement. The drawable amount of such letter of credit is
$25,000,000.
Subsequent to December 31, 1996, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of TSAT to support TSAT's share of PRIMESTAR Partners' obligations
under the GE-2 Agreement. The initial drawable amount of this letter of
credit is $25,000,000, increasing to $50,000,000 if PRIMESTAR Partners
exercises the End-Of-Life Option.
The Indemnification Agreement with TCI UA 1 provides for TSAT to reimburse
TCI UA 1 for any amounts drawn under an irrevocable transferable letter of
credit issued for the account of TCI UA 1 (the
F-66
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
"TCI UA 1 Letter of Credit"), which supports the PRIMESTAR Credit
Facility. The drawable amount of the TCI UA 1 Letter of Credit was
$141,250,000 at December 31, 1996. See notes 6 and 7.
Subsequent to December 31, 1996, an additional irrevocable transferable
letter of credit was issued pursuant to the Bank Credit Facility for the
account of TSAT to support the PRIMESTAR Credit Facility. The drawable
amount of this letter of credit is $5,000,000. See notes 6, 7 and 9.
The Indemnification Agreements provide for TSAT to indemnify and hold
harmless TCIC and TCI UA 1 and certain related persons from and against
any losses, claims, and liabilities arising out of the respective letters
of credit or any drawings thereunder. The payment obligations of TSAT to
TCIC and TCI UA 1 under such Indemnification Agreements are subordinated
in right of payment with respect to the obligations of TSAT under the Bank
Credit Facility. See note 9.
Subsequent to December 31, 1996, TCI agreed to cause TCI UA 1 to renew the
letter of credit arranged by it on TSAT's behalf, through December 31,
1997. TSAT believes (but cannot assure) that during such period TSAT
and/or PRIMESTAR Partners will be able to obtain permanent financing for
the Tempo Satellites (to the extent not sold to a person other than
PRIMESTAR Partners) on a basis that does not require TSAT to post a letter
of credit with respect thereto. If such permanent financing is not
available, under certain maintenance covenants contained in the Bank
Credit Facility, TSAT would be unable to provide or arrange for such a
letter of credit unless (i) the lenders under the Bank Credit Facility
were to agree to amend or waive such covenants to permit the posting of
such letter of credit by TSAT, (ii) TCI were to agree to renew the TCI UA
1 Letter of Credit for an additional period, or (iii) TSAT were to achieve
a greater than anticipated increase in operating income before
depreciation and amortization. If TSAT and/or PRIMESTAR Partners are
unable to refinance the Tempo Satellites (to the extent not sold to a
person other than PRIMESTAR Partners) without a letter of credit and is
unable to post (or arrange for the posting of) such a letter of credit,
TSAT could be adversely affected. See notes 6 and 7.
The International Bureau (the "International Bureau") of the FCC has
granted EchoStar Satellite 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 spacecraft now used to provide the
PRIMESTAR(R) service. Contrary to previous FCC policy, EchoStar was
authorized to operate at a power level of 130 watts. If EchoStar were to
launch its high power satellite authorized to 83(degrees) W.L. and
commence operations at that location at a power level of 130 watts, it
would likely cause harmful interference to the reception of the
PRIMESTAR(R) signal by subscribers to such service.
Subsequently, GE Americom and PRIMESTAR Partners separately requested
reconsideration of the International Bureau's authorization for EchoStar
to operate at 83(degrees) W.L. These requests were opposed by EchoStar and
others. These requests currently are pending at the International Bureau.
In addition, GE Americom and PRIMESTAR Partners have attempted to resolve
potential coordination problems directly with EchoStar. It is uncertain
whether any coordination between PRIMESTAR Partners and EchoStar will
resolve such interference. There can be no assurance that the
International Bureau will change slot assignments, or power levels, in a
fashion that eliminates the potential for harmful interference. Although
the ultimate outcome of this matter cannot presently be predicted, TSAT
believes that any such outcome would not have a material adverse effect on
TSAT's financial condition and results of operations.
TSAT has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is
reasonably possible TSAT may incur losses upon conclusion of such matters,
F-67
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
(14)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- --------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C>
1996:
Revenue........................... $ 95,760 97,887 106,602 117,212
Operating loss.................... $(19,154) (27,352) (34,760) (103,018)
Income tax benefit................ $ 5,867 9,003 10,936 20,131
Net loss.......................... $(13,571) (19,317) (23,706) (83,410)
Pro forma net loss per common
share............................ $ (.20) (.29) (.36) (1.26)
1995:
Revenue........................... $ 24,098 37,513 58,808 88,484
Operating loss.................... $ (5,676) (9,345) (9,900) (35,781)
Income tax benefit................ $ 2,563 4,267 3,603 11,425
Net loss.......................... $ (5,411) (7,625) (9,350) (25,121)
Pro forma net loss per common
share............................ $ (.08) (.12) (.14) (.38)
</TABLE>
The increased net loss during the fourth quarter of 1996 is primarily
attributable to changes in TSAT's depreciation policies. See note 3.
The increased net loss during the fourth quarter of 1995 is primarily
attributable to the overall increase in expenses that resulted from TSAT's
efforts to increase its subscriber base.
F-68
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
AMOUNTS IN THOUSANDS
<S> <C> <C>
ASSETS
Cash and cash equivalents... $ 19,279 6,560
Accounts receivable......... 25,466 24,731
Less allowance for doubtful
accounts................... 4,872 4,666
---------- ---------
20,594 20,065
---------- ---------
Prepaid expenses............ 1,384 927
Investment in, and related
advances to, PRIMESTAR
Partners L.P. ("PRIMESTAR
Partners" or the
"Partnership") (note 7).... 19,952 32,240
Property and equipment, at
cost:
Satellite reception
equipment................ 642,440 595,249
Subscriber installation
costs.................... 199,544 175,553
Support equipment......... 33,671 28,332
Satellites (note 8)....... 463,133 457,685
---------- ---------
1,338,788 1,256,819
Less accumulated
depreciation............. 239,430 149,165
---------- ---------
1,099,358 1,107,654
---------- ---------
Other assets, net of
accumulated amortization
(note 9)...................... 28,479 12,827
---------- ---------
$1,189,046 1,180,273
========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable............ $ 42,298 18,860
Accrued charges from
PRIMESTAR Partners (note
7)......................... 44,591 37,943
Accrued interest payable.... 2,855 70
Accrued charges from TCI
Communications, Inc. ..... 12,100 8,381
Accrued advertising......... 5,559 6,000
Other accrued expenses...... 18,076 9,497
Subscriber advance
payments................... 27,000 22,249
Due to PRIMESTAR Partners
(note 8)................... 463,133 457,685
Debt (note 10).............. 365,760 247,230
---------- ---------
Total liabilities....... 981,372 807,915
---------- ---------
Stockholders' Equity:
Preferred stock, $.01 par
value; authorized
5,000,000; none
issued .................. -- --
Series A common stock, $1
par value; authorized
185,000,000;
issued 58,237,114 in
1997, and 57,946,044 in
1996..................... 58,237 57,946
Series B common stock, $1
par value; authorized
10,000,000 shares;
issued 8,465,324 in 1997
and 8,466,564 in 1996.... 8,465 8,467
Additional paid-in
capital.................. 523,295 521,724
Accumulated deficit....... (382,323) (215,779)
---------- ---------
Total stockholders'
equity................. 207,674 372,358
---------- ---------
Commitments and
contingencies (notes 2, 3,
7, 8, 10, 11 and 12)
$1,189,046 1,180,273
========== =========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1996
----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C>
Revenue:
Programming and equipment rental...................... $ 374,182 249,439
Installation.......................................... 31,890 50,810
----------- ---------
406,072 300,249
----------- ---------
Operating costs and expenses:
Charges from PRIMESTAR Partners (note 7):
Programming......................................... 126,681 88,007
Satellite, marketing and distribution............... 61,568 46,781
Other operating (note 11)............................. 18,992 23,909
Selling, general and administrative (note 11)......... 139,557 136,166
Stock compensation (note 11).......................... 4,607 (553)
Depreciation (note 4)................................. 177,415 87,205
----------- ---------
528,820 381,515
----------- ---------
Operating loss.................................... (122,748) (81,266)
Other income (expense):
Interest expense...................................... (33,965) --
Interest income....................................... 2,464 --
Share of losses of PRIMESTAR Partners (note 7)........ (11,610) (1,445)
Other, net............................................ (685) 311
----------- ---------
(43,796) (1,134)
----------- ---------
Loss before income taxes.......................... (166,544) (82,400)
Income tax benefit...................................... -- 25,806
----------- ---------
Net loss.......................................... $ (166,544) (56,594)
----------- ---------
Net loss per common share (note 5):
Historical............................................ $ (2.50) --
----------- ---------
Pro forma............................................. $ -- (.85)
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B CAPITAL DEFICIT EQUITY
-------- -------- ---------- ----------- -------------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... $ 57,946 8,467 521,724 (215,779) 372,358
Net loss.............. -- -- -- (166,544) (166,544)
Recognition of stock
compensation related
to stock options and
restricted stock
awards............... -- -- 1,391 -- 1,391
Issuance of Series A
Common Stock related
to restricted stock
awards............... 33 -- 180 -- 213
Issuance of Series A
Common Stock upon
conversion of
convertible
securities of Tele-
Communications,
Inc.................. 256 -- -- -- 256
Conversion of Series B
common stock into
Series A common
stock................ 2 (2) -- -- --
-------- ----- ------- -------- --------
Balance at September 30,
1997................... $ 58,237 8,465 523,295 (382,323) 207,674
======== ===== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
AMOUNTS IN THOUSANDS
(SEE NOTE 6)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(166,544) (56,594)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation........................................ 177,415 87,205
Share of losses of PRIMESTAR Partners............... 11,610 1,445
Accretion of debt discount.......................... 11,573 --
Stock compensation.................................. 4,607 (553)
Deferred income tax expense......................... -- 18,648
Other non cash items................................ 4,158 --
Changes in operating assets and liabilities:
Change in receivables............................. (529) 2,765
Change in prepaids................................ (457) (619)
Change in accruals and payables................... 28,131 (523)
Change in subscriber advance payments............. 4,751 6,445
---------- ---------
Net cash provided by operating activities....... 74,715 58,219
---------- ---------
Cash flows from investing activities:
Capital expended for property and equipment........... (151,062) (258,907)
Capital expended for satellites....................... (5,448) (69,930)
Additional investments in and advances to PRIMESTAR
Partners............................................. (7,060) (13,827)
Repayment received on advances to PRIMESTAR Partners.. 7,806 --
---------- ---------
Net cash used in investing activities........... (155,764) (342,664)
---------- ---------
Cash flows from financing activities:
Borrowings of debt.................................... 405,061 --
Repayments of debt.................................... (299,461) --
Payment of deferred financing costs................... (17,749) --
Increase in due to PRIMESTAR Partners................. 5,448 3,319
Proceeds from issuance of common stock................ 469 --
Increase in due to TCI Communications, Inc............ -- 281,313
---------- ---------
Net cash provided by financing activities....... 93,768 284,632
---------- ---------
Net increase in cash and cash equivalents....... 12,719 187
Cash and cash equivalents:
Beginning of period............................ 6,560 1,801
---------- ---------
End of period.................................. $ 19,279 1,988
========== =========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(1)BASIS OF PRESENTATION
The accompanying financial statements of TCI Satellite Entertainment, Inc.
("TSEI") include the historical financial information of (i) certain
satellite television assets (collectively, "TCI SATCO") of TCI
Communications, Inc. ("TCIC"), a subsidiary of Tele-Communications, Inc.
("TCI") for periods prior to the December 4, 1996 consummation of the
spin-off transaction (the "TSAT Spin-off") described in note 3, and (ii)
TSEI and its consolidated subsidiaries for the period following such date.
Upon consummation of the TSAT Spin-off, TSEI became the owner of the
assets that comprised TCI SATCO, which assets included (i) a 100%
ownership interest in the TCIC business that distributes the PRIMESTAR(R)
programming service ("PRIMESTAR(R)") to subscribers within certain areas
of the continental United States, (ii) a 100% ownership interest in Tempo
Satellite, Inc. ("Tempo"), and (iii) a 20.86% aggregate ownership interest
in PRIMESTAR Partners, which owns and operates the PRIMESTAR(R) service.
PRIMESTAR Partners was formed as a limited partnership in 1990 by
subsidiaries of TCIC, subsidiaries of several other cable operators, and a
subsidiary of General Electric Company. PRIMESTAR Partners, among other
things, transmits satellite entertainment services that are delivered to
subscribers through TSEI and certain other authorized distributors.
Tempo holds a permit (the "FCC Permit") issued by the Federal
Communications Commission ("FCC") authorizing construction of a high power
direct broadcast satellite ("DBS") system. Tempo is also a party to a
satellite construction agreement (the "Satellite Construction Agreement")
with Space Systems/Loral, Inc. ("Loral"), pursuant to which Tempo has
arranged for the construction of two high power direct broadcast
satellites (the "Tempo Satellites") and has an option to purchase up to
three additional satellites.
In the following text, "TSAT" may, as the context requires, refer to "TCI
SATCO" (prior to the December 4, 1996 completion of the TSAT Spin-off),
TSEI and its consolidated subsidiaries (subsequent to the December 4, 1996
completion of the TSAT Spin-off) or both. See note 3. Additionally, unless
the context indicates otherwise, references to "TCI" and "TCIC" herein are
to TCI and TCIC and their respective consolidated subsidiaries (other than
TSAT).
All significant inter-entity and intercompany transactions have been
eliminated.
As further discussed in note 11, the accompanying statements of operations
include allocations of certain costs and expenses of TCI. Although such
allocations are not necessarily indicative of the costs that would have
been incurred by TSAT on a stand-alone basis, management believes the
resulting allocated amounts are reasonable.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
The accompanying interim financial statements of TSAT are unaudited. In
the opinion of management, all adjustments (consisting only of normal
recurring accruals) have been made which are necessary to present fairly
the financial position of TSAT as of September 30, 1997 and the results of
its operations for the periods ended September 30, 1997 and 1996. The
results of operations for any interim period are not necessarily
indicative of the results for the entire year.
F-73
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
These financial statements should be read in conjunction with the
financial statements and related notes thereto included in TSAT's December
31, 1996 Annual Report on Form 10-K.
(2)PROPOSED TRANSACTIONS
PRIMESTAR Partners Restructuring
Pursuant to (i) a Merger and Contribution Agreement dated as of February
6, 1998 (together with the exhibits and schedules thereto, the
"Restructuring Agreement"), among TSAT, PRIMESTAR, Inc. ("New PRIMESTAR"),
Time Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse
Partnership ("Newhouse"), Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne"), US
West Media Group, Inc. and GE American Communications, Inc. ("GE
Americom"), and (ii) the Asset Transfer Agreement dated as of February 6,
1998, (together with the exhibits and schedules thereto, the "TSAT Asset
Transfer Agreement") between, TSAT and New PRIMESTAR, it is contemplated
that a business combination (the "Restructuring Transaction") will be
consummated whereby (a) TSAT will contribute and transfer to New PRIMESTAR
(the "TSAT Asset Transfer") all of TSAT's assets and liabilities except
(I) the capital stock of Tempo, (II) the consideration to be received by
TSAT in the Restructuring Transaction and (III) the rights and obligations
under certain agreements with New PRIMESTAR related to the Restructuring
Transaction (such contributed and transferred assets and liabilities, the
"TSAT Business") and (b) the business of PRIMESTAR Partners and the
business of distributing the PRIMESTAR(R) programming service
("PRIMESTAR(R)") of each of TWE, Newhouse, Comcast, Cox and affiliates of
MediaOne will be consolidated into New PRIMESTAR.
The Restructuring Agreement provides for, among other things, the
following transactions to occur on the closing date of the Restructuring
Transaction:
(x) consummation of the TSAT Asset Transfer whereby TSAT will contribute
and transfer the TSAT Business to New PRIMESTAR;
(y) the merger (each a "Merger" and, collectively, the "Mergers") of
each of (I) Comcast DBS, Inc., a subsidiary of Comcast whose sole asset is
Comcast's 10.43% interest in the Partnership, (II) Comcast Satellite
Communications, Inc., a subsidiary of Comcast that holds Comcast's
PRIMESTAR(R) distribution business, (III) Cox Satellite, Inc., a
subsidiary of Cox that holds Cox's 10.43% interest in the Partnership and
Cox's PRIMESTAR(R) distribution business, and (IV) GE Americom Services,
Inc. ("GEAS"), a subsidiary of GE Americom that holds GE Americom's 16.56%
interest in the Partnership, with and into New PRIMESTAR, in each case in
accordance with the terms of a merger agreement with New PRIMESTAR; and
(z) the contribution and transfer to New PRIMESTAR by each of TWE,
Newhouse, and MediaOne (or, in the case of MediaOne, certain subsidiaries
of MediaOne) of its respective partnership interest in the Partnership
(collectively, and together with the partnership interests of the other
partners to the Partnership, the "Partnership Interests"), and its
PRIMESTAR(R) subscribers and certain other related assets (collectively,
and together with all such assets to be acquired by New PRIMESTAR in the
Restructuring Transaction, the "PRIMESTAR Assets") and related liabilities
(collectively the "PRIMESTAR Liabilities"), in each case in accordance
with the terms of an asset contribution agreement with New PRIMESTAR. The
TSAT Asset Transfer and the contribution and transfer of assets by each of
TWE, Newhouse and MediaOne are each sometimes referred to herein as an
"Asset Transfer."
F-74
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Mergers and the Asset Transfers, other than the
TSAT Asset Transfer, each of Comcast, Cox, MediaOne, Newhouse, TWE and GE
Americom will, directly or indirectly, receive from New PRIMESTAR (i) in
the case of Cox and MediaOne, an amount of cash, and in the case of
Newhouse, TWE, Comcast and GE Americom, an assumption of indebtedness by
New PRIMESTAR, (ii) shares of Class A Common Stock, $.01 par value per
share, of New PRIMESTAR ("New PRIMESTAR Class A Common Stock"), (iii) in
the case of TSAT only, shares of Class B Common Stock, $.01 par value per
share, of New PRIMESTAR ("New PRIMESTAR Class B Common Stock"), and (iv)
except in the case of TSAT and GE Americom, shares of Class C Common
Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class C
Common Stock"), in each case in an amount determined pursuant to the
Restructuring Agreement.
In connection with the TSAT Asset Transfer, at the closing, New PRIMESTAR
will assume all of TSAT's indebtedness on such date, and TSAT will receive
from New PRIMESTAR such number of shares of New PRIMESTAR Class A Common
Stock and New PRIMESTAR Class B Common Stock, respectively, as equals the
number of shares of TSAT Series A Common Stock and TSAT Series B Common
Stock, respectively, issued and outstanding or deemed to be issued and
outstanding on the closing date, in accordance with the Restructuring
Agreement and the TSAT Asset Transfer Agreement. TSAT will own
approximately 36% of the outstanding shares of common equity of New
PRIMESTAR at the closing of the Restructuring Transaction, representing
approximately 37% of the combined voting power of such common equity.
As a result of the TSAT Asset Transfer, TSAT will become a holding
company, with no substantial assets or liabilities other than (i) 100% of
the outstanding capital stock of Tempo, a current TSAT subsidiary that
holds certain authorizations granted by the FCC and other assets and
liabilities relating to a proposed DBS system being constructed by Tempo,
(ii) its ownership interest in New PRIMESTAR, and (iii) its rights and
obligations under certain agreements with New PRIMESTAR.
Immediately following the closing of the Restructuring Transaction, New
PRIMESTAR will transfer and assign all of its assets to a wholly-owned
subsidiary of New PRIMESTAR ("PRIMESTAR Satellite"), as a contribution to
capital, and PRIMESTAR Satellite will assume certain indebtedness of New
PRIMESTAR.
The respective obligations of the parties to the Restructuring Agreement
to consummate the Restructuring Transaction are subject to the
satisfaction or waiver of a number of conditions, including, among others,
(a) approval of a five year strategic plan and budget of New PRIMESTAR for
the fiscal years 1998 and 1999, in each case by a Super-Majority Vote (as
defined in PRIMESTAR Partner's Partnership Agreement, as amended) of
PRIMESTAR Partners' Partners Committee; (b) approval of the Restructuring
Agreement and the TSAT Merger Agreement (as described below) by the
requisite vote of TSAT stockholders; (c) receipt of all orders and
approvals of the FCC required in connection with the consummation of the
transactions contemplated by the Restructuring Agreement, if any; (d) the
absence of any legal restraint or prohibition preventing consummation of
the Restructuring Transaction; and (e) receipt of approval for listing on
the National Market tier of the Nasdaq Stock Market of the shares of New
PRIMESTAR Class A Common Stock and New PRIMESTAR Class B Common Stock
issuable to the stockholders of TSAT pursuant to the TSAT Merger
Agreement, subject to official notice of issuance. In July 1997, TSAT and
the other parties to the Restructuring Transaction filed Notification and
Report Forms under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the waiting periods under the HSR
Act with respect to the transactions described therein have since expired.
F-75
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The TSAT Asset Transfer will be recorded at TSAT's historical cost due to
the fact that New PRIMESTAR is a wholly-owned subsidiary of TSAT. The
remaining elements of the Restructuring Transaction, as set forth above,
will be treated as the acquisition by New PRIMESTAR of the Partnership
Interests and PRIMESTAR Assets, and the assumption by New PRIMESTAR of the
PRIMESTAR Liabilities, of the parties to the Restructuring Agreement other
than TSAT (the "Non-TSAT Parties"), and such acquisition will be accounted
for using the purchase method of accounting. The fair value of the
consideration to be issued to the Non-TSAT Parties will be allocated to
the assets and liabilities acquired based upon the estimated fair values
of such assets and liabilities. TSAT has been identified as the acquiror
for accounting purposes and the predecessor for reporting purposes due to
the fact that TSAT will own the largest interest in New PRIMESTAR
immediately following consummation of the Restructuring Transaction.
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(together with the exhibits and schedules thereto, the "TSAT Merger
Agreement"), between TSAT and New PRIMESTAR, it is contemplated that,
subsequent to the Restructuring Transaction, TSAT will be merged with and
into New PRIMESTAR, with New PRIMESTAR as the surviving corporation (the
"TSAT Merger"). In connection therewith (i) each outstanding share of TSAT
Series A Common Stock will be converted into the right to receive one
share of New PRIMESTAR Class A Common Stock, and (ii) each outstanding
share of TSAT Series B Common Stock will be converted into the right to
receive one share of New PRIMESTAR Class B Common Stock, subject to
adjustment. Each share of New PRIMESTAR's Common Stock then held by TSAT
will be canceled.
The Restructuring Transaction (including the TSAT Asset Transfer) and the
TSAT Merger are collectively referred to herein as the Roll-up Plan. If
the Roll-up Plan is approved, the Restructuring Transaction will be
consummated prior to the anticipated closing date of the TSAT Merger. 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. Accordingly, the TSAT Merger may not be consummated even if the
Roll-up Plan is approved and the Restructuring Transaction is consummated.
Upon the closing of the TSAT Merger, the then existing shareholders of
TSAT will become the direct owners of TSAT's ownership interest in New
PRIMESTAR. 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) approval of
the TSAT Merger Agreement by the requisite vote of TSAT stockholders; (b)
occurrence of one of the following: (i) FCC approval of TSAT's pending
application to transfer control of Tempo to New PRIMESTAR, (ii)
divestiture by TSAT of the construction permit issued by the FCC to Tempo
authorizing construction of a high power direct broadcast satellite system
(together with related authorizations (the "FCC Permit")), or (iii) FCC
permission to consummate the TSAT Merger without divestiture of the FCC
Permit (including pursuant to an agreement to divest the FCC Permit within
a specific time period following the TSAT Effective Time); (c) the absence
of any legal restraint or prohibition preventing consummation of the TSAT
Merger; (d) receipt of approval for listing on the National Tier of The
Nasdaq Stock Market of the shares of New PRIMESTAR Class A Common Stock
and New 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, New PRIMESTAR 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 New
PRIMESTAR. Such acquisition will be accounted for at TSAT's historical
cost since (i) the percentage of New PRIMESTAR owned by TSAT
F-76
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
prior to consummation of the TSAT Merger will be approximately equal to
the percentage of New PRIMESTAR to be owned by TSAT shareholders following
consummation of the TSAT Merger and (ii) the TSAT Merger and the
Restructuring Transaction are both a part of the Roll-up Plan.
Acquisition of Certain Satellite Assets
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement, dated as of June 11, 1997 (together with the
exhibits and schedules thereto, the "ASkyB Agreement") among PRIMESTAR
Partners, The News Corporation Limited ("News Corp."), MCI
Telecommunications Corporation, the principal domestic operating
subsidiary of MCI Communications Corporation ("MCI"), American Sky
Broadcasting LLC, a wholly-owned subsidiary of News Corp. ("ASkyB"), and
for certain purposes only, each of the partners of PRIMESTAR Partners
(collectively, the "Partners"), New PRIMESTAR will acquire from MCI two
high-power communications satellites currently under construction (the
"MCI Satellites"), certain authorizations granted to MCI by the FCC to
operate a direct broadcast satellite business at the 110(degrees) West
Longitude ("W.L.") orbital location using 28 transponder channels, and
certain related contracts (the "MCI FCC Licenses"). In consideration,
ASkyB will receive non-voting convertible securities of New PRIMESTAR,
comprising, subject to closing adjustments, approximately $600 million
liquidation value of non-voting convertible preferred stock, $.01 par
value per share, of New PRIMESTAR (the "New PRIMESTAR Convertible
Preferred Stock") (convertible into approximately 52 million shares of
non-voting Series D Common Stock, $.01 par value per share, of New
PRIMESTAR (the "New PRIMESTAR Class D Common Stock"), subject to
adjustment) and approximately $516 million principal amount of convertible
subordinated notes of New PRIMESTAR (the "New PRIMESTAR Convertible
Subordinated Notes") (convertible into approximately 45 million shares of
New PRIMESTAR Class D Common Stock).
The New PRIMESTAR Convertible Subordinated Notes will be due and payable,
and the New PRIMESTAR Convertible Preferred Stock will be mandatorily
redeemable, on the tenth anniversary of the date of issuance. The New
PRIMESTAR Convertible Preferred Stock will accrue cumulative dividends at
the annual rate of 5% of the liquidation value of such shares and the New
PRIMESTAR Convertible Subordinated Notes will have an interest rate of 5%.
Dividends on the New PRIMESTAR Convertible Preferred Stock and interest on
the New PRIMESTAR Convertible Subordinated Notes will be payable in cash
or, at the option of New PRIMESTAR, in shares of the non-voting New
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 New PRIMESTAR Class D Common
Stock to be issued to ASkyB or any of its affiliates upon conversion of
such New PRIMESTAR Convertible Preferred Stock and New PRIMESTAR
Convertible Subordinated Notes, or in payment of dividend or interest
obligations thereunder, will be non-voting; however, shares of New
PRIMESTAR Class D Common Stock will in turn automatically convert into
shares of New 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.
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.
The ASkyB Agreement provides that if the Restructuring Transaction has not
closed by March 8, 1998, and the closing conditions set forth in the ASkyB
Agreement have all been satisfied, then News Corp., MCI and ASkyB
(collectively, the "ASkyB Transferors") shall have the right to transfer
to PRIMESTAR Partners the assets contemplated to be transferred to New
PRIMESTAR under the ASkyB Transaction, in
F-77
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
exchange for such consideration, having an aggregate fair market value
equal to the aggregate consideration to have been received by the ASkyB
Transferors pursuant to the ASkyB Transaction, as PRIMESTAR Partners and
the ASkyB Transferors shall mutually agree.
(3)TSAT SPIN-OFF TRANSACTION
General
On June 17, 1996, the Board of Directors of TCI announced its intention to
distribute all the capital stock of TSAT to the holders of Tele-
Communications, Inc. Series A TCI Group Common Stock, $1.00 par value per
share, (the "Series A TCI Group Common Stock") and Tele-Communications,
Inc. Series B TCI Group Common Stock (the "Series B TCI Group Common
Stock" and, together with the Series A TCI Group Common Stock, the "TCI
Group Common Stock"). On December 4, 1996 (the "TSAT Spin-off Date"), the
TSAT Spin-off was effected as a distribution by TCI to holders of record
of its TCI Group Common Stock as of the close of business on November 12,
1996 (the "TSAT Spin-off Record Date") of shares of TSAT Common Stock. The
TSAT Spin-off did not involve the payment of any consideration by the
holders of TCI Group Common Stock (such holders, the "TCI Group
Stockholders"), and is intended to qualify as a tax-free spinoff.
On the TSAT Spin-off Record Date TCI Group Stockholders received one share
of Series A Common Stock for each ten shares of Series A TCI Group Common
Stock owned of record at the close of business on the TSAT Spin-off Record
Date and one share of Series B Common Stock for each ten shares of Series
B TCI Group Common Stock owned of record as of the close of business on
the TSAT Spin-off Record Date. Fractional shares were not issued.
Fractions of one-half or greater of a share were rounded up and fractions
of less than one-half of a share were rounded down to the nearest whole
number of shares of Series A Common Stock and Series B Common Stock.
Immediately following the TSAT Spin-off, 57,941,044 shares of Series A
Common Stock and 8,466,564 shares of Series B Common Stock were issued and
outstanding.
Since the TSAT Spin-off, TSAT and TCI have operated independently. For
purposes of governing certain of the ongoing relationships between TSAT
and TCI after the TSAT Spin-off, and to provide mechanisms for an orderly
transition, TSAT and TCI have entered into various agreements, including
the "Reorganization Agreement" (see below), the "Fulfillment Agreement"
(see note 11), the "Indemnification Agreements" (see note 12), the "TCIC
Credit Facility" (see note 10), the "Transition Services Agreement" (see
note 11), and an amendment to TCI's then existing "Tax Sharing Agreement"
(see note 11).
Reorganization Agreement
The Reorganization Agreement provided for, among other things, the
transfer to TSAT of the assets of TCI SATCO, and for the assumption by
TSAT of related liabilities. No consideration was payable by TSAT for
these transfers, except that two subsidiaries of TSAT purchased TCIC's
partnership interests in PRIMESTAR Partners for consideration payable by
delivery of promissory notes issued by such subsidiaries, which notes were
assumed by TCI on or before the TSAT Spin-off Date in the form of a
capital contribution to TSAT. The Reorganization Agreement also provides
for certain cross-indemnities designed to make TSAT financially
responsible for all liabilities relating to the digital satellite business
conducted by TCI prior to the TSAT Spin-off, as well as for all
liabilities incurred by TSAT after the TSAT Spin-off, and makes TCI
financially responsible for all potential liabilities of TSAT which are
not related to the digital satellite business, including, for example,
liabilities arising as a result of TSAT having been a subsidiary of TCI
prior to the TSAT Spin-off.
Pursuant to the Reorganization Agreement, on the TSAT Spin-off Date, TSAT
issued to TCIC a promissory note (the "TSAT Note"), in the principal
amount of $250,000,000, representing a portion of
F-78
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TSAT's intercompany balance owed to TCIC on such date. On December 31,
1996, TSAT entered into a bank credit agreement with respect to a senior
secured reducing revolving credit facility (the "Bank Credit Facility")
and used a portion of the borrowing availability thereunder to repay in
full all principal and interest due to TCIC pursuant to the TSAT Note. See
note 10.
Pursuant to the Reorganization Agreement, the remainder of TSAT's
intercompany balance owed to TCIC on the TSAT Spin-off Date (other than
certain advances made to TSAT by TCIC in 1996 to fund certain construction
and related costs associated with the Tempo Satellites, as described in
note 8) was assumed by TCI. A portion of such assumption of debt was
affected in the form of a capital contribution to TSAT; the remainder was
affected as consideration for (i) the assumption by TSAT of TCI's
obligations under options granted on the TSAT Spin-off Date to certain key
employees of TCI (who are not employees of TSAT) representing, in the
aggregate, 1,660,190 shares of Series A Common Stock and (ii) the granting
by TSAT to TCI of an option to purchase up to 4,765,000 shares of Series A
Common Stock, at an exercise price of $1.00 per share, as required by TCI
from time to time to meet its obligations under the conversion features of
certain convertible securities of TCI as such conversion features were
adjusted as a result of the TSAT Spin-off.
(4)CHANGES IN ACCOUNTING
During the fourth quarter of 1996, TSAT re-evaluated certain of its
depreciation policies. After considering relevant accounting literature,
current accounting practices in similar industries, and other factors,
TSAT concluded that the most appropriate depreciation policy for its
subscriber installation costs was to depreciate subscriber installation
costs on a straight line basis over the estimated average life of a
subscriber, and charge to depreciation expense the unamortized balance of
installation costs associated with customers who have terminated service
with TSAT. TSAT believes the new policy is more appropriate than the prior
method since, under the new policy, subscriber installation costs
associated with subscribers whose service has been terminated are no
longer carried on TSAT's balance sheet after the date of termination. This
change was adopted effective October 1, 1996 and was treated as a change
in accounting policy that was inseparable from a change in estimate.
Accordingly, the cumulative effect of such change for periods prior to
October 1, 1996, together with the fourth quarter 1996 effect of such
change, was included in TSAT's depreciation expense for the fourth quarter
of 1996.
In connection with the aforementioned discussion of TSAT's accounting
policies with respect to subscriber installation costs, TSAT also
determined that a reduction in the estimated useful life of certain
satellite reception equipment was appropriate in light of certain changes
in TSAT's expectations with respect to technological and other factors.
This change in estimate was given effect on a prospective basis as of
October 1, 1996.
(5)NET LOSS PER COMMON SHARE
As described in note 3, TSAT issued 66,407,608 shares of TSAT Common Stock
pursuant to the TSAT Spin-off. The pro forma net loss per share amounts
set forth in the accompanying statements of operations assume that the
shares issued pursuant to the TSAT Spin-off were issued and outstanding
since January 1, 1996. Accordingly, the calculation of the pro forma net
loss per share assumes 66,407,608 weighted average shares were outstanding
during the three and nine months ended September 30, 1996. The historical
net loss per common share is based on 66,676,241 and 66,642,359 weighted
average shares outstanding during the three and nine months ended
September 30, 1997, respectively.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
No. 128"). Statement No. 128 requires the presentation of
F-79
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
basic earnings per share ("EPS") and, for companies with potentially
dilutive securities, such as convertible debt, options and warrants,
diluted EPS. Statement No. 128 is effective for annual and interim periods
ending after December 15, 1997. TSAT does not believe that the adoption of
Statement No. 128 will significantly impact the calculation of TSAT's net
loss per common share.
(6)SUPPLEMENTAL DISCLOSURES TO COMBINED STATEMENTS OF CASH FLOWS
Cash paid for interest was $17,837,000 during the nine months ended
September 30, 1997, and was not significant during the nine months ended
September 30, 1996. Cash paid for income taxes was not significant during
the nine months ended September 30, 1997 and 1996.
With the exception of certain non-cash stock compensation obligations (see
note 11), transactions effected through the intercompany account with TCIC
for periods prior to the TSAT Spin-off have been considered to be
constructive cash receipts and payments for purposes of the accompanying
statements of cash flows.
Accrued capital expenditures of $13,381,000 and $5,532,000 at September
30, 1997 and 1996, respectively, have been excluded from the accompanying
statements of cash flows.
(7)INVESTMENT IN PRIMESTAR PARTNERS
Summarized unaudited operating information for PRIMESTAR Partners is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- --------
RESULTS OF OPERATIONS
---------------------
<S> <C> <C>
Revenue............................................. $ 450,973 294,634
Operating, selling, general and administrative
expenses........................................... (480,302) (299,596)
Depreciation and amortization....................... (2,856) (2,390)
--------- --------
Operating loss..................................... (32,185) (7,352)
Other income (expense), net......................... (11,677) 856
--------- --------
Net loss........................................... $ (43,862) (6,496)
========= ========
</TABLE>
The bank credit facility of PRIMESTAR Partners (the "PRIMESTAR Credit
Facility") was obtained by PRIMESTAR Partners to finance advances to Tempo
for payments due in respect of the construction of the Tempo Satellites,
and is supported by letters of credit arranged for by affiliates of all
but one of the Partners. At September 30, 1997, PRIMESTAR Partners'
indebtedness under the PRIMESTAR Credit Facility aggregated $555,000,000,
including amounts borrowed to pay interest charges. The maturity date of
the PRIMESTAR Credit Facility has been extended to September 30, 1998. See
notes 8 and 12.
Since March 10, 1997, PRIMESTAR Partners has transmitted the PRIMESTAR(R)
service from GE-2, a medium power satellite owned and operated by GE
Americom ("GE-2"). GE-2 was launched on January 30, 1997, and declared
commercially operational, effective March 6, 1997. Pursuant to the Amended
and Restated Memorandum of Agreement, effective as of October 18, 1996,
between PRIMESTAR Partners and GE Americom, which provides for PRIMESTAR
Partners' use of transponders
F-80
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
on GE-2 (the "GE-2 Agreement"), PRIMESTAR Partners is required to make
minimum lease payments for an initial term of six years from the
availability of GE-2, extendible, at the option of PRIMESTAR Partners, for
the remainder of the useful life of GE-2 (the "End-Of-Life Option").
Although the term of the End-of-Life Option was originally scheduled to
expire in February 1997, and was subsequently extended by mutual agreement
to December 1997, GE Americom has agreed to extend the term of the End-of-
Life Option for an indeterminate period, to permit the Partnership and GE
Americom to discuss the terms of a further formal extension or other
modification. In that connection, GE Americom has agreed that the End-of-
Life Option will remain exercisable until at least 15 days after GE
Americom delivers to the Partnership a written proposal with respect to
such further extension or modification. PRIMESTAR Partners' obligations
under the GE-2 Agreement are supported by letters of credit arranged for
by affiliates of all but one of the Partners. Upon consummation of the
Restructuring Transaction, the GE-2 Agreement will be assumed by New
PRIMESTAR. See notes 2, 8 and 12.
PRIMESTAR Partners provides programming services to TSAT and other
authorized PRIMESTAR(R) distributors in exchange for a fee based upon the
number of subscribers receiving programming services. In addition,
PRIMESTAR Partners arranges for satellite capacity and uplink services,
and provides national marketing and administrative support services in
exchange for a separate authorization fee.
Under PRIMESTAR Partners' limited partnership agreement, as amended, TSAT
has agreed to fund its share of any capital contributions and/or loans to
PRIMESTAR Partners that might be agreed upon from time to time by the
Partners. Additionally, those subsidiaries of TSAT that are general
partners of PRIMESTAR Partners are liable as a matter of partnership law
for all debts of PRIMESTAR Partners in the event the liabilities of
PRIMESTAR Partners were to exceed its assets. PRIMESTAR Partners has
contingent liabilities related to legal and other matters arising in the
ordinary course of business. Management of PRIMESTAR Partners is unable at
this time to assess the impact, if any, of such matters on PRIMESTAR
Partners' results of operations, financial position, or cash flows.
As described in note 2, TSAT has entered into a binding letter agreement
with respect to the Restructuring Transaction, whereby the businesses of
TSAT and PRIMESTAR Partners and the PRIMESTAR(R) distribution businesses
of affiliates of the other Partners will be consolidated into a newly-
formed company.
(8)SATELLITES
Tempo DBS System
TSAT, through Tempo, holds the FCC Permit authorizing construction of a
high-power DBS system consisting of two or more satellites delivering DBS
service in 11 frequencies at the 119(degrees) W.L. orbital position and 11
frequencies at the 166(degrees) W.L. orbital position. The 119(degrees)
W.L. orbital position is generally visible to home satellite dishes
("HSDs") throughout the entire continental U.S.; the 166(degrees) W.L.
orbital position is visible only in the western half of the continental
U.S. as well as Alaska and Hawaii.
Tempo is also a party to the Satellite Construction Agreement with Loral,
pursuant to which Tempo has arranged for the construction of the Tempo
Satellites at a fixed contract price of $487,159,500, and has an option to
purchase up to three additional satellites. The cost of constructing the
Tempo Satellites is reflected in "Satellites" in the accompanying balance
sheets.
One of the Tempo Satellites ("Tempo DBS-1") was outfitted with an antenna
designed for operation at the 119(degrees) W.L. orbital location, and was
launched into geosynchronous orbit on March 8, 1997. Such
F-81
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
satellite is currently undergoing extended in-orbit testing pursuant to
the Satellite Construction Agreement. Assuming that such in-orbit testing
results in acceptance of the satellite by Tempo under the Satellite
Construction Agreement, Tempo DBS-1 would be available for commercial
operations in the first quarter of 1998. At current levels of digital
compression, TSAT believes that Tempo DBS-1 would be able to deliver
approximately 100 channels of digital video and 20 channels of digital
audio programming, as operated under the FCC Permit.
As designed, the Tempo Satellites can be operated in single transponder
mode or paired transponder mode. Under single transponder mode, such
satellites could broadcast up to 32 transponder channels simultaneously,
at 113 watts per channel, assuming that the operator of such satellites
had authority to use that number of channels. Under paired transponder
mode, such satellites could broadcast on up to 11 transponder channels
simultaneously, at 226 watts per channel, also assuming proper
authorization. The FCC Permit authorizes Tempo to broadcast on 11
transponder channels from the 119(degrees) W.L. orbital location. The
power levels indicated by paired transponder operations would permit the
use of HSDs of less than 14 inches in diameter to subscribers in the
majority of the U.S. However, TSAT expects to use 18 inch HSDs for the
proposed high-power service, the same diameter currently used by other
high-power DBS providers, in most areas.
Since the launch of Tempo DBS-1, Loral has notified TSAT of five separate
occurrences of power reductions on Tempo DBS-1. No assurance can be given
that further power reductions will not occur in the future. TSAT does not
currently know the extent of such power reductions, and cannot confirm the
precise causes thereof; however, such reductions could eventually affect
the proposed operation of Tempo DBS-1, either alone or together with other
events that may arise during the expected life of the satellite.
TSAT currently intends to operate Tempo DBS-1 as a platform to provide
high-power digital video and audio programming services to residential
customers, as well as multiple dwelling units, commercial customers and
resellers. If the Restructuring Transaction is consummated, Tempo will be
a wholly-owned subsidiary of New PRIMESTAR and New PRIMESTAR will operate
Tempo's high-power DBS services. If the Restructuring Transaction is not
consummated, TSAT expects that such services will be provided through
PRIMESTAR Partners, which has exercised its option, under an option
agreement between Tempo and PRIMESTAR Partners (the "Tempo Option
Agreement"), to purchase or lease 100% of the capacity of Tempo DBS-1. The
availability and utility of Tempo DBS-1, including the power levels
provided by Tempo DBS-1, are subject to risks of satellite defect, loss,
or reduced performance. See note 2.
In light of the pendency of the Restructuring Transaction and the ASkyB
Transaction (see note 2), TSAT and PRIMESTAR Partners are evaluating
alternative future plans with respect to the second Tempo Satellite
("Tempo DBS-2"), including its use or disposition. Tempo DBS-2 presently
serves as a ground spare for Tempo DBS-1.
Satellite Launches
Pursuant to the Satellite Construction Agreement, Loral must conduct in-
orbit testing following the launch of a satellite. Under the Satellite
Construction Agreement, delivery of a satellite takes place upon Tempo's
acceptance of such satellite after completion of in-orbit testing
("Delivery"). Subject to certain limits, Loral must reimburse Tempo for
Tempo's actual and reasonable expenses directly incurred as a result of
any delays in the Delivery of satellites. The in-orbit useful life of each
satellite is designed to be a minimum of 12 years. If in-orbit testing
confirms that the satellite conforms fully to specifications and the
service life of the satellite will be at least 12 years, Tempo is required
to accept the satellite. If in-orbit
F-82
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
testing determines that the satellite does not fully conform to
specifications but at least 50% of its transponders are functional and the
service life of the satellite will be at least six years, Tempo is
required to accept the satellite but is entitled to receive a
proportionate decrease in the purchase price. If Loral fails to deliver a
satellite, it has 29 months to deliver, at its own expense, a replacement
satellite. Loral may make four attempts to launch the two Tempo
Satellites; however, if the two Tempo Satellites are not delivered in such
four attempts, Tempo may terminate the Satellite Construction Agreement
and receive a refund. Tempo also may terminate the contract in the event
of two successive satellite failures.
As a result of the aforementioned power reductions, in-orbit testing has
been extended and Tempo DBS-1 has not yet been accepted; however, it is
currently expected that such testing will be completed during the first
quarter of 1998. TSAT currently believes that Tempo DBS-1 may not fully
comply with specifications, but has not yet determined the extent of any
such non-compliance. Tempo and Loral are currently engaged in discussions
regarding this matter and the terms of any monetary settlement with
respect thereto to which Tempo may be entitled under the Satellite
Construction Agreement. A launch defect or damage affecting Tempo DBS-1
could cause a substantial monetary loss to TSAT or, following consummation
of the Restructuring Transaction, New PRIMESTAR.
Loral has warranted that, until the satellites are launched, the
satellites will be free from defects in materials or workmanship and will
meet the applicable performance specifications. In addition, Loral has
warranted that all items other than the satellites delivered under the
Satellite Construction Agreement will be free from defects in materials or
workmanship for one year from the date of their acceptance and will
perform in accordance with the applicable performance specifications.
Loral bears the risk of loss of the Tempo Satellites until Delivery. Upon
Delivery, title and risk of loss pass to Tempo. However, Loral is
obligated to carry risk insurance on each satellite covering the period
from launch through Delivery. Such risk insurance is required to cover (i)
the cost of any damages due under the Satellite Construction Agreement;
(ii) the cost of delivery of a replacement satellite in the event of a
satellite failure; and (iii) the refund of the fixed contract price for
each undelivered Tempo Satellite if Loral fails to deliver both Tempo
Satellites after four attempts. Loral is also required to obtain insurance
indemnifying Tempo from any third party claims arising out of the launch
of a satellite. Although TSAT is entitled to the benefit of such
warranties and insurance coverage relating to the Tempo Satellites
pursuant to the Satellite Construction Agreement, such warranties and
insurance coverage might not be sufficient to compensate TSAT for all of
its losses in the event of a partial or total satellite failure or
casualty, even if such failure or casualty were a covered loss.
Upon Delivery of each of the Tempo Satellites, Tempo is obligated to make
a $10 million incentive payment to Loral. Tempo is eligible to receive a
pro rata warranty payback of each such incentive payment to the extent
that transponder failures occur during the twelve-year period following
Delivery. Satellite incentive payments and any related warranty paybacks
are treated as adjustments of the cost of the applicable Tempo Satellite.
Tempo Option
In February 1990, Tempo entered into the Tempo Option Agreement with
PRIMESTAR Partners granting PRIMESTAR Partners the right and option (the
"Tempo Option"), upon exercise, to purchase or lease 100% of the capacity
of the DBS system to be built, launched and operated by Tempo pursuant to
the FCC Permit. Under the Tempo Option Agreement, upon the exercise of the
Tempo Option, PRIMESTAR Partners was obligated to pay Tempo $1,000,000
(the "Exercise Fee") and to lease or purchase the entire capacity of the
DBS system with the purchase price (or aggregate lease payments) being
sufficient to cover
F-83
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the costs of constructing, launching and operating such DBS system. In
connection with the Tempo Option and certain related matters, Tempo and
PRIMESTAR Partners subsequently entered into two letter agreements (the
"Tempo Letter Agreements"), which provided for, among other things, the
funding by PRIMESTAR Partners of milestone and other payments due under
the Satellite Construction Agreement, and certain related costs, through
advances by PRIMESTAR Partners to Tempo. PRIMESTAR Partners financed such
advances to Tempo through borrowings under the PRIMESTAR Credit Facility,
which is in turn supported by letters of credit arranged for by affiliates
of all but one of the Partners. The aggregate funding provided to Tempo by
PRIMESTAR Partners ($463,133,000 at September 30, 1997) is reflected in
"Due to PRIMESTAR Partners" in the accompanying balance sheets. At
September 30, 1997, the amount borrowed by PRIMESTAR Partners under the
PRIMESTAR Credit Facility was $555,000,000, including amounts borrowed to
pay interest charges. See notes 7 and 12.
During 1996, TCIC made intercompany advances to TSAT to fund the majority
of the construction and related costs associated with the Tempo
Satellites. Prior to 1996, PRIMESTAR Partners had funded substantially all
of the construction and related costs associated with the Tempo
Satellites. In connection with the TSAT Spin-off, a determination was made
that such 1996 advances from TCIC would be repaid by TSAT to TCIC, to the
extent (and only to the extent) that Tempo received corresponding advances
from PRIMESTAR Partners. As a result of negotiations between TSAT and
PRIMESTAR Partners to resolve a disagreement concerning the Tempo
Satellites, PRIMESTAR Partners advanced $73,786,000 to Tempo in December
1996 to reimburse Tempo for all of the 1996 costs which previously had
been funded by TCIC. Upon receipt, such advance was paid to TCIC by Tempo
in repayment of such 1996 advances from TCIC.
On February 7, 1997, the Partners Committee of PRIMESTAR Partners adopted
a resolution (i) affirming that PRIMESTAR Partners had unconditionally
exercised the Tempo Option, (ii) approving the proposed launch of Tempo
DBS 1 into the 119(degrees) W.L. orbital position and the use of Tempo
DBS-2 as a spare or back-up for Tempo DBS-1, pending other deployment or
disposition as determined by PRIMESTAR Partners, and (iii) authorizing the
payment by PRIMESTAR Partners to Tempo of the Exercise Fee and other
amounts in connection with the Tempo Option and the Tempo Letter
Agreements, including funding of substantially all construction and
related costs relating to the Tempo Satellites not previously funded by
PRIMESTAR Partners. Such amounts have been paid to TSAT.
The Tempo Letter Agreements permit PRIMESTAR Partners to apply its
advances to Tempo against any payments (other than the Exercise Fee) due
under the Tempo Option with respect to its purchase or lease of satellite
capacity. Although TSAT and PRIMESTAR Partners have not entered into an
agreement with respect to the purchase or lease of 100% of the capacity of
the proposed Tempo DBS system pursuant to the Tempo Option, TSAT believes
that its obligations to PRIMESTAR Partners with respect to such advances
will be satisfied in connection with the completion of such purchase or
lease. However, if notwithstanding the exercise of the Tempo Option such
purchase or lease of satellite capacity is not completed, TSAT believes
that alternative courses of action are available that would allow TSAT to
recover its costs of constructing the Tempo Satellites. See note 2.
(9)OTHER ASSETS
The components of other assets are as follows (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization.................................. $ 22,979 7,000
Investment in, and advances to, ResNet
Communications, Inc........................... 5,500 5,827
-------- ------
$ 28,479 12,827
======== ======
</TABLE>
F-84
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10)DEBT
The components of debt are as follows (amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Bank Credit Facility (a)......................... $ -- 246,000
Senior Subordinated Notes (b).................... 200,000 --
Senior Subordinated Discount Notes (b)........... 163,634 --
Other............................................ 2,126 1,230
--------- -------
$ 365,760 247,230
========= =======
</TABLE>
(a)Bank Credit Facility
On December 31, 1996, TSAT entered into the Bank Credit Facility. As a
result of the February 1997 issuance of the Notes and the March 1997
determination that GE-2 was commercially operational, the maximum
commitments under the Bank Credit Facility were increased from
$350,000,000 to $750,000,000. At September 30, 1997, $720,000,000 of
such maximum commitments were unused. The availability of such
commitments for borrowing is subject to TSAT's compliance with
operating and financial covenants and other customary conditions.
Commencing March 31, 2001, aggregate commitments will be reduced
quarterly in accordance with a schedule, until final maturity at June
30, 2005. TSAT's initial borrowings under the Bank Credit Facility were
used to repay in full the principal amount of and accrued interest on
the TSAT Note and to fund financing costs associated with the
arrangement of the facility.
Borrowings under the Bank Credit Facility bear interest at variable
rates. In addition, TSAT is required to pay a commitment fee equal to
0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity. Such
commitment fees aggregated $1,749,000 during the nine months ended
September 30, 1997.
Borrowings under the Bank Credit Facility are guaranteed by TSAT's
restricted subsidiaries (currently all of TSAT's subsidiaries except
Tempo) (the "Restricted Subsidiaries"), and secured by collateral
assignments or other security interests in (i) all capital stock of
certain of TSAT's Restricted Subsidiaries and (ii) substantially all of
TSAT's assets (other than the Tempo Satellites). The Bank Credit
Facility contains affirmative covenants regarding minimum subscribers,
revenue per subscriber and debt service coverage, as well as negative
covenants that limit TSAT and its Restricted Subsidiaries from, among
other things, (i) incurring indebtedness, (ii) creating liens and other
encumbrances, (iii) entering into merger or consolidation transactions,
(iv) entering into transactions with affiliates, (v) making
investments, (vi) making capital expenditures, (vii) paying dividends
and making other distributions, (viii) redeeming stock, (ix) redeeming
or purchasing of subordinated debt (except under certain limited
circumstances) (x) paying interest on or principal of subordinated debt
during the continuation of (A) an event of default under the Bank
Credit Facility or (B) a default under the Bank Credit Facility of
which management of TSAT has actual or constructive notice, (xi)
entering into sale and leaseback transactions and (xii) engaging in
non-designated activities. The Bank Credit Facility also contains
customary events of default and provisions for mandatory prepayments
and commitment reductions in the event of certain asset sales.
TSAT anticipates that it will be required to refinance and/or amend the
Bank Credit Facility prior to the consummation of the Restructuring
Transaction described in note 2. No assurance can be given that any
such refinancing and/or amendment will be completed on terms acceptable
to TSAT.
F-85
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During the first quarter of 1997, two letters of credit with an
aggregate drawable amount of $30,000,000 were issued for the account of
TSAT pursuant to the Bank Credit Facility. See note 12.
(b)Notes
On February 20, 1997, 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"). The net proceeds from the issuance of
the Notes (approximately $340,500,000 after deducting offering
expenses) were initially held in escrow and were subsequently released
to TSAT on March 17, 1997. TSAT initially used $244,404,000 of such net
proceeds to repay amounts outstanding under the Bank Credit Facility.
Cash interest on the Senior Subordinated Notes is payable semi-annually
in arrears on February 15 and August 15, commencing August 15, 1997.
Cash interest will not accrue or be payable on the Senior Subordinated
Discount Notes prior to February 15, 2002. Thereafter cash interest
will accrue at a rate of 12 1/4% per annum and will be payable semi-
annually in arrears on February 15 and August 15, commencing August 15,
2002; provided however, that at any time prior to February 15, 2002,
TSAT 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 mature February 15,
2007. The Notes will be redeemable at the option of TSAT, in whole or
in part, at any time after February 15, 2002 at specified redemption
prices. In addition, prior to February 15, 2000, TSAT may use the net
cash proceeds from certain specified equity transactions to redeem up
to 35% of the Notes at specified redemption prices.
The Notes were not originally registered under the Securities Act of
1933, as amended (the "Securities Act"), but contained a covenant
requiring TSAT to file with the Securities and Exchange Commission (the
"SEC") a registration statement with respect to an offer to exchange
(the "Exchange Offer") the Notes for substantially identical notes that
are so registered ("Exchange Notes") or, alternatively, to register the
Notes under the Securities Act. Although TSAT filed a registration
statement in connection with the Exchange Offer with the SEC on April
11, 1997, such registration statement has not been declared effective,
and accordingly, the Exchange Offer has not been commenced. As a
result, effective July 5, 1997, TSAT began to incur additional interest
on the Notes. During the 90-day period ended October 3, 1997,
additional interest on the Notes accrued at the rate of $0.05 per $1000
principal amount per week. For each subsequent 90-day period in which
the Notes are not registered under the Securities Act or exchanged for
registered Exchange Notes, the additional interest on the notes will be
increased by $0.05 per $1000 principal amount per week up to a maximum
of $0.50 per $1000 principal amount per week. Such additional interest
aggregated $252,000 through September 30, 1997. TSAT currently expects
that, due to the pendency of the Restructuring Transaction, it may not
be able to comply with the registration requirements under the Notes,
and accordingly, will not be able to cease the accrual of additional
interest, until the second quarter of 1998.
With the exception of the Notes, which had an aggregate fair value of
$388,903,000 at September 30, 1997, TSAT believes that the fair value and
the carrying value of TSAT's debt were approximately equal at September
30, 1997.
(11) TRANSACTIONS WITH RELATED PARTIES
TCIC provides certain installation, maintenance, retrieval and other
customer fulfillment services to TSAT. During the nine months ended
September 30, 1997 and 1996, TSAT's capitalized installation costs
F-86
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
included amounts charged by TCIC to TSAT of $43,762,000 and $37,470,000,
respectively. Maintenance, retrieval and other operating expenses charged
by TCIC to TSAT aggregated $7,216,000 and $16,446,000 during the nine
months ended September 30, 1997 and 1996, respectively. Prior to the TSAT
Spin-off, the foregoing charges were allocated from TCIC to TSAT based
upon a standard charge for each of the customer fulfillment activities
performed by TCIC.
Pursuant to a fulfillment agreement (as amended, the "Fulfillment
Agreement"), TCIC has provided fulfillment services on an exclusive basis
to TSAT with respect to customers of the PRIMESTAR(R) medium power
service. Such services include installation, maintenance, retrieval,
inventory management and other customer fulfillment services. Among other
matters, the Fulfillment Agreement (i) sets forth the responsibilities of
TCIC with respect to fulfillment services, including performance
standards, (ii) provides for TCIC's fulfillment sites to be connected to
the billing and information systems used by TSAT, allowing for on-line
scheduling and dispatch of installation and other service calls, and (iii)
provides scheduled rates to be charged to TSAT for the various customer
fulfillment services provided by TCIC.
From January 1, 1997 through July 21, 1997, charges for customer
fulfillment services provided by TCIC were made pursuant to the
Fulfillment Agreement, as originally executed by TSAT and TCIC in
connection with the TSAT Spin-off (the "Original Fulfillment Agreement").
The cost to TSAT of the services provided by TCIC under the Original
Fulfillment Agreement exceeded the standard charges allocated to TSAT for
such services through December 31, 1996. Effective July 22, 1997, the
Original Fulfillment Agreement was amended to, among other items, (i)
change the termination date to December 31, 1997 and, (ii) reduce the
scheduled rates for the customer fulfillment services provided by TCIC to
rates that are comparable to those that were used to allocate fulfillment
charges to TSAT prior to the TSAT Spin-off. In September and October,
1997, TSAT entered into agreements with eight regional fulfillment
companies (none of which is affiliated with TSAT or any other party to the
Restructuring Transaction) to perform the services that will no longer be
performed by TCIC following the termination of the Fulfillment Agreement.
TSAT's management believes that the terms and conditions of such new third
party fulfillment agreements are in the aggregate no less favorable to
TSAT than the terms and conditions of the Original Fulfillment Agreement
or the amended Fulfillment Agreement. The transition from TCIC to the
third party fulfillment companies is currently in progress and is expected
to be completed in December 1997.
TCIC also provides corporate administrative and certain telephony services
to TSAT. Prior to the TSAT Spin-off, the related administrative and
telephony expenses were allocated from TCIC to TSAT based on the estimated
cost of providing the service. Such charges aggregated $14,600,000 during
the nine months ended September 30, 1996.
Since the TSAT Spin-off Date, charges for administrative services provided
by TCIC have been made pursuant to a transition services agreement entered
into by TSAT and TCI in connection with the TSAT Spin-off (the "Transition
Services Agreement"). Pursuant to the Transition Services Agreement, TCI
is obligated to provide to TSAT certain services and other benefits,
including certain administrative and other services that were provided by
TCI prior to the TSAT Spin-off. Pursuant to the Transition Services
Agreement, TCI has also agreed to provide TSAT with certain most-favored-
customer rights to programming services that TCI or a wholly-owned
subsidiary of TCI may own in the future and access to any volume discounts
that may be available to TCI for purchase of HSDs, satellite receivers and
other equipment. As compensation for the services rendered and for the
benefits made available to TSAT pursuant to the Transition Services
Agreement, TSAT is required to pay TCI a monthly fee of $1.50 per
qualified subscribing household or other residential or commercial unit
(counted as one subscriber regardless of the number of satellite
receivers), up to a maximum of $3,000,000 per month, and to reimburse TCI
quarterly for direct, out-of-pocket expenses incurred by TCI to third
parties in providing
F-87
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the services. The Transition Services Agreement continues in effect until
the close of business on December 31, 1999, and will be renewed
automatically for successive one-year periods thereafter, unless earlier
terminated by (i) either party at the end of the initial term or the then
current renewal term, as applicable, on not less than 180 days' prior
written notice to the other party, (ii) TCI upon written notice to TSAT
following certain changes in control of TSAT, and (iii) either party if
the other party is the subject of certain bankruptcy or insolvency-related
events. Pursuant to the terms of the Transition Services Agreement, TCI
has the right to terminate the agreement upon the consummation of the
Restructuring Transaction. TSAT believes that TCI will exercise its right
to terminate the Transition Services Agreement concurrently with the
consummation of the Restructuring Transaction. TSAT does not believe that
any such termination will have a material adverse effect on TSAT. Charges
under the Transition Services Agreement aggregated $8,611,000 during the
nine months ended September 30, 1997.
During the nine months ended September 30, 1997, TSAT purchased from TCIC
at TCIC's cost certain telephony services aggregating $3,457,000.
Beginning in March 1997, TCIC began providing TSAT with customer support
services from its Boise, Idaho call center ( the "Boise Call Center"). The
Boise Call Center responds to calls that exceed the capacity of TSAT's
National Call Center. Amounts charged by TCIC to TSAT for such services
aggregated $5,939,000 during the nine months ended September 30, 1997.
Through the TSAT Spin-off Date, the effects of all transactions between
TSAT and TCI were reflected as adjustments to a non-interest bearing
intercompany account. As described in note 3, all but $250,000,000 of this
intercompany account was forgiven in connection with the TSAT Spin-off
(other than certain advances relating to construction of the Tempo
Satellites, which were repaid from advances subsequently received from
PRIMESTAR Partners--see note 8). Since the TSAT Spin-off Date, the effects
of transactions between TSAT and TCI have been reflected in a non-interest
bearing account that is settled periodically in cash. At September 30,
1997 and December 31, 1996, amounts owed to TCIC pursuant to such non-
interest bearing intercompany account aggregated $12,100,000 and
$8,381,000, respectively, and are included in "Other accrued expenses" in
the accompanying consolidated balance sheets.
Certain key employees of TSAT hold stock options in tandem with stock
appreciation rights with respect to certain common stock of TCI. Estimates
of the compensation related to the options and/or stock appreciation
rights granted to employees of TSAT have been recorded in the accompanying
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. Non-
cash increases (decreases) to TSAT's share of TCI's estimated stock
compensation liability aggregated $3,039,000 and $(553,000) during the
nine months ended September 30, 1997 and 1996, respectively.
Through the TSAT Spin-off Date, TSAT's results of operations were included
in TCI's consolidated U.S. Federal income tax returns, in accordance with
the existing tax sharing arrangements among TCI and its consolidated
subsidiaries. Effective July 1, 1995, TCI, TCIC and certain other
subsidiaries of TCI entered into a tax sharing agreement (the "Tax Sharing
Agreement"), which formalized such pre-existing tax sharing arrangements
and implemented additional provisions regarding the allocation of certain
consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. Federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986, as
amended, and any applicable state, local and foreign tax law and related
regulations. In connection with the TSAT Spin-off, the Tax Sharing
Agreement was amended to provide that TSAT be treated as if it had been a
party to the
F-88
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Tax Sharing Agreement, effective July 1, 1995. TSAT's intercompany income
tax allocation for the nine months ended September 30, 1996 has been
calculated in accordance with the Tax Sharing Agreement.
In connection with the Restructuring Transaction, TSAT and TCI entered
into a tax sharing agreement dated June 1997, to confirm that pursuant to
the amended Tax Sharing Agreement (i) neither TSAT nor any of its
subsidiaries has any obligation to indemnify TCI or the TCI shareholders
for any tax resulting from the TSAT Spin-off failing to qualify as a tax-
free distribution pursuant to Section 355 of the Internal Revenue Code of
1986 (the "Code"); (ii) TCI is obligated to indemnify TSAT and its
subsidiaries for any taxes resulting from the TSAT Spin-off failing to
qualify as a tax-free distribution pursuant to Section 355 of the Code;
(iii) to the best knowledge of TCI, TSAT's total payment obligation under
the Tax Sharing Agreement could not reasonably be expected to exceed $5
million; and (iv) the sole agreement between TCI, on the one hand, and
TSAT or any of its subsidiaries, on the other, relating to taxes is the
Tax Sharing Agreement. As of the date of the TSAT Spin-off, the sole
agreement, if any, between any of the TCI stockholders, on the one hand,
and TSAT or any of its subsidiaries, on the other, relating to taxes was
the Tax Sharing Agreement.
(12) COMMITMENTS AND CONTINGENCIES
At September 30, 1997, TSAT's future minimum commitments to purchase
satellite reception equipment aggregated approximately $20,000,000.
TSAT engages master sales agents to recruit, train and maintain a network
of sub-agents to sell services on behalf of TSAT and to install, service
and maintain equipment located at the premises of the subscribers. As part
of the compensation paid for such services, TSAT has agreed to pay certain
residual sales commissions equal to a percentage of the programming
revenue collected from a subscriber installed by a master sales agent
during specified periods following the initiation of service (generally
five years). During the nine months ended September 30, 1997 and 1996,
respectively, residual sales commissions to such master sales agents
aggregated $11,518,000 and $7,887,000, respectively, and were charged to
expense in the accompanying statements of operations.
On the TSAT Spin-off Date, TSAT entered into an Indemnification Agreement
with each of TCIC and TCI UA 1, Inc. ("TCI UA 1"), an indirect subsidiary
of TCIC, (collectively, the "Indemnification Agreements"). The
Indemnification Agreement with TCIC provides for TSAT to reimburse TCIC
for any amounts drawn under an irrevocable transferable letter of credit
issued for the account of TCIC to support TSAT's share of PRIMESTAR
Partners' obligations under the GE-2 Agreement. The drawable amount of
such letter of credit is $25,000,000. Although TCIC's obligations under
such letter of credit expire on February 14, 1998, TCIC has agreed to
extend such letter of credit through June 30, 1999. See note 7.
The Indemnification Agreement with TCI UA 1 provides for TSAT to reimburse
TCI UA 1 for any amounts drawn under an irrevocable transferable letter of
credit issued for the account of TCI UA 1 (the "TCI UA 1 Letter of
Credit"), which supports the PRIMESTAR Credit Facility. The drawable
amount of the TCI UA 1 Letter of Credit was $141,250,000 at September 30,
1997. See notes 7 and 8.
During the first quarter of 1997, two additional irrevocable transferable
letters of credit were issued pursuant to the Bank Credit Facility for the
account of TSAT, one to support TSAT's share of PRIMESTAR Partners'
obligations under the GE-2 Agreement, and the second to support the
PRIMESTAR Credit Facility. The initial drawable amount of the first letter
of credit is $25,000,000, increasing to $50,000,000 if PRIMESTAR Partners
exercises the End-of-Life Option, and the initial drawable amount of the
second letter of credit is $5,000,000. See notes 7 and 10.
F-89
<PAGE>
TCI SATELLITE ENTERTAINMENT, INC.
(SEE NOTE 1)
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The Indemnification Agreements provide for TSAT to indemnify and hold
harmless TCIC and TCI UA 1 and certain related persons from and against
any losses, claims, and liabilities arising out of the respective letters
of credit or any drawings thereunder. The payment obligations of TSAT to
TCIC and TCI UA 1 under such Indemnification Agreements are subordinated
in right of payment with respect to the obligations of TSAT under the Bank
Credit Facility. See note 10.
TCI has caused TCI UA 1 to renew the letter of credit arranged by it on
TSAT's behalf, through June 30, 1999. During such period TSAT and/or
PRIMESTAR Partners will seek to obtain permanent financing for the Tempo
Satellites (to the extent not sold to a person other than PRIMESTAR
Partners) on a basis that does not require TSAT to post a letter of credit
with respect thereto. If such permanent financing is not available, under
certain maintenance covenants contained in the Bank Credit Facility, TSAT
would be unable to provide or arrange for such a letter of credit unless
(i) the lenders under the Bank Credit Facility were to agree to amend or
waive such covenants to permit the posting of such letter of credit by the
TSAT, (ii) TCI were to agree to renew the TCI UA 1 Letter of Credit for an
additional period, or (iii) TSAT were to achieve a greater than
anticipated increase in operating income before depreciation and stock
compensation. If TSAT and/or PRIMESTAR Partners are unable to refinance
the Tempo Satellites (to the extent not sold to a person other than
PRIMESTAR Partners) without a letter of credit and is unable to post (or
arrange for the posting of) such a letter of credit, TSAT could be
adversely affected. See notes 7, 8 and 10.
The International Bureau of the FCC (the "International Bureau") has
granted EchoStar Satellite Corporation, a subsidiary of EchoStar
Communications Corp. (together with its consolidated subsidiaries,
"EchoStar") a conditional authorization to construct, launch and operate a
Ku-band domestic fixed satellite into the orbital position at 83(degrees)
W.L., immediately adjacent to that occupied by GE-2. Contrary to previous
FCC policy 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 PRIMESTAR Partners 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, are currently 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 PRIMESTAR Partners have attempted to resolve potential
coordination problems directly with EchoStar. However, it is uncertain
whether any agreement in respect of such coordination between PRIMESTAR
Partners and EchoStar will be reached, or that even if such agreement is
reached, that coordination will resolve such interference.
TSAT has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is
reasonably possible TSAT may incur losses upon conclusion of such matters,
an estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the
accompanying financial statements.
F-90
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED HISTORICAL
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ -----------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA:
Revenue................. $276,158 199,175 277,083 130,926 20,171 3,471 --
Operating, selling and
administrative
expenses............... (226,894) (171,678) (241,566) (115,473) (26,645) (6,606) --
Depreciation............ (48,724) (30,567) (45,449) (20,261) (5,725) (696) --
Operating income
(loss)................. 540 (3,070) (9,932) (4,808) (12,199) (3,831) --
Interest expense........ (20,637) (15,503) (21,980) (12,703) (3,438) (757) --
Share of losses of
PRIMESTAR
Partners, L.P.......... (11,424) (3,074) (5,314) (8,957) (12,095) (2,012) --
Other, net.............. (1,097) (788) 5 (30) 345 (45) --
Income tax benefit...... -- -- -- -- -- --
Net loss................ $(32,618) (22,435) (37,221) (26,498) (27,387) (6,645) --
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA:
Property, plant and
equipment, net......... $447,898 396,110 273,207 82,798 8,322 --
Investment in PRIMESTAR
Partners, L.P. ........ $ 28,494 31,021 16,624 5,638 19,082 --
Total assets............ $494,200 448,053 309,678 89,163 27,565 --
Group deficit........... $(93,217) (60,699) (23,378) (33,647) (6,645) --
</TABLE>
F-91
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be
read in conjunction with the accompanying financial statements and the notes
thereto.
OVERVIEW
The accompanying combined financial statements of Time Warner Satellite
Services Group (the "Company") reflect the combined historical financial
information of the direct broadcast satellite operations conducted by Time
Warner Entertainment Company, L.P. ("TWE") and the TWE-Advance/Newhouse
Partnership ("TWEAN"), including TWEAN's 31.29% partnership interest in
PRIMESTAR Partners, L.P. ("PrimeStar" and collectively, the "PrimeStar
Assets"). The PrimeStar Assets are expected to be transferred to a new,
unaffiliated company ("Newco"), that will also hold assets of TCI Satellite
Entertainment, Inc., pursuant to a merger and contribution agreement (the
"Restructuring Agreement") and related agreements entered into in February of
1998 (See Note 2 of Combined Financial Statements).
The Company distributes programming services which are purchased from
PrimeStar, under the PrimeStar brand name to subscribers within specified
areas of the continental United States. These services are
presented/transmitted to subscribers via a medium powered satellite owned and
operated by PrimeStar. As of December 31, 1996, the Company served 475,403
subscribers. The Company's most popular subscriber offering at December 31,
1996 was its Prime Value package which was sold at $29.95 per month including
all related equipment charges.
In August 1994, PrimeStar converted its distribution system from a low
powered analog to a medium powered digital signal. Following this conversion,
the Company has experienced significant subscriber growth. This growth was
facilitated by the Company's centralized operating structure and aggressive
marketing programs. Unless otherwise stated herein, increases in the Company's
revenue and operating, selling, general and administrative expenses are
primarily related to such subscriber growth. The Company operates in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect the Company's ability to
sustain its significant historical growth in subscribers and revenue.
USE OF EBITDA
Industry analysts generally consider operating income before depreciation
and amortization ("EBITDA") to be an important measure of comparative
operating performance for the cable and satellite television industries and,
when used in comparison to debt levels or the coverage of interest expense, as
a measure of liquidity. However, EBITDA should be considered in addition to,
not as a substitute for, operating income, net income, cash flow and other
measures of financial performance and liquidity reported in accordance with
generally accepted accounting principles. EBITDA as defined and used herein
may not be comparable to similarly titled measures reported by other
companies.
F-92
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
1996 VS. 1995
Operating results for the Company in 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
(MILLIONS)
<S> <C> <C>
Revenues...................................... $277.1 $130.9
EBITDA(a)..................................... 35.5 15.5
Depreciation.................................. 45.4 20.3
Operating loss................................ (9.9) (4.8)
Equity in losses of PRIMESTAR, L.P. .......... (5.3) (9.0)
Interest and other, net....................... (22.0) (12.7)
Net loss...................................... (37.2) (26.5)
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Basic subscribers............................. 475,403 298,896
Pay units..................................... 482,973 273,839
Average monthly subscriber service revenues... $ 49.50 $ 46.67
</TABLE>
(a) See Use of EBITDA above.
Revenues
Revenues increased to $277.1 million, compared to $130.9 million in 1995.
This increase reflects aggregate subscriber growth of 176,507 achieved through
a series of aggressive decentralized directed marketing campaigns. Average
monthly subscriber service revenues increased 6% to $49.50 in 1996 primarily
due to the expansion of premium and pay-per-view revenues. Average
installation revenue decreased to $151.63 in 1996, compared to $174.07 in 1995
as the result of relatively more aggressive pricing associated with
promotional programs.
Operating expenses
Operating expenses increased to $156.9 million, compared to $76.3 million in
1995. This increase reflects the increase in the Company's subscriber base,
particularly with respect to higher aggregate programming costs. PrimeStar
provides programming services to the Company and other authorized distributors
in exchange for a fee based upon the number of subscribers receiving such
programming services. PrimeStar also provides satellite capacity and uplink,
national marketing and administrative support services for a separate fee
charged to each distributor, including the Company, based on each
distributor's total number of subscribers. The aggregate charges from
PrimeStar for such services increased to $136.0 million, compared to $64.1
million in 1995. The average monthly charge per subscriber decreased to
$29.29, compared to $31.56 in 1995 primarily due to a decrease in programming
rates charged by PrimeStar. During 1996, the Company also experienced higher
technical and customer service costs reflecting the higher subscriber levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $84.7 million,
compared to $39.2 million in 1995. This increase was primarily due to higher
marketing and administrative costs incurred in support of the ongoing
subscriber growth.
F-93
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
EBITDA
EBITDA (see Use of EBITDA above) increased to $35.5 million, compared to
$15.5 million in 1995. EBITDA (see Use of EBITDA above) for 1996 benefited
from increased revenues generated by significant subscriber growth, which were
partially offset by increased operating, selling, general and administrative
expenses reflecting the increased subscriber levels.
Depreciation Expense
Depreciation expensed increased to $45.4 million, compared to $20.3 million
in 1995. This increase is attributable to increases in the Company's
depreciable assets due primarily to purchases of subscriber access equipment
and related installation costs associated with subscriber growth.
Equity in Losses in PrimeStar
The Company's interest in PrimeStar's losses decreased to $5.3 million,
compared to $9.0 million in 1995. This decrease is primarily attributable to a
significant increase in PrimeStar subscriber growth, partially offset by
additional losses in 1996 relating to the Advance/Newhouse Partnership's
10.43% PrimeStar ownership interest acquired by the Company in late 1995.
Interests and Other, Net
Interest and other, net increased to $22.0 million, compared to $12.7
million in 1995. This increase principally relates to increased interest
expense charged in connection with higher average amounts due to TWE and TWEAN
as highlighted in the following discussion of liquidity and capital resources.
Income Taxes
In 1996 and 1995, net income tax benefits of approximately $15.0 million and
$10.7 million, respectively, have been fully offset by corresponding increases
in the valuation allowance due to the uncertainty of realizing the benefit for
tax losses on a separate return basis.
1995 VS. 1994
Operating results for the Company in 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(MILLIONS)
<S> <C> <C>
Revenues................ $130.9 $ 20.2
EBITDA(a)............... 15.5 (6.5)
Depreciation............ 20.3 5.7
Operating loss.......... (4.8) (12.2)
Equity in losses of
PRIMESTAR Partners,
L.P. .................. (9.0) (12.1)
Interest and other, net
....................... (12.7) (3.1)
Net loss................ (26.5) (27.4)
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Basic subscribers....... 298,896 66,749
Pay units............... 273,839 66,084
Average monthly
subscriber service
revenues............... $ 46.67 $ 41.75
</TABLE>
- --------
(a) See Use of EBITDA above.
F-94
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Revenues
Revenues increased to $130.9 million, compared to $20.2 million in 1994.
This increase reflects aggregate subscriber growth of 232,147 achieved through
a series of aggressive decentralized directed marketing campaigns. Average
monthly subscriber service revenues increased 12% due primarily to increased
premium and pay-per-view revenues. Average per subscriber installation revenue
increased to $174.07, compared to $146.78 in 1994 as the result of an increase
in the standard installation rate effected in the last quarter of 1995.
Operating expenses
Operating expenses increased to $76.3 million, compared to $7.7 million in
1994. This increase reflects the increase in the Company's subscriber base,
particularly with respect to higher aggregate programming costs, satellite
uplink charges and marketing and administrative support fees from PrimeStar.
These aggregate charges increased to $64.1 million, compared to $6.8 million
in 1994. The average monthly charge per subscriber increased to $31.56,
compared to $25.86 in 1994 with the expansion of programming services
concurrent with PrimeStar's conversion to a digital based distribution system
in August 1994. During 1995, the Company also experienced higher technical and
customer service costs reflecting the higher subscriber levels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $39.2 million,
compared to $18.9 million in 1994. This increase was principally due to
increased marketing costs incurred in connection with aggressive customer
acquisition programs.
EBITDA
EBITDA (see Use of EBITDA above) increased to $15.5 million, compared to a
loss of $6.5 million in 1994, EBITDA (see Use of EBITDA above) for 1995
benefited from increased revenues generated by significant subscriber growth,
which were partially offset by increased operating, selling, general and
administrative expenses reflecting the increased subscriber levels.
Depreciation Expense
Depreciation expense increased to $20.3 million, compared to $5.7 million in
1994. This increase is primarily attributable to increases in the Company's
depreciable assets required to support its rapidly expanding subscriber base.
Equity in Losses of PrimeStar
The Company's interest in PrimeStar's losses decreased to $9.0 million,
compared to $12.1 million in 1994. This decrease is primarily attributable to
a significant increase in PrimeStar subscriber growth, offset in part by
additional losses relating to the Advance/Newhouse Partnership's 10.43%
PrimeStar ownership interest acquired by the Company in late 1995.
Interest and Other, Net
Interest and other, net increased to $12.7 million, compared to $3.1 million
in 1994. This increase principally relates to increased interest expense
charged in connection with higher average amounts due to TWE and TWEAN as
highlighted in the following discussion of liquidity and capital resources.
F-95
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Income Taxes
In 1995 and 1994, net income tax benefits of approximately $10.7 million and
$11.0 million, respectively, have been fully offset by corresponding increases
in the valuation allowance due to the uncertainty of realizing the benefit for
tax losses on a separate return basis.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $430.6 million of amounts due to TWE
and TWEAN and a $60.6 million group deficit, compared to $288.2 million of
amounts due to TWE and TWEAN and a $23.4 million group deficit at December 31,
1995. The increase in amounts due to TWE and TWEAN principally resulted from
additional advances by TWE and TWEAN to fund the Company's cash flow deficit
as described more fully below. The increase in group deficit resulted from the
Company's net loss incurred in 1996.
The development of the Company's subscriber base since 1993 has resulted in
significant capital expenditures during subsequent periods. These capital
requirements have contributed to substantial negative cash flows since
inception. Funding of this cash flow deficit has been primarily provided
through interest bearing advances from TWE and TWEAN and cash from operations.
The Company expects such funding to continue until the Restructuring Agreement
(see Note 2 of Combined Financial Statements) is consummated, after which, all
of the Company's cash needs are expected to be funded by Newco. However, there
can be no assurance that the Restructuring Agreement will be consummated. In
the event that the Restructuring Agreement is not consummated, management
believes that the Company's operating cash flow and additional TWE and TWEAN
funding are sufficient to fund its capital and liquidity needs for the
foreseeable future.
PrimeStar has a credit facility ("Credit Facility") maturing on December 31,
1997. Borrowings under this Credit Facility, which totaled $521.0 million at
December 31, 1996, are primarily used to fund the construction of high powered
satellites and are collateralized by letters of credit provided by the Company
and the other PrimeStar partners. The Company's obligation under these letters
of credit totaled $211.9 million, representing 37.5% of the total amounts
available under the Credit Facility at December 31, 1996. Effective March
1997, the Company increased its letter of credit obligation to $219.4 million
in connection with an increase of the Credit Facility to $585.0 million.
In 1995, PrimeStar entered into a satellite transponder service agreement
with General Electric Co., which is collateralized by letters of credit issued
by various PrimeStar partners, including the Company. At December 31, 1996,
the Company had entered into letters of credit amounting to $37.5 million to
cover the Company's maximum obligation under this agreement. On February 19,
1997, PrimeStar amended this agreement resulting in an increase in the
Company's credit obligation to $75.0 million. The Company has secured
additional letters of credit to cover this entire obligation.
In 1996, 1995 and 1994, the Company's operating activities provided (used)
cash of $47.1 million, $(1.9) million and $23.4 million, respectively. Most of
the cash provided by the Company's operating activities is attributable to
positive EBITDA (see Use of EBITDA above) generated in 1996 and 1995, more
than offset in 1995 by an increase in working capital requirements. In 1994,
cash provided by operations reflected reductions in working capital
requirements, which more than offset EBITDA (see Use of EBITDA above) losses
resulting from the Company's operating activities.
Cash used by investing activities totaled $189.5 million, $198.6 million and
$78.8 million in 1996, 1995, and 1994, respectively. The decrease in cash used
by investing activities in 1996 was primarily due to lower capital spending.
The increase in 1995 investment requirements was attributable to increased
capital spending
F-96
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
necessitated by subscriber growth and repayments of advances to PrimeStar in
1994. Capital expenditures amounted to $169.8 million, $183.1 million and
$80.2 million in 1996, 1995 and 1994, respectively. Capital expenditures are
primarily driven by net subscriber growth. Customer access equipment is
purchased by the Company and leased to customers for a monthly fee. The
Company expects that the majority of future capital expenditures will be used
to fund the acquisition and installation of satellite reception equipment. The
actual amount of capital required in the future will be primarily a function
of (i) subscriber growth and related churn rates, (ii) the actual cost to
purchase and install satellite reception equipment and (iii) changes in
technology.
At December 31, 1996, the Company's future minimum commitments to purchase
satellite reception equipment totaled approximately $30.6 million.
Prior to the consummation of the Restructuring Agreement and under the
existing PrimeStar partnership agreement, the Company has agreed to fund its
share of any capital contributions and/or loans to PrimeStar that might be
agreed upon from time to time by PrimeStar's Board of Directors.
F-97
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Time Warner Satellite Services Group
We have audited the accompanying combined balance sheet of Time Warner
Satellite Services Group ("TWSS") as of December 31, 1996, and 1995, and the
related combined statements of operations, group deficit and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of TWSS's management. Our responsibility is
to express an opinion on these financial statements based on our audits. The
financial statements of PRIMESTAR Partners, L.P., (a limited partnership in
which the Company has a 31.29% interest) ("PRIMESTAR"), have been audited by
other auditors whose report has been furnished to us; insofar as our opinion
on the combined financial statements related to data included for PRIMESTAR,
it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
combined financial statements referred to above present fairly, in all
material respects, the financial position of TWSS as of December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
August 25, 1997
F-98
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED BALANCE SHEET
DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables, less allowances of $1,278 and $900............. $ 18,398 $ 17,119
Receivables from related parties............................ 2,347 2,615
Prepaid expenses............................................ 104 70
-------- --------
Total current assets...................................... 20,849 19,804
Investment in PRIMESTAR Partners, L.P. ..................... 31,021 16,624
Property, plant & equipment, net............................ 396,110 273,207
Other assets................................................ 73 43
-------- --------
Total assets.............................................. $448,053 $309,678
======== ========
LIABILITIES AND GROUP DEFICIT
CURRENT LIABILITIES
Accounts payable............................................ $ 33,537 $ 21,880
Accrued charges from PRIMESTAR Partners, L.P. .............. 28,060 15,137
Other current liabilities................................... 16,448 7,872
-------- --------
Total current liabilities................................. 78,045 44,889
Due to TWE and TWEAN........................................ 430,607 288,167
Group deficit............................................... (60,599) (23,378)
-------- --------
Total liabilities and group deficit....................... $448,053 $309,678
======== ========
</TABLE>
See accompanying notes.
F-99
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Revenues....................................... $277,083 $130,926 $ 20,171
-------- --------- --------
Costs and expenses:
Operating(a)................................. 156,897 76,253 7,706
Selling, general and administrative(b)....... 84,669 39,220 18,939
Depreciation................................. 45,449 20,261 5,725
-------- --------- --------
Total costs and expenses................... 287,015 135,734 32,370
-------- --------- --------
Operating loss................................. (9,932) (4,808) (12,199)
Equity in losses of PRIMESTAR Partners, L.P.... (5,314) (8,957) (12,095)
Interest and other, net (c).................... (21,975) (12,733) (3,093)
-------- --------- --------
Net loss....................................... $(37,221) $ (26,498) $(27,387)
======== ========= ========
(a) Includes expenses resulting from transac-
tions with affiliates (Note 6)............. $135,997 $ 64,066 $ 6,800
======== ========= ========
(b) Includes expenses resulting from transac-
tions with affiliates (Note 6)............. $ 6,927 $ 3,273 $ 504
======== ========= ========
(c) Includes expenses resulting from transac-
tions with affiliates (Note 5)............. $ 20,921 $ 11,910 $ 3,021
======== ========= ========
</TABLE>
See accompanying notes.
F-100
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF GROUP DEFICIT
(THOUSANDS)
<TABLE>
<CAPTION>
GROUP DEFICIT
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1993..................................... $ (6,260)
Net loss....................................................... (27,387)
--------
BALANCE AT DECEMBER 31, 1994..................................... (33,647)
Net loss....................................................... (26,498)
Capital contribution resulting from Advance/Newhouse transac-
tion.......................................................... 36,767
--------
BALANCE AT DECEMBER 31, 1995..................................... (23,378)
Net loss....................................................... (37,221)
--------
BALANCE AT DECEMBER 31, 1996..................................... $(60,599)
========
</TABLE>
See accompanying notes.
F-101
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
OPERATIONS
Net loss...................................... $ (37,221) $ (26,498) $(27,387)
Adjustments for noncash and nonoperating
items:
Depreciation................................ 45,449 20,261 5,725
Equity in losses of PRIMESTAR Partners,
L.P. ...................................... 5,314 8,957 12,095
Changes in operating assets and liabilities:
Accounts receivable......................... (1,011) (16,310) (635)
Accounts payable and accrued expenses....... 24,580 12,142 26,011
Other balance sheet changes................. 9,953 (467) 7,605
--------- --------- --------
Cash provided (used) by operations............ 47,064 (1,915) 23,414
--------- --------- --------
INVESTING ACTIVITIES
Capital expenditures.......................... (169,793) (183,135) (80,241)
Investments in and advances to PRIMESTAR
Partners, L.P. .............................. (19,711) (15,449) (16,332)
Repayment of advances to PRIMESTAR Partners,
L.P. ........................................ -- -- 17,791
--------- --------- --------
Cash used by investing activities............. (189,504) (198,584) (78,782)
--------- --------- --------
FINANCING ACTIVITIES
Advances from TWE and TWEAN................... 425,851 315,286 74,883
Repayments of advances from TWE and TWEAN..... (283,411) (114,787) (19,515)
--------- --------- --------
Cash provided by financing activities......... 142,440 200,499 55,368
--------- --------- --------
INCREASE IN CASH AND EQUIVALENTS.............. -- -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR..... -- -- --
--------- --------- --------
CASH AND EQUIVALENTS AT END OF YEAR........... $ -- $ -- $ --
========= ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid............................... $ 20,921 $ 11,910 $ 3,021
========= ========= ========
Noncash capital contribution................ $ -- $ 36,767 $ --
========= ========= ========
</TABLE>
See accompanying notes.
F-102
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying combined financial statements of Time Warner Satellite
Services Group (the "Company") reflect the combined historical financial
information of the direct broadcast satellite operations conducted by Time
Warner Entertainment Company, L.P. ("TWE") and the TWE-Advance/Newhouse
Partnership ("TWEAN"), including TWEAN's 31.29% partnership interest in
PRIMESTAR Partners, L.P. ("PrimeStar" and collectively, the "PrimeStar
Assets"). The PrimeStar Assets are expected to be transferred to a new,
unaffiliated company that will also hold assets of TCI Satellite
Entertainment, Inc. ("TSAT"), pursuant to a separate agreement entered
into in January of 1998 (Note 2). The Company distributes programming
services under the PrimeStar brand name to subscribers within specified
areas of the continental United States.
The Company's statement of operations includes allocations of certain
costs and expenses of TWE and TWEAN (Notes 5 and 6). Although such
allocations are not necessarily indicative of the costs that would have
been incurred if the Company operated as an unaffiliated entity,
management believes that the allocation methods used are reasonable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and footnotes thereto. Actual results could differ from those estimates.
REVENUE RECOGNITION
Subscriber fees are recorded as revenue in the period related services are
provided. Rights to exhibit programming are purchased from PrimeStar. The
cost of such rights are generally expensed as the related services are
made available to subscribers.
ADVERTISING
Advertising costs are expensed upon the first exhibition of related
advertisements. Advertising expense amounted to $18.8 million, $12.9
million and $3.6 million for the years ended December 31, 1996, 1995 and
1994, respectively.
CASH AND CASH EQUIVALENTS
All of the Company's operating, investing and financing activities are
funded by TWE and TWEAN. Such funding is recorded as interest bearing
advances and are included in due to TWE and TWEAN (Note 5).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include materials and labor. Depreciation is
provided on the straight-line method over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................... 5--20 years
Distribution equipment........................................ 7--15 years
Furniture and other equipment................................. 3--10 years
</TABLE>
F-103
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements............................ $ 204 $ 155
Distribution equipment................................ 455,902 295,408
Furniture and other equipment......................... 6,301 4,467
-------- --------
462,407 300,030
Less accumulated depreciation......................... (66,297) (26,823)
-------- --------
Total............................................... $396,110 $273,207
======== ========
</TABLE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"), which
established standards for the recognition and measurement of impairment
losses on long-lived assets and certain intangible assets. The adoption of
FAS 121 did not have a material effect on the Company's financial
statements.
INCOME TAXES
No income tax benefits have been provided in the accompanying combined
statement of operations because such benefits have been fully offset by
corresponding increases in the valuation allowance due to the uncertainty
of realizing the benefit for tax losses on a separate return basis. On a
historical basis, the operating results of the Company have primarily been
included in the consolidated U.S. Federal, state and local income tax
returns of Time Warner or subsidiaries of Time Warner. Time Warner has
not, and will not, compensate the Company for the utilization of the
Company's losses.
RISKS AND UNCERTAINTIES
Satellites are subject to significant risks including manufacturing
defects affecting the satellite or its components; launch failure
resulting in damage to or destruction of the satellite, or incorrect
orbital placement; and damage in orbit caused by asteroids, space debris
or electrostatic storms. Such factors can prevent or limit commercial
operation or reduce the useful life of PrimeStar's satellites.
2.PROPOSED TRANSACTIONS
TWE and the Advance/Newhouse Partnership ("Advance/Newhouse") entered into
agreements in June 1997 and January of 1998 (the "Restructuring
Agreement") to transfer the direct broadcast satellite operations
conducted by TWE and TWEAN (the "DBS Operations") and the 31.29%
partnership interest in the PrimeStar Assets held by TWEAN to a new
company ("Newco") that will also hold assets of TSAT. Newco will also own
the DBS operations and PrimeStar partnership interests currently owned by
TSAT and other existing partners of PrimeStar. In exchange for
contributing its interests in the PrimeStar Assets, TWE and
Advance/Newhouse will collectively receive an approximate 30% equity
interest and approximately $260 million in cash (or debt assumption),
subject to adjustment pursuant to the Restructuring Agreement.
In a related transaction, PrimeStar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation
and American Sky Broadcasting LLC ("ASkyB"), pursuant to which PrimeStar
(or, under certain circumstances, Newco) will acquire certain assets
relating
F-104
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to the high-power, direct broadcast satellite business of ASkyB. In
exchange for such assets, ASkyB will receive non-voting securities of
Newco that will be convertible into non-voting common stock of Newco and,
accordingly, reduce TWE and Advance/Newhouse's collective equity interest
in Newco to approximately 20% on a fully diluted basis.
The PrimeStar transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to customary
closing conditions, including all necessary governmental and regulatory
approvals, including the approval of the Federal Communications
Commission. There can be no assurance that such approvals will be
obtained.
3.MERGERS AND ACQUISITIONS
In connection with the formation of TWEAN, Advance/Newhouse contributed
its pre-existing 10.43% interest in PrimeStar and related direct broadcast
satellite operations (the "Advance/Newhouse DBS Operations") to TWEAN
effective October 1, 1995. The assets contributed by Advance/Newhouse and
liabilities assumed by TWEAN approximated $37.5 million and $767,000,
respectively.
The accompanying combined statement of operations includes the operating
results of Advance/Newhouse DBS Operations from the date of contribution
to TWEAN. On a pro forma basis, giving effect to the contribution of
Advance/Newhouse DBS Operations as if it had occurred on January 1, 1994,
the Company would have reported, for years ended December 31, 1995 and
1994, revenues of $146.6 million and $23.5 million, depreciation of $25.3
million and $6.8 million, operating losses of $8.5 million and $13.0
million and net losses of $22.3 million and $30.6 million, respectively.
4.INVESTMENT IN PRIMESTAR
The Company uses the equity method to account for its investment in
PrimeStar. Under the equity method, only the investment in and amounts due
from PrimeStar are included in the balance sheet, only the Company's share
of PrimeStar's earnings is included in the operating results and only the
dividends, cash distributions, loans or other cash received from
PrimeStar, less any additional cash investments, loan repayments or other
cash paid to PrimeStar are included in the cash flows.
Summarized financial information as reported by PrimeStar is set forth
below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Revenue......................................... $412,999 $180,595 $27,841
Operating loss.................................. 16,823 38,395 53,034
Net loss........................................ 15,702 42,037 55,716
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Current assets......................................... $137,048 $ 72,638
Total assets........................................... 688,273 515,962
Current liabilities (including $521.0 million of short-
term debt due under PrimeStar credit facility at
December 31, 1996).................................... 584,907 37,911
Long-term debt due under PrimeStar credit facility..... -- 419,000
Other liabilities...................................... 4,227 7,210
Partners' capital...................................... 99,139 51,841
</TABLE>
F-105
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The PrimeStar credit facility matures on December 31, 1997 and borrowings
thereunder are collateralized by letters of credit issued by various
PrimeStar partners, including $219.4 million issued by the Company (Note
9).
5.DUE TO TWE AND TWEAN
All of the Company's operating, investing and financing activities are
funded by advances from TWE and TWEAN. These advances bear interest at
LIBOR plus a margin equal to 50 basis points, subject to adjustment, based
upon the interest rates paid by TWE and TWEAN on borrowings under their
bank credit agreement. Interest expense incurred by the Company relating
to these advances amounted to $20.9 million, $11.9 million and $3.0
million for the years ended December 31, 1996, 1995 and 1994,
respectively.
6.RELATED PARTIES
The Company purchases all programming services through PrimeStar. These
programming services include certain services owned by TWE (primarily Home
Box Office and Cinemax) and Time Warner Inc. ("Time Warner", a general and
limited partner of TWE). Purchases of TWE and Time Warner programming
services, which are made in the normal course of business and, in
management's opinion, at rates which approximate those the Company could
obtain from third parties, amounted to $93.3 million, $42.6 million and
$4.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
PrimeStar also arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services, in
exchange for a separate fee from each distributer, including the Company,
based on the distributor's total number of subscribers. The costs
associated with such services have been charged to the Company based upon
a standard fee for each of the various activities performed by PrimeStar.
These costs totaled $42.7 million, $21.5 million and $2.6 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company has an arrangement with TWE under which TWE manages the
Company's operations. The accompanying financial statements reflect an
allocation of certain corporate and regional expenses of TWE and TWEAN
based on the proportion of the Company's subscribers to the total number
of subscribers managed by TWE and TWEAN. Such allocated costs totaled $6.9
million, $3.3 million and $504,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In connection with the TWEAN partnership agreement, TWEAN has funded
certain Advance/Newhouse obligations which were incurred prior to the
formation of TWEAN. These funded obligations are non-interest bearing, and
amounted to $2.3 million and $2.6 million at December 31, 1996 and 1995,
respectively, and are shown as receivables from related parties. The
Company expects these receivables to be settled in 1997.
7.EMPLOYEE BENEFIT PLANS
The Company participates in the Time Warner Cable Pension Plan (the
"Pension Plan"), a noncontributory defined benefit pension plan, which is
maintained by TWE and covers substantially all employees. Benefits under
the Pension Plan are determined based on formulas which reflect an
employee's years of service and compensation levels during the employment
period. Pension expense totaled $742,000, $270,000 and $85,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company also participates in the Time Warner Cable Employee Savings
Plan (the "Savings Plan"), a defined contribution plan, which is
maintained by TWE, and covers substantially all employees. The
F-106
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Company's contributions to the Savings Plan are limited to 6.67% of an
employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right, in any year, to set the maximum
amount of the Company's contribution. Defined contribution plan expense
totaled $262,000, and $200,000 for the years ended December 31, 1996, and
1995, respectively. There was no defined contribution plan expense in
1994.
8.INCOME TAXES
There are no current income taxes payable based on the Company's operating
losses.
The proforma deferred tax assets and liabilities calculated on a separate-
company basis consistent with the liability method prescribed by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1996 1995
-------- --------
(THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $ 514 $ 362
Investment in PRIMESTAR Partners, L.P............... 5,328 1,611
Tax losses utilized by Time Warner.................. 61,428 32,792
-------- --------
Total gross deferred tax assets................... 67,270 34,765
Less: valuation allowance............................. (38,438) (23,475)
-------- --------
Net deferred tax assets............................... 28,832 11,290
-------- --------
Deferred tax liabilities:
Depreciation........................................ (28,832) (11,290)
-------- --------
Total gross deferred tax liabilities.............. (28,832) (11,290)
-------- --------
Net deferred tax account with Time Warner............. $ -- $ --
======== ========
</TABLE>
In 1996, 1995 and 1994, net income tax benefits of approximately $15.0
million, $10.7 million and $11.0 million, respectively, have been fully
offset by corresponding increases in the valuation allowance due to the
uncertainty of realizing the benefit for tax losses on a separate return
basis.
On a proforma basis, had the Company been operating on a stand alone
basis, the Company would have had net operating loss carryforwards for tax
purposes of approximately $153.0 million during the three years ended
December 31, 1996. However, at December 31, 1996, the Company has no net
operating loss carryforwards for tax purposes because such losses were
primarily utilized by Time Warner and its affiliates. The Company has not,
and will not, be compensated for such losses. Consequently, without the
tax benefit for losses utilized by Time Warner, the Company would have a
net deferred tax liability of approximately $23.0 million at December 31,
1996.
9.COMMITMENTS AND CONTINGENCIES
In connection with its guarantee of the PrimeStar credit facility, the
Company has agreed to issue letters of credit to support its proportional
37.5% share of outstanding borrowings plus accrued interest and expenses
under the facility. PrimeStar's maximum borrowing availability under the
facility is $585 million. At December 31, 1996, the Company had issued
letters of credit in the amount of $211.9 million, which were subsequently
increased to $219.4 million in March 1997.
F-107
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In 1995, PrimeStar entered into a satellite transponder service agreement
with General Electric Co., which is collateralized by letters of credit
issued by various PrimeStar partners, including the Company. At December
31, 1996, the Company had entered into letters of credit amounting to
$37.5 million to cover the Company's maximum obligation under this
agreement. On February 19, 1997, PrimeStar amended this agreement
resulting in an increase in the Company's maximum obligation to $75.0
million for which the Company has secured additional letters of credit.
At December 31, 1996, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $30.6 million.
The Company has noncancelable operating leases, primarily relating to
office facilities, expiring over various terms. Rental expense for all
operating leases for the years ended December 31, 1996, 1995 and 1994
totaled $1.5 million, $920,000 and $511,000, respectively.
Future minimum rental payments at December 31, 1996 under noncancelable
operating leases were as follows:
<TABLE>
<CAPTION>
TOTAL RENTAL
COMMITMENT
------------
(THOUSANDS)
<S> <C>
Year Ending December 31:
1997..................................................... $1,230
1998..................................................... 941
1999..................................................... 724
2000..................................................... 145
2001 and thereafter...................................... --
------
$3,040
======
</TABLE>
10.OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------- ------
(THOUSANDS)
<S> <C> <C>
Accrued expenses........................................... $ 8,117 $3,865
Sales and other taxes...................................... 2,107 1,503
Accrued salaries and employee benefits..................... 1,948 835
Accrued data processing.................................... 1,967 744
Subscriber related liabilities............................. 1,452 684
Other...................................................... 857 241
------- ------
Total.................................................... $16,448 $7,872
======= ======
</TABLE>
F-108
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be
read in conjunction with the accompanying financial statements and the notes
thereto.
OVERVIEW
The accompanying combined financial statements of Time Warner Satellite
Services Group (the "Company") reflect the combined historical financial
information of the direct broadcast satellite operations conducted by Time
Warner Entertainment Company, L.P. ("TWE") and the TWE-Advance/Newhouse
Partnership ("TWEAN"), including TWEAN's 31.29% partnership interest in
PRIMESTAR Partners, L.P. ("PrimeStar" and collectively, the "PrimeStar
Assets"). The PrimeStar Assets are expected to be transferred to a new,
unaffiliated company ("Newco"), that will also hold assets of TCI Satellite
Entertainment, Inc., pursuant to a merger and contribution agreement (the
"Restructuring Agreement") and related agreements entered into in January of
1998 (See Note 2 of Combined Financial Statements).
The Company distributes programming services which are purchased from
PrimeStar, under the PrimeStar brand name to subscribers within specified
areas of the continental United States. These services are
presented/transmitted to subscribers via a medium powered satellite owned and
operated by PrimeStar. As of September 30, 1997, the Company served 567,433
subscribers. The Company's most popular subscriber offering at September 30,
1997 was its Prime Value package which was sold at $32.99 per month including
all related equipment charges.
In August 1994, PrimeStar converted its distribution system from a low
powered analog to a medium powered digital signal. Following this conversion,
the Company has experienced significant subscriber growth. This growth was
facilitated by the Company's centralized operating structure and aggressive
marketing programs. Unless otherwise stated herein, increases in the Company's
revenue and operating, selling, general and administrative expenses are
primarily related to such subscriber growth. The Company operates in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect the Company's ability to
sustain its significant historical growth in subscribers and revenue.
USE OF EBITDA
Industry analysts generally consider operating income before depreciation
and amortization ("EBITDA") to be an important measure of comparative
operating performance for the cable and satellite television industries and,
when used in comparison to debt levels or the coverage of interest expense, as
a measure of liquidity. However, EBITDA should be considered in addition to,
not as a substitute for, operating income, net income, cash flow and other
measures of financial performance and liquidity reported in accordance with
generally accepted accounting principles. EBITDA as defined and used herein
may not be comparable to similarly titled measures reported by other
companies.
F-109
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
Operating results for the Company for nine months ended September 30, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(MILLIONS)
<S> <C> <C>
Revenues............................................... $276.2 $199.2
EBITDA(a).............................................. 49.2 27.5
Depreciation........................................... 48.7 30.6
Operating income (loss)................................ 0.5 (3.1)
Equity in losses of PRIMESTAR Partners, L.P............ (11.4) (3.1)
Interest and other, net................................ (21.7) (16.3)
Net loss............................................... (32.6) (22.4)
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Basic subscribers...................................... 567,433 424,488
Pay units.............................................. 708,716 413,589
Average monthly subscriber service revenues............ $52.11 $49.44
</TABLE>
- --------
(a) See Use of EBITDA above.
Revenues
Revenues increased to $276.2 million for the nine months ended September 30,
1997, compared to $199.2 million for the same period in 1996. This increase
reflects aggregate subscriber growth of 142,945 achieved through a series of
aggressive decentralized directed marketing campaigns. Average monthly
subscriber service revenues increased 5.4% to $52.11 for the nine months ended
September 30, 1997 primarily due to the expansion of premium and pay-per-view
revenues. Average installation revenue decreased to $127.81 for the nine
months ended September 30, 1997, compared to $160.95 for the same period in
1996 as the result of more aggressive pricing associated with promotional
programs.
Operating expenses
Operating expenses increased to $157.1 million for the nine months ended
September 30, 1997, compared to $111.0 million for the same period in 1996.
This increase reflects the increase in the Company's subscriber base,
particularly with respect to higher aggregate programming costs. PrimeStar
provides programming services to the Company and other authorized distributors
in exchange for a fee based upon the number of subscribers receiving such
programming services. PrimeStar also provides satellite capacity and uplink,
national marketing and administrative support services for a separate fee
charged to each distributor, including the Company, based on each
distributor's total number of subscribers. The aggregate charges from
PrimeStar for such services increased to $137.7 million for the nine months
ended September 30, 1997, compared to $96.7 million for the same period in
1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $69.8 million for
the nine months ended September 30, 1997, compared to $60.7 million for the
same period in 1996. This increase was primarily due to higher marketing and
administrative costs incurred in support of the ongoing subscriber growth.
F-110
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
EBITDA
EBITDA (see Use of EBITDA above) increased to $49.2 million for the nine
months ended September 30, 1997, compared to $27.5 million for the same period
in 1996. EBITDA (see Use of EBITDA above) for 1997 benefited from increased
revenues generated by significant subscriber growth, which were partially
offset by increased operating, selling, general and administrative expenses
reflecting the increased subscriber levels.
Depreciation Expense
Depreciation expense increased to $48.7 million for the nine months ended
September 30, 1997, compared to $30.6 million for the same period in 1996.
This increase is attributable to increases in the Company's depreciable assets
due primarily to purchases of subscriber access equipment and related
installation costs associated with subscriber growth.
Equity in Losses of PrimeStar
The Company's interest in PrimeStar's losses increased to $11.4 million for
the nine months ended September 30, 1997, compared to $3.1 million for the
same period in 1996. This increase is primarily attributable to significantly
higher transponder lease, advertising and interest expenses incurred by
PrimeStar during the nine months ended September 30, 1997.
Interest and other, net
Interest and other, net increased to $21.7 million for the nine months ended
September 30, 1997, compared to $16.3 million for the same period in 1996.
This increase principally relates to increased interest expense charged in
connection with higher average amounts due to TWE and TWEAN as highlighted in
the following discussion of liquidity and capital resources.
Income Taxes
For the nine months ended September 30, 1997 and 1996, net income tax
benefits of approximately $13.1 million and $9.0 million, respectively, have
been fully offset by corresponding increases in the valuation allowance due to
the uncertainty of realizing the benefit for tax losses on a separate return
basis.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $513.1 million of amounts due to TWE
and TWEAN and a $93.2 million group deficit, compared to $430.6 million of
amounts due to TWE and TWEAN and a $60.6 million group deficit at December 31,
1996. The increase in amounts due to TWE and TWEAN principally resulted from
additional advances by TWE and TWEAN to fund the Company's cash flow deficit
as described more fully below. The increase in group deficit resulted from the
Company's net loss incurred for the nine months ended September 30, 1997.
The development of the Company's subscriber base since 1993 has resulted in
significant capital expenditures during subsequent periods. These capital
requirements have contributed to substantial negative cash flows since
inception. Funding of this cash flow deficit has been primarily provided
through interest bearing advances from TWE and TWEAN and cash from operations.
The Company expects such funding to continue until the Restructuring Agreement
(see Note 2 of Combined Financial Statements) is consummated, after which, all
of the Company's cash needs will be funded by Newco. However, there can be no
assurance that the Restructuring Agreement will be consummated. In the event
that the Restructuring Agreement is not consummated, management believes that
the Company's operating cash flow and additional TWE and TWEAN funding are
sufficient to fund its capital and liquidity needs for the foreseeable future.
F-111
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
PrimeStar has a credit facility ("Credit Facility") maturing on December 31,
1997. Borrowings under this Credit Facility, which totaled $555.0 million at
September 30, 1997, are primarily used to fund the construction of high
powered satellites and are collateralized by letters of credit provided by the
Company and the other PrimeStar partners. The Company's obligation under these
letters of credit totaled $219.4 million, representing 37.5% of the total
amounts available under the Credit Facility at September 30, 1997.
In 1995, PrimeStar entered into a satellite transponder service agreement
with General Electric Co., which is collateralized by letters of credit issued
by various PrimeStar partners, including the Company. At December 31, 1996,
the Company had entered into letters of credit amounting to $37.5 million to
cover the Company's maximum obligation under this agreement. On February 19,
1997, PrimeStar amended this agreement resulting in an increase in the
Company's credit obligation to $75.0 million. The Company has secured
additional letters of credit to cover this entire obligation.
For the nine months ended September 30, 1997 and 1996, the Company's
operating activities provided cash of $26.7 million and $18.2 million,
respectively. Cash provided by the Company's operating activities increased in
1997 principally due to EBITDA (see Use of EBITDA above) growth, partially
offset by an increase in working capital requirements and other balance sheet
accounts. EBITDA (see Use of EBITDA above) amounted to $49.2 million and $27.5
million for the nine months ended September 30, 1997 and 1996.
Cash used by investing activities totaled $109.2 million and $147.0 million
for the nine months ended September 30, 1997 and 1996, respectively. The
decrease in cash used by investing activities for the nine months ended
September 30, 1997 was primarily due to lower capital spending resulting from
lower aggregate subscriber growth in 1997. Capital expenditures amounted to
$100.3 million and $130.4 million for the nine months ended September 30, 1997
and 1996, respectively. Customer access equipment is purchased by the Company
and leased to customers for a monthly fee. The Company expects that the
majority of future capital expenditures will be used to fund the acquisition
and installation of satellite reception equipment. The actual amount of
capitalrequired in the future will be primarily a function of (i) subscriber
growth and related churn rates, (ii) the actual cost to purchase and install
satellite reception equipment and (iii) changes in technology.
At September 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment totaled approximately $10.5 million.
Prior to the consummation of the Restructuring Agreement and under the
existing PrimeStar partnership agreement, the Company has agreed to fund its
share of any capital contributions and/or loans to PrimeStar that might be
agreed upon from time to time by PrimeStar's Board of Directors.
F-112
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED BALANCE SHEET
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables, less allowances of $1,706 and $1,278... $ 15,295 $ 18,398
Receivables from related parties.................... 2,314 2,347
Prepaid expenses.................................... 106 104
-------- --------
Total current assets.............................. 17,715 20,849
Investment in PRIMESTAR Partners, L.P. ............. 28,494 31,021
Property, plant & equipment, net.................... 447,898 396,110
Other assets........................................ 93 73
-------- --------
Total assets...................................... $494,200 $448,053
======== ========
LIABILITIES AND GROUP DEFICIT
CURRENT LIABILITIES
Accounts payable.................................... $ 14,465 $ 33,537
Accrued charges from PRIMESTAR Partners, L.P........ 38,085 28,060
Other current liabilities........................... 21,763 16,448
-------- --------
Total current liabilities......................... 74,313 78,045
Due to TWE and TWEAN................................ 513,104 430,607
Group deficit....................................... (93,217) (60,599)
-------- --------
Total liabilities and group deficit............... $494,200 $448,053
======== ========
</TABLE>
See accompanying notes.
F-113
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF OPERATIONS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues.................................................. $276,158 $199,175
-------- --------
Costs and expenses:
Operating (a)........................................... 157,054 110,950
Selling, general and administrative (b)................. 69,840 60,728
Depreciation............................................ 48,724 30,567
-------- --------
Total costs and expenses.............................. 275,618 202,245
-------- --------
Operating income (loss)................................... 540 (3,070)
Equity in losses of PRIMESTAR Partners, L.P............... (11,424) (3,074)
Interest and other, net (c)............................... (21,734) (16,291)
-------- --------
Net loss.............................................. $(32,618) $(22,435)
======== ========
(a)Includes expenses resulting from transactions with af-
filiates (Note 5)........................................ $137,738 $ 96,747
======== ========
(b)Includes expenses resulting from transactions with af-
filiates (Note 5)........................................ $ 6,905 $ 4,979
======== ========
(c)Includes expenses resulting from transactions with af-
filiates (Note 4)........................................ $ 20,637 $ 15,503
======== ========
</TABLE>
See accompanying notes.
F-114
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF GROUP DEFICIT
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP DEFICIT
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1996...................................... $(60,599)
Net loss.......................................................... (32,618)
--------
BALANCE AT SEPTEMBER 30, 1997..................................... $(93,217)
========
</TABLE>
See accompanying notes.
F-115
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF CASH FLOWS
(THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATIONS
Net loss................................................. $ (32,618) $ (22,435)
Adjustments for noncash and nonoperating items:
Depreciation............................................. 48,724 30,567
Equity in losses of PRIMESTAR Partners, L.P.............. 11,424 3,074
Changes in operating assets and liabilities:
Accounts receivable.................................... 3,136 (16,274)
Accounts payable and accrued expenses.................. (9,047) 12,066
Other balance sheet changes............................ 5,129 11,160
--------- ---------
Cash provided by operations.............................. 26,748 18,158
--------- ---------
INVESTING ACTIVITIES
Capital expenditures..................................... (100,348) (130,379)
Investments in and advances to PRIMESTAR Partners, L.P... (8,897) (16,583)
--------- ---------
Cash used by investing activities........................ (109,245) (146,962)
--------- ---------
FINANCING ACTIVITIES
Advances from TWE and TWEAN.............................. 368,418 316,564
Repayments of advances from TWE and TWEAN................ (285,921) (187,760)
--------- ---------
Cash provided by financing activities.................... 82,497 128,804
--------- ---------
INCREASE IN CASH AND EQUIVALENTS......................... -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR................ -- --
--------- ---------
CASH AND EQUIVALENTS AT END OF YEAR...................... $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................ $ 20,637 $ 15,503
========= =========
</TABLE>
See accompanying notes.
F-116
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The accompanying combined financial statements of Time Warner Satellite
Services Group (the "Company") reflect the combined historical financial
information of the direct broadcast satellite operations conducted by Time
Warner Entertainment Company, L.P. ("TWE") and the TWE-Advance/Newhouse
Partnership ("TWEAN"), including TWEAN's 31.29% partnership interest in
PRIMESTAR Partners, L.P. ("PrimeStar" and collectively, the "PrimeStar
Assets"). The PrimeStar Assets are expected to be transferred to a new,
unaffiliated company that will also hold assets of TCI Satellite
Entertainment, Inc. ("TSAT"), pursuant to a separate agreement entered into in
January of 1998 (Note 2). The Company distributes programming services under
the PrimeStar brand name to subscribers within specified areas of the
continental United States.
The Company's statement of operations includes allocations of certain costs
and expenses of TWE and TWEAN (Notes 4 and 5). Although such allocations are
not necessarily indicative of the costs that would have been incurred if the
Company operated as an unaffiliated entity, management believes that the
allocation methods used are reasonable.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited but, in the opinion of
management, contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles
applicable to interim periods. The accompanying financial statements should be
read in conjunction with the audited consolidated financial statements of the
Company for the year ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings per Share" ("FAS 128"), effective for periods
ending after December 15, 1997. The new rules establish simplified standards
for computing and presenting earnings per share. The Company does not expect
that the adoption of FAS 128 will have a material effect on its financial
statements.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("FAS 130"), effective for fiscal years beginning after December 15,
1997. The new rules establish standards for the reporting of comprehensive
income and its components in financial statements. Comprehensive income
consists of net income and other gains and losses affecting group deficit
that, under generally accepted principles, are excluded from net income, such
as unrealized gains and losses on marketable equity investments and foreign
currency translation gains and losses. The Company does not expect that the
adoption of FAS 130 will have a material effect on its financial statement.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS 131"), effective for fiscal
years beginning after December 15, 1997. The new rules establish revised
standards for public companies relating to the reporting of financial and
descriptive information about their operating segments in financial
statements. The Company does not expect that the adoption of FAS 131 will have
a material effect on its financial statements.
F-117
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
CASH AND CASH EQUIVALENTS
All of the Company's operating, investing and financing activities are
funded by TWE and TWEAN. Such funding is recorded as interest bearing advances
and are included in due to TWE and TWEAN (Note 4).
INCOME TAXES
No income tax benefits have been provided in the accompanying combined
statement of operations because such benefits have been fully offset by
corresponding increases in the valuation allowance due to the uncertainty of
realizing the benefit for tax losses on a separate return basis. On a
historical basis, the operating results of the Company have primarily been
included in the consolidated U.S. Federal, state and local income tax returns
of Time Warner or subsidiaries of Time Warner. Time Warner has not, and will
not, compensate the Company for the utilization of the Company's losses.
2. PROPOSED TRANSACTIONS
TWE and the Advance/Newhouse Partnership ("Advance/Newhouse") entered into
agreements in June 1997 and January of 1998 (the "Restructuring Agreement") to
transfer the direct broadcast satellite operations conducted by TWE and TWEAN
(the "DBS Operations") and the 31.29% partnership interest in the PrimeStar
Assets held by TWEAN to a new company ("Newco") that will also hold assets of
TSAT. Newco will also own the DBS operations and PrimeStar partnership
interests currently owned by TSAT and other existing partners of PrimeStar. In
exchange for contributing its interests in the PrimeStar Assets, TWE and
Advance/Newhouse will collectively receive an approximate 30% equity interest
and approximately $242 million in cash (or debt assumption), subject to
adjustment pursuant to the Restructuring Agreement.
In a related transaction, PrimeStar also entered into an agreement in June
1997 with The News Corporation Limited, MCI Telecommunications Corporation and
American Sky Broadcasting LLC ("ASkyB"), pursuant to which PrimeStar (or,
under certain circumstances, Newco) will acquire certain assets relating to
the high-power, direct broadcast satellite business of ASkyB. In exchange for
such assets, ASkyB will receive non-voting securities of Newco that will be
convertible into non-voting common stock of Newco and, accordingly, reduce TWE
and Advance/Newhouse's collective equity interest in Newco to approximately
20% on a fully diluted basis.
The PrimeStar transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to customary
closing conditions, including all necessary governmental and regulatory
approvals, including the approval of the Federal Communications Commission.
There can be no assurance that such approvals will be obtained.
3. INVESTMENT IN PRIMESTAR
The Company uses the equity method to account for its investment in
PrimeStar. Under the equity method, only the investment in and amounts due
from PrimeStar are included in the balance sheet, only the Company's share of
PrimeStar's earnings is included in the operating results and only the
dividends, cash distributions, loans or other cash received from PrimeStar,
less any additional cash investments, loan repayments or other cash paid to
PrimeStar are included in the cash flows.
F-118
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information as reported by PrimeStar is set forth below
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Revenue....................................... $450,974 $294,634
Operating loss................................ 28,435 7,064
Net loss...................................... 40,111 6,208
<CAPTION>
SEPTEMBER, 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Current assets................................ $160,014 $137,048
Total assets.................................. 720,252 688,273
Current liabilities (including $555.0 million
and $521.0 million short-term debt due under
PrimeStar credit facility)................... 628,767 584,907
Other liabilities............................. 4,023 4,227
Partners' capital............................. 87,462 99,139
</TABLE>
The PrimeStar credit facility matures on December 31, 1997 and borrowings
thereunder are collateralized by letters of credit issued by various PrimeStar
partners.
4. DUE TO TWE AND TWEAN
All of the Company's operating, investing and financing activities are
funded by advances from TWE and TWEAN. These advances bear interest at LIBOR
plus a margin equal to 50 basis points, subject to adjustment, based upon the
interest rates paid by TWE and TWEAN on borrowings under their bank credit
agreement. Interest expense incurred by the Company relating to these advances
amounted to $20.6 million and $15.5 million for the nine months ended
September 30, 1997 and 1996.
5. RELATED PARTIES
The Company purchases all programming services through PrimeStar. These
programming services include certain services owned by TWE (primarily Home Box
Office and Cinemax) and Time Warner Inc. ("Time Warner", a general and limited
partner of TWE). Purchases of TWE and Time Warner programming services, which
are made in the normal course of business and, in management's opinion, at
rates which approximate those the Company could obtain from third parties,
amounted to $93.6 million and $66.3 million for the nine months ended
September 30, 1997 and 1996, respectively.
PrimeStar also arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services, in exchange
for a separate fee from each distributor, including the Company, based on the
distributor's total number of subscribers. The costs associated with such
services have been charged to the Company based upon a standard fee for each
of the various activities performed by PrimeStar. These costs totaled $44.1
million and $30.4 million for the nine months ended September 30, 1997 and
1996, respectively.
The Company has an arrangement with TWE under which TWE manages the
Company's operations. The accompanying financial statements reflect an
allocation of certain corporate and regional expenses of TWE and TWEAN based
on the proportion of the Company's subscribers to the total number of
subscribers managed by TWE and TWEAN. Such allocated costs totaled $6.9
million and $5.0 million for the nine months ended September 30, 1997 and
1996, respectively.
F-119
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the TWEAN partnership agreement, TWEAN has funded certain
Advance/Newhouse obligations which were incurred prior to the formation of
TWEAN. These funded obligations are non-interest bearing, and amounted to $2.3
million at September 30, 1997 and December 31, 1996, respectively, and are
shown as receivables from related parties. The Company expects these
receivables to be settled in 1997.
6. COMMITMENTS AND CONTINGENCIES
In connection with its guarantee of the PrimeStar credit facility, the
Company has agreed to issue letters of credit to support its proportional
37.5% share of outstanding borrowings plus accrued interest and expenses under
the facility. PrimeStar's maximum borrowing availability under the facility is
$585 million. At September 30, 1997, the Company had issued letters of credit
in the amount of $219.4 million.
In 1995, PrimeStar entered into a satellite transponder service agreement
with General Electric Co., which is collateralized by letters of credit issued
by various PrimeStar partners, including the Company. At September 30, 1997,
the Company had entered into letters of credit amounting to $75.0 million to
cover the Company's maximum obligation under this agreement.
At September 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment totaled approximately $10.5 million.
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of the Company. In the opinion of counsel and management,
the ultimate resolution of these matters will not have a material effect on
the consolidated financial statements of the Company.
F-120
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the Cox
Communications, Inc.'s ("Cox") Direct Broadcast Satellite Business ("Cox DBS")
historical financial position and results of operations as of and for each of
the years in the five-year period ended December 31, 1996. The Statement of
Operations Data for each of the years in the three-year period ended December
31, 1996, and the Balance Sheet Data as of December 31, 1996 and 1995, have
been derived from the Financial Statements of Cox DBS for the corresponding
periods. The historical data for the other periods presented has been derived
from unaudited financial statements of Cox DBS, which in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of financial position at such
dates and results of operations for such periods. Operating results for the
nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. The
following information should be read in conjunction with Management's
Discussion and Analysis of Results of Operations and Financial Condition and
is qualified in its entirety to the historical financial statements, including
the notes thereto, of Cox DBS.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- ------------ --------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF
OPERATIONS DATA
Revenue................. $ 4,041 $ 5,700 $ 8,985 $ 27,549 $ 68,291 $ 48,562 $ 78,773
Operating, selling,
general, and
administrative
expenses............... 6,343 7,165 9,193 26,761 66,146 45,202 70,732
Depreciation............ 528 1,051 4,977 6,323 21,704 14,654 31,041
------- -------- -------- -------- -------- -------- --------
Operating loss........ (2,830) (2,516) (5,185) (5,535) (19,559) (11,294) (23,000)
Interest expense........ (762) (1,490) (2,844) (3,630) (6,898) (5,131) (8,034)
Share of losses of
PrimeStar Partners,
L.P. .................. (2,333) (2,898) (5,736) (4,087) (1,397) (1,420) (4,259)
Other, net.............. (205) (238) 81 (66) (151) (103) (388)
Income tax benefit...... 2,084 2,455 4,792 4,657 9,791 6,277 12,621
------- -------- -------- -------- -------- -------- --------
Net loss.............. $(4,046) $ (4,687) $ (8,892) $ (8,661) $(18,214) $(11,671) $(23,060)
======= ======== ======== ======== ======== ======== ========
<CAPTION>
DECEMBER 31
----------------------------------------------- SEPTEMBER 30
1992 1993 1994 1995 1996 1997
------- -------- -------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET
DATA
Property and equipment,
net.................... $ 4,428 $ 5,045 $ 15,559 $ 50,004 $ 98,828 $114,823
Investment in PrimeStar
Partners, L.P. ........ $ 231 $ 921 $ 3,351 $ 6,362 $ 11,536 $ 10,214
Total assets............ $ 5,418 $ 15,555 $ 20,201 $ 64,758 $128,119 $142,687
Deficiency in net
assets................. $(8,745) $(13,432) $(22,324) $(30,985) $(49,199) $(72,259)
</TABLE>
F-121
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
The following discussion and analysis provides information concerning the
financial condition and results of operations of Cox DBS, and should be read
in conjunction with the accompanying financial statements of Cox DBS. Cox DBS
owns a 10.43% interest in PrimeStar Partners, L.P. ("PrimeStar Partners") and
distributes the PrimeStar direct broadcast satellite ("DBS") service under the
name "PrimeStar by Cox."
PROPOSED TRANSACTIONS
In June 1997, Cox entered into a binding letter agreement with PrimeStar
Partners, affiliates of each of the other partners of PrimeStar Partners and a
stockholder of TCI Satellite Entertainment, Inc. (TSAT) to effect the
consolidation of these entities into a newly-formed company (the
"Restructuring Transaction"). The new corporation ("New PrimeStar") will
acquire Cox's interest in PrimeStar Partners and Cox DBS in exchange for cash
and shares of Series A and Series C Common Stock of New PrimeStar. It is
expected that upon consummation of the Restructuring Transaction that shares
of Series A Common Stock and Series B Common Stock (Series B issued to TSAT in
the Restructuring Transaction) will be publicly traded on the NASDAQ Stock
Market. Cox DBS as an operating company will cease to exist upon consummation
of the Restructuring Transaction.
Subsequent to the Restructuring Transaction, the board of directors of New
PrimeStar will initially consist of eleven members, one of which will be
nominated by Cox. Upon completion of the Restructuring Transaction but before
the acquisition of certain satellite assets, Cox will hold approximately 9
percent of the common equity ownership of New PrimeStar. The Restructuring
Transaction is subject to certain closing conditions including, among other
things, receipt of necessary regulatory approvals.
Also in June 1997, PrimeStar Partners announced that it had entered into a
binding asset acquisition agreement (the "ASkyB Agreement") with several
affiliated and unaffiliated parties. The ASkyB Agreement provides for the
transfer to New PrimeStar of two high power communications satellites
currently under construction and DBS related licenses and contracts. In
consideration, the parties selling the above noted assets will receive
convertible securities of New PrimeStar. Consummation of the transactions
contemplated by the ASkyB agreement are contingent on, among other things,
receipt of all necessary government and regulatory approvals.
SUMMARY OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996
Cox DBS reported a net loss of $23,060,000 for the nine months ended
September 30, 1997, a 98% increase over net losses of $11,671,000 for the nine
months ended September 30, 1996. Future improvements in Cox DBS's results of
operations are largely dependent upon its ability to increase its customer
base while maintaining its pricing structure, reducing subscriber churn and
effectively managing Cox DBS's costs. No assurance can be given that any such
improvements will occur. In addition, Cox DBS incurs significant sales
commissions and installation costs when its customers initially subscribe to
the service. Accordingly, management expects that operating costs will remain
high as a percentage of revenue so long as Cox DBS maintains its rapid growth
in customer acquisition.
For the nine months ended September 30, 1997 and 1996, Cox DBS'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 40.5% and 27.0%, respectively. The increase in subscriber churn in
1997 is due to increased competition, a lower cost of entry for consumers, and
a revised collections policy.
F-122
<PAGE>
COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
As set forth above, Cox DBS has experienced an increase during the nine
months ended September 30, 1997 in the rate of subscriber churn, as compared
to the same period in 1996. Cox DBS believes that the higher 1997 churn rate
is primarily attributable to identifiable circumstances in customer
acquisition programs that are not expected to have a continuing effect. In
general, these circumstances stemmed from Cox DBS's efforts to maximize its
subscriber growth during the fourth quarter of 1996 and first quarter of 1997.
Cox DBS's subscriber maximization efforts in the fourth quarter of 1996 and
the first quarter of 1997 included marketing programs that allowed subscribers
to initiate service and receive one or two free months of programming by
paying a discounted installation fee with no credit approval. One result of
these subscriber maximization efforts was that a significant number of these
customers became delinquent and were disconnected in the first half of 1997,
thereby increasing churn. Such delinquent accounts contributed to a
significant increase in Cox DBS's bad debt expense during 1997. Cox DBS has
addressed this issue by implementing more stringent credit and collection
policies.
Cox DBS continues to lease the satellite reception equipment to its
subscribers with no purchase options as part of the overall marketing effort
by PrimeStar Partners. Other PrimeStar distributors offer to sell subscriber
equipment as part of their credit tightening policies.
Cox DBS experienced significant growth in active authorized satellite
receivers ("Authorized Units"), more than one of which may be installed in a
subscribing household. In the nine months ended September 30, 1997, the number
of Authorized Units, including additional outlets, was 181,717, a 62% increase
over Authorized Units of 112,344 for nine months ended September 30, 1996.
To the extent not otherwise described, increases in Cox DBS's revenue and
operating, selling, general and administrative expenses, as detailed below,
are primarily related to growth in subscribers. Cox DBS is operating in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect Cox DBS's ability to continue
to achieve significant growth in subscribers and revenue.
Revenues for the nine months ended September 30, 1997 were $78,773,000, a
62% increase over revenues of $48,562,000 for the nine months ended September
30, 1996. Basic customers were 157,193, a 53% increase over customers at
September 30, 1996. Exclusive of installation revenue, Cox DBS's average
monthly revenue per subscriber was $54 for the nine months ended September 30,
1997, a $3 increase over $51 for the same period in 1996. The increase from
1996 to 1997 in the average monthly revenue per subscriber was primarily a
result of increased penetration of Cox DBS's higher level programming services
due to the marketing program offered in the fourth quarter of 1996 and a rate
increase effective May 1, 1997 that was a result of the PrimeStar Partners
"Big Switch" program. The "Big Switch" combined the PrimeStar satellite
service transitioning to a new satellite, GE-2, with increased transponders,
and the addition of 55 new channels. This rate increase, coupled with the
increase in penetration of Cox DBS's higher level services, more than offsets
the effects of a 1996 promotional campaign that provided new customers with
one or two months of free service in the first quarter of 1997. The average
installation revenue from each Authorized Unit installed was $117 for the nine
months ended September 30, 1997, down $69 compared to the same period in 1996.
The decrease from 1997 to 1996 is attributable to the continuation of a fourth
quarter 1996 marketing program, in which the customer received a discounted
installation price, and the introduction of the Radio Shack Program that
provides additional subscribers for Cox DBS but does not contribute to
installation revenue. The continuation of the marketing program was in
reaction to the competition from other DBS providers, which continues to lower
the cost of entry for consumers.
F-123
<PAGE>
COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
PrimeStar Partners provides programming services to Cox DBS and other
authorized distributors in exchange for a fee based upon the number of
Authorized Units receiving programming services. PrimeStar Partners also
arranges for satellite capacity and uplink services and provides national
marketing and administrative support services in exchange for a separate
authorization fee from each distributor, including Cox DBS, based on such
distributor's total number of Authorized Units. The aggregate charges for such
services were $38,763,000 for the nine months ended September 30, 1997, an 85%
increase over the same period in 1996. For additional information concerning
the operations of PrimeStar Partners, see related discussion below.
Other operating expenses, which include customer support activities such as
repair and service calls, were $7,286,000 for the nine months ended September
30, 1997, an increase of 69% compared to the same period in 1996. A
significant portion of the operating costs and expenses were incurred due to
the increased growth in Authorized Units.
Selling, general and administrative expenses were $24,683,000 for the nine
months ended September 30, 1997, a 24% increase compared to the same period in
1996. Such percentage increases are attributable to Cox DBS's efforts to
maximize subscriber growth and to support the increase in its customer
subscriber base.
Cox DBS has agreements with four master sales agents to perform sales and
installations of customers. During the nine months ended September 30, 1997
total payments to such master sales agents aggregated $9,247,214 and were
charged, net of capitalized amounts, to both other operating and selling,
general and administrative expenses in the period incurred.
Under the master agent program, each master agent provides services, which
include installation, maintenance, equipment retrieval, inventory management
and other customer fulfillment services, to be performed in accordance with
specified performance standards. The agreements with the master agents have a
contract period term that expires in 1998, and are terminable, based on non-
performance. Installation charges from master agents include direct and
indirect costs of performing installations. Cox DBS capitalizes a portion of
such charges as subscriber installation costs.
Depreciation expense was $31,041,000 for the nine months ended September 30,
1997, a 112% increase compared to the same period in 1996. Such increase is
the result of the increase in Cox DBS's depreciable assets due primarily to
capital expenditures with respect to Cox DBS's satellite reception equipment
and subscriber growth in Authorized Units and accelerated depreciation due to
the write off of subscriber installation costs due to disconnects.
Interest expense was $8,034,000 for the nine months ended September 30,
1997, a 57% increase compared to the same period in 1996. All interest expense
was incurred on the outstanding amounts due to Cox. See "Liquidity and Capital
Resources."
Cox DBS's 10.43% share of PrimeStar Partners' net losses increased
$2,839,000 to $4,259,000 for the nine months ended September 30, 1997 compared
to the same period in 1996. Such increase is primarily attributable to a
significant increase in the expenses related to satellite costs, distribution
marketing support and advertising, and increased corporate personnel.
Historically, PrimeStar Partners' operating deficits have been funded by
capital contributions from Cox DBS and the other partners of PrimeStar
Partners. To the extent that future subscriber growth does not generate
increases in PrimeStar Partners' revenue sufficient to offset its operating
costs and expenses, Cox DBS anticipates that any such operating deficit would
be funded by PrimeStar Partners' then existing external sources of liquidity
(which may include capital contributions from Cox DBS and PrimeStar Partners'
other partners), or by increases in the above-described programming and
authorization fees charged by PrimeStar Partners to Cox DBS and other
authorized distributors.
F-124
<PAGE>
COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Cox DBS's income tax benefit was $12,621,000 for the nine months ended
September 30, 1997, an increase of $6,344,000 over the same period in 1996.
Years Ended December 31, 1996, 1995 and 1994
Cox DBS reported net losses of $18,214,000, $8,661,000 and $8,892,000 during
the years ended December 31, 1996, 1995 and 1994, respectively. Future
improvements in Cox DBS's results of operations are largely dependent upon its
ability to increase its customer base while maintaining its pricing structure,
reducing subscriber churn and effectively managing Cox DBS's costs. No
assurance can be given that any such improvements will occur. In addition, Cox
DBS incurs significant sales commissions and installation costs when its
customers initially subscribe to the service. Accordingly, management expects
that operating costs will remain high as a percentage of revenue so long as
Cox DBS maintains its rapid growth in customer acquisition.
During the years ended December 31, 1996, 1995 and 1994, Cox DBS'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 30.4%, 20.6% and 24.7%, respectively. The increase in
subscriber churn in 1996 is due to increased competition and a lower cost of
entry for consumers. The decrease in churn for 1995 is attributed to the
change to a digital signal from an analog signal in late 1994 and adding
additional programming in 1995 due to digital compression.
As set forth above, Cox DBS has experienced an increase during 1996 in the
rate of subscriber churn, as compared to prior periods. Cox DBS believes that
the higher 1996 churn rate is primarily attributable to identifiable
circumstances in customer acquisition programs that are not expected to have a
continuing effect. In general, these circumstances stemmed from Cox DBS's
efforts to maximize its subscriber growth during the fourth quarter of 1995
and during 1996.
Cox DBS's subscriber maximization efforts in 1996 included marketing
programs that allowed subscribers to initiate service and receive one or two
free months of programming by paying the normal installation fee with no
credit approval. One result of these subscriber maximization efforts was that
a significant number of these customers became delinquent and were
disconnected, thereby increasing churn. Such delinquent accounts contributed
to a significant increase in Cox DBS's bad debt expense during 1996. Cox DBS
has addressed this issue by implementing more stringent credit and collection
policies.
Since July 1994, when PrimeStar Partners completed its conversion from an
analog to a digital signal, Cox DBS experienced significant growth in active
authorized satellite receivers ("Authorized Units"), more than one of which
may be installed in a subscribing household. In this regard, the number of
Authorized Units, including additional outlets, was 147,946, 60,743 and 18,914
at December 31, 1996, 1995 and 1994, respectively.
To the extent not otherwise described, increases in Cox DBS's revenue and
operating, selling, general and administrative expenses, as detailed below,
are primarily related to growth in subscribers. Cox DBS is operating in an
increasingly competitive environment. No assurance can be given that such
increasing competition will not adversely affect Cox DBS's ability to continue
to achieve significant growth in subscribers and revenue.
Revenue increased $40,742,000 or 148% and $18,564,000 or 207% during 1996
and 1995, respectively, as compared to the corresponding prior year. Exclusive
of installation revenue, Cox DBS's average monthly revenue per subscriber was
$47, $42 and $35, during 1996, 1995 and 1994, respectively. The 12% increase
from 1995 to 1996 in the average monthly revenue per subscriber was primarily
a result of the increase in monthly revenue derived from premium and pay-per-
view services. The increase from such services more than offset the effects of
a 1996 promotional campaign that provided certain new customers with one to
two months of free service. The 20% increase from 1994 to 1995 in the average
monthly revenue per subscriber is primarily
F-125
<PAGE>
COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
attributable to the full year effect of the higher basic service rates, the
increased availability of premium and pay-per-view services that followed the
July 1994 completion of the conversion to a digital signal and a March 1995
increase in the monthly equipment rental fee. The average installation revenue
from each subscriber was $157, $196 and $251 during 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 is primarily attributable to the
Radio Shack Program that provides additional subscribers for Cox DBS but does
not contribute to installation revenue. The decrease from 1994 to 1995 is a
result of decreasing the installation costs due to competition from other DBS
providers.
PrimeStar Partners provides programming services to Cox DBS and other
authorized distributors in exchange for a fee based upon the number of
Authorized Units receiving programming services. PrimeStar Partners also
arranges for satellite capacity and uplink services and provides national
marketing and administrative support services in exchange for a separate
authorization fee from each distributor, including Cox DBS, based on such
distributor's total number of Authorized Units. The aggregate charges for such
services increased $19,248,000 or 168% and $8,568,000 or 294% during 1996 and
1995, respectively, as compared to the corresponding prior year. For
additional information concerning the operations of PrimeStar Partners, see
related discussion below.
Other operating expenses, which include customer support activities such as
repair and service calls, increased $4,221,000 or 177% and $843,000 or 55%
during 1996 and 1995, respectively, as compared to the corresponding prior
year. Most of such operating costs and expenses were incurred from the
increased infrastructure to support Cox DBS's 19 PrimeStar locations.
Selling, general and administrative expenses increased $15,916,000 or 123%
and $8,157,000, or 172% during 1996 and 1995, respectively, as compared to the
corresponding prior year. Such relatively high percentage increases are
attributable to Cox DBS's efforts to increase its subscriber base.
Cox DBS has entered into agreements with four master sales agents to perform
sales and installations of customers. During the years ended December 31, 1996
and 1995, total payments to such master sales agents aggregated $10,232,698
and $494,722, respectively and were charged, net of capitalized amounts, to
both other operating and selling, general and administrative expenses in the
period incurred.
Under the master agent program, each master agent provides services, which
include installation, maintenance, retrieval, inventory management and other
customer fulfillment services, to be performed in accordance with specified
performance standards. The agreements with the master agents have a contract
period term that expires in 1998, and are terminable, based on non-
performance. Installation charges from master agents include direct and
indirect costs of performing installations. Cox DBS capitalizes a portion of
such charges as subscriber installation costs.
The $15,381,000 or 243% and $1,346,000 or 27% increases in depreciation
during 1996 and 1995, respectively, as compared to the corresponding prior
year, are the result of the increase in Cox DBS's depreciable assets due
primarily to capital expenditures with respect to the Cox DBS's satellite
reception equipment and accelerated depreciation due to the write off of
subscriber installation costs due to disconnects.
Interest expense increased $3,268,000 or 90% and $786,000 or 28% during 1996
and 1995, respectively, as compared to the corresponding prior year periods.
All interest expense was incurred on the outstanding amounts due to Cox. See
"Liquidity and Capital Resources."
Cox DBS's 10.43% share of PrimeStar Partners' net losses decreased
$2,690,000 or 65% and $1,649,000 or 28% during 1996 and 1995, respectively, as
compared to the corresponding prior year periods. Such decrease is primarily
attributable to a significant increase in the revenue derived by PrimeStar
Partners from Cox DBS and
F-126
<PAGE>
COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
other distributors of the PrimeStar service. Historically, PrimeStar Partners'
operating deficits have been funded by capital contributions from Cox DBS and
the other partners of PrimeStar Partners. To the extent that future subscriber
growth does not generate increases in PrimeStar Partners' revenue sufficient
to offset its operating costs and expenses, Cox DBS anticipates that any such
operating deficit would be funded by PrimeStar Partners' then existing
external sources of liquidity (which may include capital contributions from
Cox DBS and PrimeStar Partners' other partners), or by increases in the above-
described programming and authorization fees charged by PrimeStar Partners to
Cox DBS and other authorized distributors.
Cox DBS's income tax benefit was $9,791,000, $4,657,000 and $4,792,000
during 1996, 1995 and 1994, respectively. The effective tax rates associated
with such benefits were 34.96%, 34.97% and 35.02%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cox DBS's business requires cash for the purchase of satellite reception
equipment, subscriber acquisition costs, daily operating needs and capital
funding requirements to PrimeStar Partners. Cash requirements are funded by
Cox DBS's operating activities and through intercompany advances from Cox. If
Cox DBS were operated as a stand alone entity, financial resources needed to
satisfy short-term and long-term liquidity requirements would be funded from
outside sources at potentially less favorable terms.
During 1996, 1995, and 1994 and the nine months ended September 30, 1997,
Cox DBS generated $8,533,000, $7,816,000, $3,737,000 and $1,214,000 of cash
from operations, respectively. Significant changes in Cox DBS's receivables,
payables and other operating assets and liabilities are primarily a function
of subscriber growth.
During the years ended December 31, 1996, 1995 and 1994 and the nine months
ended September 30, 1997, Cox DBS used cash of $70,522,000, $40,768,000,
$15,491,000, and $47,042,000, respectively, to fund the acquisition and
installation of satellite reception equipment and certain other capital
expenditures. Based upon current business plans, Cox DBS estimates that its
capital expenditures for the year ended December 31, 1997 will be
approximately $60,000,000. Cox DBS expects that the majority of such estimated
capital expenditures will be used to fund the acquisition and installation of
satellite reception equipment. The actual amount of capital to be required
will be primarily a function of subscriber growth and churn rates.
Under the PrimeStar Partners limited partnership agreement, Cox DBS has
agreed to fund its share of any capital contributions and/or loans to
PrimeStar Partners that might be agreed upon from time to time by the partners
of PrimeStar Partners. Cumulative funding to the partnership by Cox DBS
approximated $32.4 million, $25.8 million and $35.3 million as of December 31,
1996 and 1995 and September 30, 1997, respectively. Additionally, as a general
partner of PrimeStar Partners, Cox DBS is liable as a matter of partnership
law for all debts of PrimeStar Partners in the event the liabilities of
PrimeStar Partners were to exceed its assets. PrimeStar Partners has
contingent liabilities related to legal and other matters arising in the
ordinary course of business. Management of PrimeStar Partners is unable at
this time to assess the impact, if any, of such matters on PrimeStar
Partners's results of operations, financial position, or cash flow.
LITIGATION
The International Bureau of the FCC (the "International Bureau") has granted
EchoStar Satellite Corporation, a subsidiary of EchoStar Communications
Corporation (together with its consolidated subsidiaries "EchoStar") a
conditional authorization to construct, launch and operate a Ku-band domestic
fixed satellite into the orbital position at 83 degrees W.L., immediately
adjacent to that occupied by GE-2, the spacecraft now used
F-127
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
to provide the PrimeStar service. Contrary to previous FCC policy, EchoStar
was authorized to operate at a power level of 130 watts. If EchoStar were to
launch its high power satellite authorized to 83 degrees W.L. and commence
operations at that location at a power level of 130 watts, it would likely
cause harmful interference to the reception of the PrimeStar signal by
subscribers to such services.
Subsequently, GE Americom and PrimeStar Partners separately requested
reconsideration of the International Bureau's authorization for EchoStar to
operate at 83 degrees W.L. These requests were opposed by EchoStar and others
and are currently pending at the International Bureau. In addition, GE
Americom and PrimeStar Partners have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
coordination between PrimeStar Partners and EchoStar will resolve such
interference. There can be no assurance that the International Bureau will
change slot assignments, or power levels, in a fashion that eliminates the
potential for harmful interference. The ultimate outcome of this matter cannot
presently be predicted.
The degree to which Cox DBS is leveraged may adversely affect Cox DBS's
ability to compete effectively against better capitalized competitors and to
withstand downturns in its business or the economy and could limit its ability
to pursue business opportunities that may be in the interests of Cox DBS and
Cox. Cox DBS's ability to pursue such opportunities may require Cox DBS to
increase its cash from operations or to obtain additional funding from Cox.
F-128
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Cox Communications, Inc. Direct Broadcast Satellite Business
Atlanta, Georgia
We have audited the accompanying balance sheets of Cox Communications, Inc.
Direct Broadcast Satellite Business (the "Company") as of December 31, 1995
and 1996, and the related statements of operations, deficiency in net assets,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
PrimeStar Partners L.P. ("PrimeStar"), the Company's investment in which is
accounted for by use of the equity method. The Company's equity of $6,362,000
and $11,536,000 in PrimeStar at December 31, 1995 and 1996, respectively, and
of $5,736,000, $4,087,000 and $1,397,000 in PrimeStar's net loss for years
ended December 31, 1994, 1995 and 1996, respectively, are included in the
accompanying financial statements. Those statements were audited by other
auditors whose report (which includes an explanatory paragraph regarding
PrimeStar Partners, L.P.'s ability to continue as a going concern) has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for such company, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
such financial statements present fairly, in all material respects, the
financial position of Cox Communications, Inc. Direct Broadcast Satellite
Business as of December 31, 1995 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Atlanta, Georgia
July 10, 1997
F-129
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
ASSETS
Cash......................................... $ 4,713 $ 2,271 $ 2,025
Accounts receivable.......................... 1,359 5,063 8,070
Less allowance for doubtful accounts......... (810) (391) (1,017)
------- -------- --------
549 4,672 7,053
------- -------- --------
Plant and equipment
Satellite reception equipment.............. 45,898 94,679 126,297
Subscriber installation costs.............. 11,837 27,700 33,296
Support equipment.......................... 250 659 954
------- -------- --------
57,985 123,038 160,547
Less accumulated depreciation................ (7,981) (24,210) (45,724)
------- -------- --------
50,004 98,828 114,823
------- -------- --------
Investment in PrimeStar Partners, L.P. ...... 6,362 11,536 10,214
Other assets................................. 3,130 10,812 8,572
------- -------- --------
Total assets............................. $64,758 $128,119 $142,687
======= ======== ========
LIABILITIES AND EQUITY
Accounts payable............................. $ 5,590 $ 10,905 $ 9,290
Accrued charges from PrimeStar Partners,
L.P. ....................................... 3,047 7,105 4,698
Other accrued expenses....................... 720 5,956 3,566
Amounts due to Cox Communications, Inc
("CCI")..................................... 84,711 150,829 199,348
Deferred income taxes........................ 1,675 2,523 (1,956)
------- -------- --------
Total liabilities........................ 95,743 177,318 214,946
------- -------- --------
Deficiency in net assets..................... (30,985) (49,199) (72,259)
------- -------- --------
Total liabilities and equity............. $64,758 $128,119 $142,687
======= ======== ========
</TABLE>
See notes to financial statements.
F-130
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
REVENUES
Programming and equipment
rental.................. $ 6,240 $ 18,547 $ 53,434 $ 36,939 $ 70,532
Installation............. 2,745 9,002 14,857 11,623 8,241
-------- -------- -------- --------- ---------
8,985 27,549 68,291 48,562 78,773
COSTS AND EXPENSES
Programming and other
charges from PrimeStar
Partners, L.P. ......... 2,915 11,483 30,731 20,993 38,763
Other operating.......... 1,546 2,389 6,610 4,306 7,286
Selling, general and
administrative.......... 4,732 12,889 28,805 19,903 24,683
Depreciation............. 4,977 6,323 21,704 14,654 31,041
-------- -------- -------- --------- ---------
OPERATING LOSS............. (5,185) (5,535) (19,559) (11,294) (23,000)
OTHER INCOME (EXPENSE)
Interest expense......... (2,844) (3,630) (6,898) (5,131) (8,034)
Share of losses of
PrimeStar Partners,
L.P. ................... (5,736) (4,087) (1,397) (1,420) (4,259)
Other, net............... 81 (66) (151) (103) (388)
-------- -------- -------- --------- ---------
LOSS BEFORE INCOME TAXES... (13,684) (13,318) (28,005) (17,948) (35,681)
Income tax benefit......... 4,792 4,657 9,791 6,277 12,621
-------- -------- -------- --------- ---------
NET LOSS................... $ (8,892) $ (8,661) $(18,214) $ (11,671) $ (23,060)
======== ======== ======== ========= =========
</TABLE>
See notes to financial statements.
F-131
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
STATEMENTS OF DEFICIENCY IN NET ASSETS
<TABLE>
<CAPTION>
DEFICIENCY IN
NET ASSETS
----------------------
(THOUSANDS OF DOLLARS)
<S> <C>
BALANCE AT DECEMBER 31, 1993............................. $(13,432)
Net loss............................................... (8,892)
--------
BALANCE AT DECEMBER 31, 1994............................. (22,324)
Net loss............................................... (8,661)
--------
BALANCE AT DECEMBER 31, 1995............................. (30,985)
Net loss............................................... (18,214)
--------
BALANCE AT DECEMBER 31, 1996............................. (49,199)
Net loss (unaudited)................................... (23,060)
--------
BALANCE AT SEPTEMBER 30, 1997 (UNAUDITED)................ $(72,259)
========
</TABLE>
See notes to financial statements.
F-132
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss................ $ (8,892) $ (8,661) $(18,214) $ (11,671) $ (23,060)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation.......... 4,977 6,323 21,704 14,654 31,041
Share of losses of
PrimeStar Partners,
L.P. ................ 5,736 4,087 1,397 1,420 4,259
Deferred income
taxes................ 750 1,148 978 (916) (4,479)
Increase in accounts
receivable............. (123) (39) (4,123) (2,428) (2,381)
Increase (Decrease) in
accounts payable and
accrued expenses....... 1,795 5,742 7,193 1,467 (6,406)
Other, net.............. (506) (784) (402) (6,527) 2,240
-------- -------- -------- --------- ---------
Net cash provided
(used) by operating
activities......... 3,737 7,816 8,533 (4,001) 1,214
-------- -------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures.... (15,491) (40,768) (70,522) (49,221) (47,042)
Investments in
affiliated companies... (8,166) (7,098) (6,571) (5,528) (2,937)
Repayment of advances to
PrimeStar Partners..... 8,896 -- -- -- --
-------- -------- -------- --------- ---------
Net cash used in
investing
activities......... (14,761) (47,866) (77,093) (54,749) (49,979)
-------- -------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase in amounts due
to CCI................. 10,978 44,733 66,118 55,040 48,519
-------- -------- -------- --------- ---------
Net cash provided by
financing
activities......... 10,978 44,733 66,118 55,040 48,519
-------- -------- -------- --------- ---------
Net increase (decrease)
in cash................ (46) 4,683 (2,442) (3,710) (246)
Cash at beginning of
period................. 76 30 4,713 4,713 2,271
-------- -------- -------- --------- ---------
Cash at end of period... $ 30 $ 4,713 $ 2,271 $ 1,003 $ 2,025
======== ======== ======== ========= =========
</TABLE>
See notes to financial statements.
F-133
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION AND BASIS OF PRESENTATION
Cox Communications, Inc.'s ("Cox") direct broadcast satellite business
("Cox DBS") is involved in the business of delivering television
programming via direct broadcast satellite ("DBS"). Cox DBS also owns a
10.43 percent interest in PrimeStar Partners, L.P. ("PrimeStar Partners"),
the nation's second largest DBS operation. In addition to being an investor
in PrimeStar Partners, Cox DBS distributes the service under the name
"PrimeStar by Cox." Cox, an indirect 75.3% owned subsidiary of Cox
Enterprises, Inc. ("CEI"), is among the nation's five largest multiple
system operators, serving some 3.3 million customers. Cox is a fully
integrated, diversified broadband communications company with interests in
domestic and United Kingdom cable distribution systems, programming
networks and telecommunications technology. The historical financial
statements do not necessarily reflect the results of operations or
financial position that would have existed had Cox DBS been an independent
company.
2.PROPOSED TRANSACTIONS
In June 1997, Cox entered into a binding letter agreement with PrimeStar
Partners, affiliates of each of the other partners of PrimeStar Partners
and a stockholder of TCI Satellite Entertainment, Inc. (TSAT) to effect the
consolidation of these entities into a newly-formed company (the
"Restructuring Transaction"). The new corporation ("New PrimeStar") will
acquire Cox's interest in PrimeStar Partners and Cox DBS in exchange for
cash and shares of Series A and Series C Common Stock of New PrimeStar. It
is expected that upon consummation of the Restructuring Transaction that
shares of Series A Common Stock and Series B Common Stock (Series B issued
to TSAT in the Restructuring Transaction) will be publicly traded on the
NASDAQ Stock Market. Cox DBS as an operating company will cease to exist
upon consummation of the Restructuring Transaction.
Subsequent to the Restructuring Transaction, the board of directors of New
PrimeStar will initially consist of eleven members, one of which will be
nominated by Cox. Upon completion of the Restructuring Transaction but
before the acquisition of certain satellite assets, Cox will hold
approximately 9 percent of the common equity ownership of New PrimeStar.
The Restructuring Transaction is subject to certain closing conditions
including, among other things, receipt of necessary regulatory approvals.
Also in June 1997, PrimeStar Partners announced that it had entered into a
binding asset acquisition agreement (the "ASkyB Agreement") with several
affiliated and unaffiliated parties. The ASkyB Agreement provides for the
transfer to New PrimeStar of two high power communications satellites
currently under construction and DBS related licenses and contracts. In
consideration, the parties selling the above noted assets will receive
convertible securities of New PrimeStar. Consummation of the transactions
contemplated by the ASkyB agreement are contingent on, among other things,
receipt of all necessary government and regulatory approvals.
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Cox DBS bills its customers in advance; however, revenue is recognized as
television programming services are provided. Receivables are generally
collected within 30 days. Credit risk is managed by disconnecting services
to customers who are delinquent generally greater than 75 days. Other
revenues are recognized as services are provided. Revenues obtained from
the connection of customers to the PrimeStar Partners DBS service are less
than related direct selling costs; therefore, such revenues are recognized
as earned.
F-134
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Cash Management
Cox DBS participates in CEI's cash management system, whereby the bank
sends daily notification of checks presented for payment. CEI transfers
funds from other sources to cover the checks presented for payment.
Plant and Equipment
Depreciation is computed using principally the straight-line method at
rates based upon estimated useful lives of three to five years for
satellite reception equipment and subscriber installation costs and three
to 10 years for other plant and equipment.
The costs of initial customer installations are capitalized as subscriber
installation costs at standard rates for Cox DBS's labor, materials and
outside labor. Expenditures for maintenance and repairs are charged to
operating expense as incurred. At the time of retirements, sales,
disconnects or other disposals of property, the original cost and related
accumulated depreciation are written off.
Investment in PrimeStar Partners, L.P.
Cox DBS uses the equity method to account for its investment in PrimeStar
Partners. The investment is recorded at cost and adjusted to recognize Cox
DBS's proportionate share of PrimeStar Partners' undistributed income or
losses.
Impairment of Long-Lived Assets
Effective January 1996, Cox DBS adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." This Statement
requires that long-lived assets and certain intangibles be reviewed for
impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, with any impairment
losses being reported in the period in which the recognition criteria are
first applied based on the fair value of the asset. Long-lived assets and
certain intangibles to be disposed of are required to be reported at the
lower of carrying amount or fair value less cost to sell. There was no
impact on the financial statements upon adoption of SFAS No. 121.
Income Taxes
The accounts of Cox DBS historically have been included in the consolidated
federal income tax return and certain state income tax returns of CEI.
Current federal and state income tax expenses and benefits have been
allocated on a separate return basis to Cox DBS based on the current year
tax effects of the inclusion of its income, expenses and credits in the
consolidated income tax returns of CEI or based on separate state income
tax returns.
Deferred income tax assets and liabilities arise from differences in
recording certain income and expenses for financial reporting and income
tax purposes and are principally related to depreciation and Cox DBS's
share of losses of PrimeStar Partners.
Retirement Plans
Cox DBS generally provides defined pension benefits to all employees based
on years of service and compensation during those years through the Cox
Communications, Inc. Pension Plan (the "Cox Plan").
F-135
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Additionally, Cox DBS provides certain health care, life insurance and
retirement savings benefits to substantially all retirees and employees
through certain CEI plans. Expense related to the Cox Plan and the CEI
plans are allocated to Cox DBS through the intercompany account. The amount
of the allocations is generally based on actuarial determinations of the
effects of Cox DBS employees' participation in the Cox Plan and CEI plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4.INVESTMENT IN PRIMESTAR PARTNERS, L.P.
Below is unaudited financial information of PrimeStar Partners:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
---------------------------- ENDED SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------------
(UNAUDITED)
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenues.................. $ 27,841 $180,595 $412,999 $450,973
Operating loss............ (53,034) (38,395) (16,823) (32,186)
Net loss.................. (55,716) (42,037) (15,702) (43,862)
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C> <C> <C>
Current assets............ $ 72,638 $137,048
Noncurrent assets......... 443,324 551,225
Current liabilities....... 37,911 584,907
Noncurrent liabilities.... 426,210 4,227
Equity.................... 51,841 99,139
</TABLE>
PrimeStar Partners provides programming services to Cox DBS and other
authorized distributors in exchange for a fee based upon the number of
subscribers receiving programming services. Cox DBS also pays PrimeStar
Partners for arranging for satellite capacity and uplink services and
providing national marketing and administrative support services. During
the years ended December 31, 1996, 1995 and 1994, the charges from
PrimeStar Partners for programming services and other items were
approximately $30,731,000, $11,483,000 and $2,915,000, respectively.
Amounts payable to PrimeStar Partners at December 31, 1996 and 1995, were
approximately $7,105,000 and $3,047,000, respectively.
Under the PrimeStar Partners limited partnership agreement, Cox DBS has
agreed to fund its share of any capital contributions and/or loans to
PrimeStar Partners that might be agreed upon from time to time by the
partners of PrimeStar Partners. Cox DBS funded approximately $32.4 million
and $25.8 million to the partnership as of December 31, 1996 and 1995,
respectively. Additionally, as a general partner of PrimeStar Partners, Cox
DBS is liable as a matter of partnership law for all debts of PrimeStar
Partners in the event the liabilities of PrimeStar Partners were to exceed
its assets. PrimeStar Partners has contingent liabilities
F-136
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
related to legal and other matters arising in the ordinary course of
business. Management of PrimeStar Partners is unable at this time to assess
the impact, if any, of such matters on PrimeStar Partners' results of
operations, financial position, or cash flow.
5.INCOME TAXES
Current and deferred income tax expenses (benefits) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current......................................... $(5,542) $(5,805) $(10,769)
Deferred........................................ 750 1,148 978
------- ------- --------
Net income tax benefit........................ $(4,792) $(4,657) $ (9,791)
Effective tax rate.............................. 35.02% 34.97% 34.96%
------- ------- --------
</TABLE>
Income tax benefit differs from the amount computed by applying the U.S.
statutory federal income tax rate (35%) to loss before income taxes as a
result of certain insignificant items not deductible for tax purposes. Cox
DBS records the benefit of losses in its financial statements since these
losses are utilized by Cox.
Significant components of the net deferred tax liability consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1996
------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Plant and equipment.................................... $(2,035) $(2,541)
Other.................................................. 360 18
------- -------
Net deferred tax liability........................... $(1,675) $(2,523)
======= =======
</TABLE>
6.TRANSACTIONS WITH AFFILIATED COMPANIES
Cox DBS borrows funds for working capital, PrimeStar Partners capital calls
and other needs from Cox. Certain services are provided to Cox DBS by Cox.
Such services include corporate administration, customer service
operations, risk management, benefits administration and other support
services. Cox DBS was allocated expenses for the years ended December 31,
1996, 1995 and 1994 of approximately $2,720,000, $1,089,000 and $379,000,
respectively, related to these services. Cox DBS pays rent and certain
other occupancy costs to Cox for its office facilities, which amounts
approximated $664,000, $194,000 and $62,000 for the years ended December
31, 1996, 1995 and 1994, respectively. Allocated expenses are based on
Cox's estimate of expenses related to the services provided to Cox DBS in
relation to those provided to its cable and other operations. Rent and
occupancy expense is allocated based on occupied space. Management believes
that these allocations were made on a reasonable basis. However, the
allocations are not necessarily indicative of the level of expenses that
might have been incurred had Cox DBS contracted directly with third
parties. Management has not made a study or any attempt to obtain quotes
from third parties to determine what the cost of obtaining such services
from third parties would have been. The fees and expenses to be paid by Cox
DBS to Cox are subject to change.
The amounts due to Cox are generally due on demand and represent the net of
various transactions, including those described above. At December 31,
1996, outstanding amounts to Cox bear interest at fifty
F-137
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
basis points above Cox's commercial paper borrowings. This rate as of
December 31, 1996 and 1995 was 6.6% and 6.2%, respectively.
Included in amounts due to Cox are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
Intercompany due to Cox, December 31, 1994.......... $ 39,978
Cash transferred from Cox......................... 7,099
Net operating expense allocations and
reimbursements................................... 37,634
--------
Intercompany due to Cox, December 31, 1995.......... 84,711
Cash transferred from Cox......................... 6,571
Net operating expense allocations and
reimbursements................................... 59,547
--------
Intercompany due to Cox, December 31, 1996.......... 150,829
Cash transferred from Cox (unaudited)............. 2,937
Net operating expense allocations and
reimbursements (unaudited)....................... 45,582
--------
Intercompany due to Cox, September 30, 1997
(unaudited)........................................ $199,348
========
</TABLE>
In accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments," Cox DBS has estimated the fair value
of its intercompany advances. Given the short-term nature of these
advances, the carrying amounts reported in the balance sheets approximate
fair value.
7.COMMITMENTS AND CONTINGENCIES
Cox DBS is a party to various legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending will have a material adverse impact on Cox
DBS's financial position or results of operations.
8.UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following table sets forth selected historical quarterly financial
information for Cox DBS. This information is derived from unaudited
financial statements of Cox DBS and includes, in the opinion of management,
all normal and recurring adjustments that management considers necessary
for a fair presentation of the results for such periods.
<TABLE>
<CAPTION>
1996
----------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenue.................................. $13,850 $15,438 $19,274 $19,729
Operating loss........................... (2,730) (4,693) (3,871) (8,265)
Income tax benefit....................... (2,245) (2,735) (1,647) (3,164)
Net loss................................. (2,677) (3,890) (5,752) (5,895)
<CAPTION>
1995
----------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenue.................................. $ 4,768 $ 5,677 $ 7,036 $10,068
Operating loss........................... (443) (1,030) (1,756) (2,306)
Income tax benefit....................... (1,135) (1,329) (1,366) (827)
Net loss................................. (1,049) (1,297) (3,513) (2,802)
</TABLE>
F-138
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
SELECTED COMBINED FINANCIAL AND OTHER DATA
The following selected combined financial and other data (other than
operating statistics) as of the dates and for the periods indicated have been
derived from the combined financial statements of Comcast Satellite
Communications, Inc. ("Comcast Satellite") and Comcast DBS, Inc. ("Comcast
DBS, and together with Comcast Satellite, the "Companies"). The selected
combined financial and other data is qualified in its entirety by, and should
be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the combined financial
statements of Comcast Satellite and Comcast DBS, including the notes thereto.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ----------------------------------------------
1997(1) 1996(1) 1996(1) 1995(1) 1994(1) 1993 1992
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service income.......... $ 81,057 $ 44,932 $ 65,574 $ 27,726 $ 4,394 $ 2,242 $ 1,484
Operating, selling,
general and
administrative
expenses............... 71,826 42,546 62,021 33,786 7,183 3,312 2,835
Depreciation and
amortization........... 21,248 12,889 17,956 6,973 2,942 832 618
Operating loss.......... (12,017) (10,503) (14,403) (13,033) (5,731) (1,902) (1,969)
Interest expense on
notes payable to
affiliate.............. 11,481 5,427 8,442 3,174 -- -- --
Equity in net loss of
Primestar.............. 4,352 657 1,647 4,385 5,840 3,078 2,519
Net loss (2)............ (27,618) (16,529) (24,366) (20,524) (11,414) (4,973) (4,467)
SUPPLEMENTARY FINANCIAL
DATA:
Operating income (loss)
before depreciation and
amortization (3)....... $ 9,231 $ 2,386 $ 3,553 $ (6,060) $ (2,789) $(1,070) $(1,351)
Net cash provided by
(used in): (4)
Operating activities.. 11,769 8,256 8,009 (2,270) (1,326) -- --
Financing activities
..................... 43,325 38,574 72,535 51,443 11,427 -- --
Investing activities.. (61,050) (46,830) (74,588) (49,292) (10,045) -- --
Capital expenditures.... 46,946 30,680 52,962 32,692 9,493 361 1,193
Subscriber installation
costs.................. 10,970 10,613 15,046 9,501 1,613 189 484
BALANCE SHEET DATA (AT
PERIOD END):
Investment in
Primestar.............. $ 9,122 $ 10,287 $ 10,340 $ 5,407 $ 2,693 $ 9,271 $ (184)
Property and equipment,
net.................... 107,929 57,676 76,674 36,902 9,378 2,364 2,588
Subscriber installation
costs, net............. 25,145 17,082 19,732 9,452 1,756 606 655
Total assets............ 149,020 87,658 116,451 56,859 14,306 12,703 3,460
Notes payable to
affiliate.............. 174,436 91,700 131,471 58,800 12,000 -- --
Stockholder's
(deficiency) equity.... (67,307) (26,493) (39,857) (15,501) (2,069) 9,186 136
OPERATING STATISTICS (AT
PERIOD END):
Subscribers............. 169 101 121 54 12 5 4
</TABLE>
- -------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors, principally the growth
in Comcast Satellite's operations, which affect the comparability of the
information reflected in the selected combined financial and other data.
(2) Except for the year ended December 31, 1993, net loss also represents loss
from continuing operations before extraordinary items and cumulative
effect of changes in accounting principle. Net loss for the year ended
December 31, 1993 includes $52,000 relating to the adoption of Statement
of Financial Accounting Standards No. 106, "Postretirement Benefits Other
than Pensions," effective January 1, 1993.
(3) Operating income (loss) before depreciation and amortization is commonly
referred to in the direct broadcast satellite business as "operating cash
flow (deficit)." Operating cash flow (deficit) is a measure of a company's
ability to generate cash to service its obligations, including debt
service obligations, and to finance capital and other expenditures. In
part due to the capital intensive nature of the direct broadcast satellite
business and the resulting significant level of non-cash depreciation and
amortization expense, operating cash flow (deficit) is frequently used as
one of the bases for comparing businesses in the direct broadcast
satellite industry, although the Companies' measure of operating cash flow
may not be comparable to similarly titled measures of other companies.
Operating cash flow (deficit) does not purport to represent net income or
net cash provided by operating activities, as those terms are defined
under generally accepted accounting principles, and should not be
considered as an alternative to such measurements as an indicator of
Comcast Satellite's and Comcast DBS' combined performance.
(4) Represents net cash provided by (used in) operating, financing and
investing activities as presented in the combined statement of cash flows
included in the Companies' combined financial statements included
elsewhere herein (not available for the years ended December 31, 1993 and
1992).
F-139
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
This discussion and analysis of the financial condition and results of
operations of Comcast Satellite Communications, Inc. ("Comcast Satellite") and
Comcast DBS, Inc. ("Comcast DBS," and together with Comcast Satellite, the
"Companies") should be read in conjunction with the Companies' combined
financial statements for the quarter ended September 30, 1997 and for the
years ended December 31, 1996, 1995 and 1994, including the notes thereto. The
Companies are wholly owned subsidiaries of Comcast Corporation ("Comcast").
GENERAL DEVELOPMENTS OF BUSINESS
Comcast and Comcast DBS have entered into an agreement (the "Restructuring
Agreement") with PRIMESTAR Partners L.P. ("Primestar") and the affiliates of
each of the other partners of Primestar, including TCI Satellite
Entertainment, Inc. ("TSAT"), a publicly-traded company. Primestar, in which
Comcast DBS holds a 10.4% general and limited partnership interest, is
principally engaged in the business of acquiring, originating and/or providing
television programming services delivered by satellite through a network of
distributors, including Comcast Satellite, throughout the continental United
States. The Restructuring Agreement sets forth the principal terms and
conditions of a proposed transaction (the "Restructuring Transaction"),
through which Comcast Satellite's direct broadcast satellite ("DBS")
operations, Primestar and the Primestar-related distribution businesses of the
other partners of Primestar will be consolidated into a newly-formed company
("New Primestar"). Comcast Satellite provided DBS services, through a
distributorship arrangement with Primestar, to 169,000 subscribers as of
September 30, 1997.
New Primestar will acquire the Primestar partnership interests, subscribers
and related assets, as applicable, of the parties to the Restructuring
Transaction, in exchange for (i) cash (or assumption of debt in lieu of cash
consideration), (ii) shares of Series A Common Stock of New Primestar and
(iii) shares of Series C Common Stock of New Primestar, in each case in an
amount determined pursuant to the Restructuring Agreement. Comcast will
continue to have the right to market and support the PRIMESTAR Programming
Services on an agency basis after consummation of the Restructuring
Transaction, however, the terms of such arrangement have not yet been
determined. Under the terms of the Restructuring Agreement, upon closing of
the Restructuring Transaction and based upon the number of subscribers as of
September 30, 1997, it is expected that New PRIMESTAR will assume
approximately $75 million of the Companies' debt, and that Comcast would own
approximately 10% of New Primestar common equity, both subject to adjustments
based on the number of subscribers, inventory amounts and other factors.
In June 1997, Primestar entered into an agreement with The News Corporation
Limited, MCI Telecommunications Corporation and American Sky Broadcasting LLC
("ASkyB"), pursuant to which Primestar (or, under certain circumstances, New
Primestar) will acquire certain assets relating to a high-power, DBS business.
In exchange for such assets, ASkyB will receive non-voting securities of New
Primestar that will be convertible into non-voting common stock of New
Primestar and, accordingly, will reduce Comcast's common equity interest in
New Primestar to approximately 7% on a fully diluted basis, subject to
adjustment.
These transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to receipt of all
necessary governmental and regulatory approvals, including the approval of the
Federal Communications Commission. There can be no assurance that such
approvals will be obtained.
LIQUIDITY AND CAPITAL RESOURCES
The Companies had working capital deficits of $35.1 million, $15.1 million
and $8.5 million as of September 30, 1997, December 31, 1996 and December 31,
1995, respectively. The Companies have historically met their cash needs for
operations and investing activities, including their working capital
requirements, through their cash flows from financing activities, which
principally consist of capital contributions from Comcast and
F-140
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
borrowings from a subsidiary of Comcast (the "Comcast Subsidiary") under
Revolving Credit Notes (the "Notes") (see "Financing").
Investment
Primestar has suffered recurring losses from operations and its 1997
operating budget reflects cash requirements which are in excess of the current
aggregate capital commitment of its partners. Primestar's credit facility
becomes due on September 30, 1998. Presently, the partners determine the
amount of additional capital commitments to Primestar on a quarterly basis.
Primestar is currently negotiating to refinance its credit facility and
Primestar's management believes either such refinancing will occur prior to
its expiration or that the due date of the credit facility will be extended
until refinancing occurs. To the extent not earlier refinanced by Primestar,
New Primestar will be required to refinance the Primestar credit facility.
There can be no assurance that Primestar or New Primestar will be able to
refinance the credit facility. Management of Comcast DBS does not believe that
these matters result in the impairment of its investment in Primestar as of
September 30, 1997.
Under the Primestar limited partnership agreement, Comcast DBS has agreed to
fund its share of any capital contributions and/or loans to Primestar that
might be agreed upon from time to time by the partners of Primestar.
Additionally, Comcast DBS, as a general partner of Primestar, is liable as a
matter of partnership law for all debts of Primestar in the event the
liabilities of Primestar were to exceed its assets. Primestar has contingent
liabilities related to legal and other matters arising in the ordinary course
of its business. Management of Primestar is unable to assess the impact, if
any, of such matters on Primestar's financial position, results of operations
or liquidity. To the extent Comcast DBS does not fund Primestar's capital
calls, it exposes itself to dilution of its ownership interest.
As of September 30, 1997, indirect wholly owned subsidiaries of Comcast had
unused irrevocable standby letters of credit totaling $98.1 million to cover
potential fundings to Primestar.
Capital Expenditures
It is anticipated that, during 1997, Comcast Satellite will incur
approximately $75 million of capital expenditures, including subscriber
installation costs, of which $57.9 million had been incurred through September
30, 1997. The amount of such expenditures for years subsequent to 1997 will
depend on numerous factors, certain of which are beyond Comcast Satellite's
control. These factors include the rate of Comcast Satellite's subscriber
growth and the effects of competition and technological and regulatory
changes. Comcast Satellite, however, anticipates such expenditures for years
subsequent to 1997 will continue to be significant. As of September 30, 1997,
Comcast Satellite does not have any significant contractual obligations for
capital expenditures.
Financing
As of September 30, 1997 and December 31, 1996 and 1995, the Companies'
borrowings under the Notes were $174.4 million, $131.5 million and $58.8
million, respectively. Borrowings under the Notes are payable on demand,
however, as the Comcast Subsidiary will not demand payment of the Notes until
after September 30, 1998, the Notes have been classified as long-term in the
Companies' combined balance sheet. In October 1997 and November 1997, Comcast
Satellite borrowed an additional $18.0 million from the Comcast Subsidiary
under the Comcast Satellite Revolving Credit Note. Maximum available
borrowings under the Notes are $220.0 million. The weighted average interest
rate under the Notes was 9.97%, 9.98% and 10.00% as of September 30, 1997 and
December 31, 1996 and 1995, respectively.
As of September 30, 1997, the Companies had a combined stockholder's
deficiency of $67.3 million. The Companies' expect to continue to recognize
significant losses for the foreseeable future resulting in increases in their
stockholder's deficiency. The direct broadcast satellite industry is
experiencing increasing competition and rapid technological changes. The
Companies' future results of operations will be affected by their ability to
react
F-141
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
to changes in the competitive environment, their ability to implement new
technologies, along with the impact of any regulatory changes.
The Companies believe that they will be able to meet their current and long-
term liquidity and capital requirements, including fixed charges, through
borrowings under the Notes and through cash flows from operating activities.
STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
Cash and cash equivalents decreased $6.0 million as of September 30, 1997
from December 31, 1996 and did not change from December 31, 1995 to September
30, 1996. Changes in cash and cash equivalents resulted from cash flows from
operating, financing and investing activities which are explained below.
Net cash provided by operating activities amounted to $11.8 million and $8.3
million for the nine months ended September 30, 1997 and 1996, respectively.
The increase of $3.5 million is principally due to the increase in the
Companies' operating income before depreciation and amortization (see "Results
of Operations"), offset by changes in working capital, excluding accrued
interest on notes payable to affiliate, as a result of the timing of receipts
and disbursements.
Net cash provided by financing activities was $43.3 million and $38.6
million for the nine months ended September 30, 1997 and 1996, respectively.
During the nine months ended September 30, 1997, the Companies borrowed $43.0
million under the Notes. During the nine months ended September 30, 1996, the
Companies borrowed $32.9 million under the Notes and received capital
contributions from Comcast of $5.5 million.
Net cash used in investing activities was $61.0 million and $46.8 million
for the nine months ended September 30, 1997 and 1996, respectively. Net cash
used in investing activities for the nine months ended September 30, 1997
included $46.9 million of capital expenditures, $11.0 million of subscriber
installation costs and $3.1 million of capital contributions to Primestar.
During the nine months ended September 30, 1996, capital expenditures were
$30.7 million, subscriber installation costs were $10.6 million and capital
contributions to Primestar were $5.5 million.
Years Ended December 31, 1996, 1995 and 1994
Cash and cash equivalents increased $6.0 million as of December 31, 1996
from December 31, 1995 and decreased $119,000 as of December 31, 1995 from
December 31, 1994. Changes in cash and cash equivalents resulted from cash
flows from operating, financing and investing activities which are explained
below.
Net cash provided by (used in) operating activities amounted to $8.0
million, ($2.3) million and ($1.3) million for the years ended December 31,
1996, 1995 and 1994, respectively. The increase of $10.3 million from 1995 to
1996 and the decrease of $1.0 million from 1994 to 1995 were principally due
to changes in the Companies' operating income (loss) before depreciation and
amortization (see "Results of Operations") and changes in working capital as a
result of the timing of receipts and disbursements.
Net cash provided by financing activities was $72.5 million, $51.4 million
and $11.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. During 1996, the Companies borrowed $72.7 million under the
Notes. In 1995, the Companies borrowed $46.8 million under the Notes and
received capital contributions from Comcast of $7.1 million. During 1994, net
cash provided by financing activities included $12.0 million of borrowings
under the Notes and $14.3 million of capital contributions from Comcast,
offset by a $15.1 million return of capital to Comcast.
F-142
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Net cash used in investing activities was $74.6 million, $49.3 million and
$10.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Net cash used in investing activities in 1996 included $53.0
million of capital expenditures, $15.0 million of subscriber installation
costs and $6.6 million of capital contributions to Primestar. In 1995, capital
expenditures were $32.7 million, subscriber installation costs were $9.5
million and capital contributions to Primestar were $7.1 million. Net cash
used in investing activities in 1994 included capital expenditures of $9.5
million, capital contributions to Primestar of $8.2 million and subscriber
installation costs of $1.6 million, offset by an $8.9 million repayment of a
loan by Primestar.
RESULTS OF OPERATIONS
The effects of Comcast Satellite's subscriber growth, and the related
capital expenditures and subscriber installation costs, have been to increase
significantly the Companies' revenues and expenses, resulting in substantial
increases in operating income before depreciation and amortization,
depreciation and amortization expense and interest expense on notes payable to
affiliate. As a result of the increases in depreciation and amortization
expense and interest expense on notes payable to affiliate, it is expected
that the Companies will continue to recognize significant losses for the
foreseeable future.
Nine Months Ended September 30, 1997 and 1996
Summarized combined financial information for the Companies for the nine and
three months ended September 30, 1997 and 1996 is as follows (dollars in
millions, "NM" denotes percentage is not meaningful):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE
-------------------- ---------------------
1997 1996 $ %
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Service income.................. $ 81.1 $ 44.9 $ 36.2 80.6%
Operating, selling, general and
administrative expenses........ 71.9 42.5 29.4 69.2
--------- ---------
Operating income before
depreciation and amortization
(1)............................ 9.2 2.4 6.8 NM
Depreciation and amortization... 21.2 12.9 8.3 64.3
--------- ---------
Operating loss.................. (12.0) (10.5) 1.5 14.3
Interest expense on notes
payable to affiliate........... 11.5 5.4 6.1 NM
Investment income and other..... (0.2) (0.1) 0.1 NM
Equity in net loss of
Primestar...................... 4.3 0.7 3.6 NM
--------- ---------
Net loss........................ $ (27.6) $ (16.5) $ 11.1 67.3%
========= =========
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, INCREASE/(DECREASE)
-------------------- ---------------------
1997 1996 $ %
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Service income.................. $ 30.3 $ 17.1 $ 13.2 77.2 %
Operating, selling, general and
administrative expenses........ 26.3 16.4 9.9 60.4
--------- ---------
Operating income before
depreciation and amortization
(1)............................ 4.0 0.7 3.3 NM
Depreciation and amortization... 7.3 4.6 2.7 58.7
--------- ---------
Operating loss.................. (3.3) (3.9) (0.6) (15.4)
Interest expense on notes
payable to affiliate........... 4.3 2.1 2.2 NM
Investment income and other..... (0.1) (0.1) -- --
Equity in net loss of
Primestar...................... 1.2 -- 1.2 NM
--------- ---------
Net loss........................ $ (8.7) $ (5.9) $ 2.8 47.5%
========= =========
</TABLE>
F-143
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
- --------
(1) Operating income (loss) before depreciation and amortization is commonly
referred to in the DBS business as "operating cash flow (deficit)."
Operating cash flow (deficit) is a measure of a company's ability to
generate cash to service its obligations, including debt service
obligations, and to finance capital and other expenditures. In part due to
the capital intensive nature of the DBS business and the resulting
significant level of non-cash depreciation and amortization expense,
operating cash flow (deficit) is frequently used as one of the bases for
comparing businesses in the DBS industry, although the Companies' measure
of operating cash flow may not be comparable to similarly titled measures
of other companies. Operating cash flow (deficit) does not purport to
represent net income or net cash provided by operating activities, as
those terms are defined under generally accepted accounting principles,
and should not be considered as an alternative to such measurements as an
indicator of the Companies' combined performance.
The Companies reported net losses of $27.6 million, $16.5 million, $8.7
million and $5.9 million for the nine and three months ended September 30,
1997 and 1996, respectively. Improvements in Comcast Satellite's results of
operations are dependent upon its ability to increase its customer base while
maintaining its pricing structure, reducing subscriber churn and effectively
managing its costs. No assurance can be given that any such improvements will
occur. In addition, Comcast Satellite incurs significant capital expenditures
and subscriber installation costs when its customers initially subscribe to
the service. It is expected that the cost of acquiring subscribers will
continue to be significant so long as Comcast Satellite maintains its rapid
growth. The high cost of obtaining new subscribers also magnifies the negative
effects of subscriber churn.
During the nine and three months ended September 30, 1997 and 1996, (i)
Comcast Satellite's annualized subscriber churn rate (which represents the
annualized number of subscriber terminations divided by the average number of
subscribers during the period) was 29.6%, 34.6%, 27.9% and 37.5%,
respectively, and (ii) the average subscriber life implied by such subscriber
churn rate was 3.4 years, 2.9 years, 3.6 years and 2.7 years, respectively.
Comcast Satellite experienced a higher rate of subscriber churn in 1996.
Comcast Satellite believes that the higher 1996 churn rate was primarily
attributable to the fact that subscribers were allowed to initiate service at
discounted rates under promotional activities targeted at subscriber growth. A
significant number of customers added as a result of these promotional
activities were eventually terminated after their accounts became delinquent.
Although no assurance can be given, Comcast Satellite expects future churn
rates to continue to improve from levels experienced in 1996. If Comcast
Satellite's churn rates were to continue at the 1996 levels or to increase
over such levels, Comcast Satellite believes that its financial condition,
results of operations and liquidity would be adversely affected.
Since July 1994, when Primestar completed its conversion from an analog to a
digital signal, Comcast Satellite has experienced significant subscriber
growth. As of September 30, 1997 and 1996, Comcast Satellite had subscribers
of 169,000 and 101,000, respectively. Increases in Comcast Satellite's service
income and operating, selling, general and administrative expenses, as
described below, are primarily related to such growth in subscribers. Comcast
Satellite is operating in an increasingly competitive environment. No
assurance can be given that such increasing competition will not adversely
affect Comcast Satellite's ability to continue to achieve significant growth
in subscribers and service income.
Of the respective $36.2 million and $13.2 million increases in service
income for the nine and three month periods from 1996 to 1997, $31.7 million
and $10.7 million are attributable to subscriber growth, $2.9 million and $0.6
million are attributable to the growth in pay-per-view revenues and the
remaining increases of $1.6 million and $1.9 million relate to other revenues.
Of the respective $29.4 million and $9.9 million increases in operating,
selling, general and administrative expenses for the nine and three month
periods from 1996 to 1997, $18.0 million and $6.3 million are attributable
F-144
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
to increases in the costs of programming and other services purchased from
Primestar, principally as a result of subscriber growth, and the remaining
increases of $11.4 million and $3.6 million are attributable to increases in
the cost of labor and other volume related expenses.
Comcast Satellite purchases programming services from Primestar for a fee
based upon the number of subscribers receiving programming services. In
addition, Primestar arranges for satellite capacity and uplink services and
provides marketing and administrative support services. During the nine and
three months ended September 30, 1997 and 1996, expenses relating to such
services were $37.2 million, $19.2 million, $13.9 million and $7.6 million,
respectively. It is anticipated that Comcast Satellite's cost of programming
will increase in the future as a result of subscriber growth.
Comcast Satellite purchases certain services, including insurance and
employee benefits, from Comcast under cost-sharing arrangements on terms that
reflect Comcast's actual costs. Comcast Satellite reimburses Comcast for
certain other costs under cost-reimbursement arrangements. Under all of these
arrangements, Comcast Satellite incurred expenses of $1.8 million, $1.1
million, $0.7 million and $0.4 million during the nine and three months ended
September 30, 1997 and 1996, respectively.
The respective $8.3 million and $2.7 million increases in depreciation and
amortization expense for the nine and three month periods from 1996 to 1997
are primarily the result of capital expenditures relating to Comcast
Satellite's satellite reception equipment and subscriber installation costs.
The respective $6.1 million and $2.2 million increases in interest expense
on notes payable to affiliate for the nine and three month periods from 1996
to 1997 are the result of increases in amounts borrowed under the Notes.
The Companies' proportionate share of Primestar's net loss increased $3.7
million and $1.3 million during the nine and three month periods from 1996 to
1997, respectively. Such increases are attributable to increases in
Primestar's net loss. Historically, Primestar's operating deficits have been
funded by capital contributions from Comcast DBS and the other partners of
Primestar. To the extent that future subscriber growth does not generate
increases in Primestar's revenue sufficient to offset its operating costs and
expenses, Comcast DBS anticipates that any such operating deficit would be
funded by Primestar's then existing external sources of liquidity (which may
include capital contributions from Comcast DBS and Primestar's other
partners), or by increases in the above-described fees charged by Primestar to
Comcast Satellite and other authorized distributors.
For the nine and three months ended September 30, 1997 and 1996, the
Companies' losses before equity in net loss (income) of Primestar and fixed
charges (interest expense on notes payable to affiliate) were $11.8 million,
$10.4 million, $3.2 million and $3.8 million, respectively. Such losses were
not adequate to cover the Companies' fixed charges of $11.5 million, $5.4
million, $4.3 million and $2.1 million for the nine and three months ended
September 30, 1997 and 1996, respectively. The inadequacy of such losses to
cover fixed charges is primarily due to the substantial non-cash charges for
depreciation and amortization expense during such periods.
F-145
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
Summarized combined financial information for the Companies for the three
years ended December 31, 1996 is as follows (dollars in millions, "NM" denotes
percentage is not meaningful):
<TABLE>
<CAPTION>
YEAR ENDED INCREASE/
DECEMBER 31, (DECREASE)
-------------- ------------
1996 1995 $ %
------ ------ ----- -----
<S> <C> <C> <C> <C>
Service income................................. $ 65.6 $ 27.7 $37.9 NM %
Operating, selling, general and administrative
expenses...................................... 62.0 33.8 28.2 83.4
------ ------
Operating income (loss) before depreciation and
amortization (a).............................. 3.6 (6.1) 9.7 NM
Depreciation and amortization.................. 18.0 6.9 11.1 NM
------ ------
Operating loss................................. (14.4) (13.0) 1.4 10.8
Interest expense on notes payable to
affiliate..................................... 8.4 3.2 5.2 NM
Investment income and other.................... (0.1) (0.1) -- --
Equity in net loss of Primestar................ 1.7 4.4 (2.7) (61.4)
------ ------
Net loss....................................... $(24.4) $(20.5) $ 3.9 19.0 %
====== ======
</TABLE>
- --------
(a) See footnote (1) to table appearing under Nine Months Ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, INCREASE / (DECREASE)
-------------- ----------------------
1995 1994 $ %
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Service income........................ $ 27.7 $ 4.4 $ 23.3 NM%
Operating, selling, general and admin-
istrative expenses................... 33.8 7.2 26.6 NM
------ ------
Operating loss before depreciation and
amortization (a)..................... (6.1) (2.8) 3.3 NM
Depreciation and amortization......... 6.9 2.9 4.0 NM
------ ------
Operating loss........................ (13.0) (5.7) 7.3 NM
Interest expense on notes payable to
affiliate............................ 3.2 -- 3.2 NM
Investment income and other........... (0.1) (0.1) -- --
Equity in net loss of Primestar....... 4.4 5.8 (1.4) (24.1)
------ ------
Net loss.............................. $(20.5) $(11.4) $ 9.1 79.8%
====== ======
</TABLE>
- --------
(a) See footnote (1) to table appearing under Nine Months Ended September 30,
1997 and 1996.
During the years ended December 31, 1996, 1995 and 1994, (i) Comcast
Satellite's annual subscriber churn rate (which represents the annual number
of subscriber terminations divided by the average number of subscribers during
the period) was 34.2%, 24.4% and 20.3%, respectively, and (ii) the average
subscriber life implied by such subscriber churn rate was 2.9 years, 4.1 years
and 4.9 years, respectively. Comcast Satellite experienced a higher rate of
subscriber churn in 1996, as compared to prior years. Comcast Satellite
believes that the higher 1996 churn rate was primarily attributable to the
fact that subscribers were allowed to initiate service at discounted rates
under promotional activities targeted at subscriber growth. A significant
number of customers added as a result of these promotional activities were
eventually terminated after their accounts became delinquent.
As of December 31, 1996, 1995 and 1994, Comcast Satellite had subscribers of
121,000, 54,000 and 12,000, respectively. Increases in the Comcast Satellite's
service income and operating, selling, general and administrative expenses, as
described below, are primarily related to such growth in subscribers.
F-146
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONCLUDED)
Of the $37.9 million increase in service income from 1995 to 1996, $31.5
million is attributable to subscriber growth, $1.1 million is attributable to
changes in rates, $3.2 million is attributable to the growth in pay-per-view
revenues and the remaining increase of $2.1 million is principally related to
the growth in installation revenues. Of the $23.3 million increase in service
income from 1994 to 1995, $13.6 million is attributable to subscriber growth,
$0.7 million is attributable to changes in rates, $1.5 million is attributable
to the growth in pay-per-view revenues and the remaining increase of $7.5
million is principally related to the growth in installation revenues.
Of the $28.2 million increase in operating, selling, general and
administrative expenses from 1995 to 1996, $16.9 million is attributable to
increases in the costs of programming and other services purchased from
Primestar, principally as a result of subscriber growth, $6.3 million is
attributable to increased marketing expenses incurred in an effort to increase
subscribers and the remaining increase of $5.0 million is attributable to
increases in the cost of labor and other volume related expenses. Of the $26.6
million increase in operating, selling, general and administrative expenses
from 1994 to 1995, $9.9 million is attributable to increases in the costs of
programming and other services purchased from Primestar, principally as a
result of subscriber growth, $6.4 million is attributable to increased
marketing expenses incurred in an effort to increase subscribers and the
remaining increase of $10.3 million is attributable to increases in the cost of
labor and other volume related expenses.
During the years ended December 31, 1996, 1995 and 1994, expenses relating to
programming and other services purchased from Primestar were $28.3 million,
$11.4 million and $1.5 million, respectively. Under cost-sharing and cost-
reimbursement arrangements with Comcast, Comcast Satellite incurred expenses of
$1.6 million, $1.4 million and $0.2 million in 1996, 1995 and 1994,
respectively.
The respective $11.1 million and $4.0 million increases in depreciation and
amortization expense from 1995 to 1996 and from 1994 to 1995 are primarily the
result of capital expenditures relating to Comcast Satellite's satellite
reception equipment and subscriber installation costs.
The respective $5.2 million and $3.2 million increases in interest expense on
notes payable to affiliate from 1995 to 1996 and from 1994 to 1995 are the
result of increases in amounts borrowed under the Notes.
The Companies' proportionate share of Primestar's net loss decreased by $2.7
million and $1.4 million from 1995 to 1996 and from 1994 to 1995, respectively.
Such decreases are attributable to decreases in Primestar's net loss.
For the years ended December 31, 1996 and 1995, the Companies' losses before
equity in net loss of Primestar and fixed charges (interest expense on notes
payable to affiliate) were $14.3 million and $13.0 million, respectively. Such
losses were not adequate to cover the Companies' fixed charges of $8.4 million
and $3.2 million for the years ended December 31, 1996 and 1995, respectively.
The inadequacy of such losses to cover fixed charges is primarily due to the
substantial non-cash charges for depreciation and amortization expense in 1996
and 1995 and the Companies' operating loss before depreciation and amortization
in 1995.
----------------
The Company believes that its losses will not significantly affect the
performance of its normal business activities because of its ability to obtain
financing from Comcast and the Comcast Subsidiary and its ability to generate
operating income before depreciation and amortization.
The Companies' believe that their operations are not materially affected by
inflation.
F-147
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Comcast Satellite Communications, Inc. and Comcast DBS, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying combined balance sheet of Comcast Satellite
Communications, Inc. and Comcast DBS, Inc. (wholly owned subsidiaries of
Comcast Corporation) as of December 31, 1996 and 1995, and the related
combined statements of operations, stockholder's (deficiency) equity and of
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
PRIMESTAR Partners L.P. ("Primestar"), Comcast DBS, Inc.'s investment which is
accounted for under the equity method. Comcast DBS, Inc.'s equity of
$22,120,000 and $20,473,000 in Primestar's accumulated losses at December 31,
1996 and 1995, respectively, and of $1,647,000, $4,385,000 and $5,840,000 in
Primestar's net loss for the years ended December 31, 1996, 1995 and 1994,
respectively, are included in the accompanying combined financial statements.
The financial statements of Primestar were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included in the accompanying combined financial statements for
Primestar as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, is based solely on the report of such
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
combined financial statements present fairly, in all material respects, the
combined financial position of Comcast Satellite Communications, Inc. and
Comcast DBS, Inc. as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
August 22, 1997
F-148
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 5,956 $ --
Accounts receivable, less allowance for doubtful accounts
of $887 and $654........................................ 2,807 1,824
Other current assets..................................... 843 3,274
Due from affiliates...................................... 99 --
-------- --------
Total current assets................................... 9,705 5,098
-------- --------
Investment in Primestar.................................... 10,340 5,407
-------- --------
Property and equipment..................................... 93,726 42,859
Accumulated depreciation................................. (17,052) (5,957)
-------- --------
Property and equipment, net.............................. 76,674 36,902
-------- --------
Subscriber installation costs.............................. 27,205 12,159
Accumulated amortization................................. (7,473) (2,707)
-------- --------
Subscriber installation costs, net....................... 19,732 9,452
-------- --------
$116,451 $ 56,859
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses.................... $ 24,376 $ 10,339
Accrued interest on notes payable to affiliate........... 461 3,174
Due to affiliates........................................ -- 47
-------- --------
Total current liabilities.............................. 24,837 13,560
-------- --------
Notes payable to affiliate................................. 131,471 58,800
-------- --------
Commitments and Contingencies
Stockholder's Deficiency
Common stock............................................. -- --
Additional capital....................................... 31,633 31,623
Accumulated deficit...................................... (71,490) (47,124)
-------- --------
Total stockholder's deficiency......................... (39,857) (15,501)
-------- --------
$116,451 $ 56,859
======== ========
</TABLE>
See notes to combined financial statements.
F-149
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service income................................... $ 65,574 $ 27,726 $ 4,394
-------- -------- --------
Costs and expenses
Operating...................................... 40,241 19,755 2,773
Selling, general and administrative............ 21,780 14,031 4,410
Depreciation and amortization.................. 17,956 6,973 2,942
-------- -------- --------
79,977 40,759 10,125
-------- -------- --------
Operating loss................................... (14,403) (13,033) (5,731)
Other (income) expense
Interest expense on notes payable to affili-
ate........................................... 8,442 3,174 --
Investment income and other.................... (126) (68) (157)
Equity in net loss of Primestar................ 1,647 4,385 5,840
-------- -------- --------
9,963 7,491 5,683
-------- -------- --------
Net loss......................................... $(24,366) $(20,524) $(11,414)
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-150
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net loss........................................ $(24,366) $(20,524) $(11,414)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 17,956 6,973 2,942
Equity in net loss of Primestar................ 1,647 4,385 5,840
-------- -------- --------
(4,763) (9,166) (2,632)
Increase in accounts receivable................ (983) (1,494) (278)
Decrease (increase) in other current assets.... 2,431 (3,244) (6)
Increase in accounts payable and accrued
expenses...................................... 14,037 8,460 1,590
(Decrease) increase in accrued interest on
notes payable to affiliate.................... (2,713) 3,174 --
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. 8,009 (2,270) (1,326)
-------- -------- --------
Financing activities
Proceeds from notes payable to affiliate........ 72,671 46,800 12,000
Capital contributions........................... 10 7,092 14,255
Return of capital............................... -- -- (15,096)
Net transactions with affiliates................ (146) (2,449) 268
-------- -------- --------
Net cash provided by financing activities.... 72,535 51,443 11,427
-------- -------- --------
Investing activities
Capital contributions to Primestar.............. (6,580) (7,099) (8,207)
Repayment of loan by Primestar.................. -- -- 8,945
Capital expenditures............................ (52,962) (32,692) (9,493)
Subscriber installation costs................... (15,046) (9,501) (1,613)
Decrease in short-term investments.............. -- -- 323
-------- -------- --------
Net cash used in investing activities........ (74,588) (49,292) (10,045)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 5,956 (119) 56
Cash and cash equivalents, beginning of year..... -- 119 63
-------- -------- --------
Cash and cash equivalents, end of year........... $ 5,956 $ -- $ 119
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-151
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF STOCKHOLDER'S (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1994...................... $ 24,372 $(15,186) $ 9,186
Net loss...................................... -- (11,414) (11,414)
Capital contributions......................... 15,255 -- 15,255
Return of capital............................. (15,096) -- (15,096)
-------- -------- --------
Balance, December 31, 1994.................... 24,531 (26,600) (2,069)
Net loss...................................... -- (20,524) (20,524)
Capital contributions......................... 7,092 -- 7,092
-------- -------- --------
Balance, December 31, 1995.................... 31,623 (47,124) (15,501)
Net loss...................................... -- (24,366) (24,366)
Capital contributions......................... 10 -- 10
-------- -------- --------
Balance, December 31, 1996.................... $ 31,633 $(71,490) $(39,857)
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-152
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1.BUSINESS
Comcast Satellite Communications, Inc. ("Comcast Satellite") and Comcast
DBS, Inc. ("Comcast DBS"), Delaware corporations, are wholly owned
subsidiaries of Comcast Corporation ("Comcast"). Comcast Satellite is
engaged in the distribution of direct broadcast satellite ("DBS") services
to subscribers within specified areas of 19 states in the continental
United States. Comcast DBS' sole asset is its 10.4% general and limited
partnership interest in PRIMESTAR Partners L.P. ("Primestar") (see Note 4),
a Delaware limited partnership principally engaged in the business of
acquiring, originating and/or providing television programming services
delivered by satellite through a network of distributors throughout the
continental United States. Comcast Satellite provided DBS services, through
a distributorship arrangement with Primestar, to approximately 121,000
subscribers as of December 31, 1996.
2. RESTRUCTURING OF PRIMESTAR'S OPERATIONS
In June 1997, Comcast and Comcast DBS entered into a binding letter
agreement (the "Restructuring Agreement") with Primestar and the affiliates
of each of the other partners of Primestar, including TCI Satellite
Entertainment, Inc. ("TSAT"), a publicly-traded company. The Restructuring
Agreement sets forth the principal terms and conditions of a proposed
transaction (the "Restructuring Transaction"), through which Comcast
Satellite's DBS operations, Primestar and the Primestar-related
distribution businesses of the other partners of Primestar will be
consolidated into a newly-formed publicly-traded company ("New Primestar").
In connection with the Restructuring Transaction, TSAT will become a wholly
owned subsidiary of New Primestar.
New Primestar will acquire the Primestar partnership interests, subscribers
and related assets, as applicable, of the parties to the Restructuring
Transaction, in exchange for (i) cash, (ii) shares of Series A Common Stock
of New Primestar and (iii) shares of Series C Common Stock of New
Primestar, in each case in an amount determined pursuant to the
Restructuring Agreement. Comcast will continue to market and support the
Primestar programming services on an agency basis after consummation of the
Restructuring Transaction; however, the terms of such arrangement have not
yet been determined. Under the terms of the Restructuring Agreement, upon
closing of the Restructuring Transaction, Comcast is expected to receive
approximately $75 million in cash and to own approximately 10% of New
Primestar common equity, subject to adjustments based on the number of
subscribers, inventory amounts and other factors.
In June 1997, Primestar entered into an agreement with The News Corporation
Limited, MCI Telecommunications Corporation and American Sky Broadcasting
LLC ("ASkyB"), pursuant to which Primestar (or, under certain
circumstances, New Primestar) will acquire certain assets relating to a
high-power, DBS business. In exchange for such assets, ASkyB will receive
non-voting securities of New Primestar that will be convertible into non-
voting common stock of New Primestar and, accordingly, will reduce
Comcast's common equity interest in New Primestar to approximately 7% on a
fully diluted basis.
These transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to receipt of
all necessary governmental and regulatory approvals, including the approval
of the Federal Communications Commission. There can be no assurance that
such approvals will be obtained.
F-153
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of Comcast Satellite
and Comcast DBS. All significant intercompany accounts and transactions
among the combined entities have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts discussed in these notes to combined
financial statements have been determined by Comcast Satellite and Comcast
DBS using available market information and appropriate methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. The estimates discussed herein are not
necessarily indicative of the amounts that Comcast Satellite and Comcast
DBS could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. Such fair value estimates are based on
pertinent information available to management as of December 31, 1996 and
1995, and have not been comprehensively revalued for purposes of these
combined financial statements since such dates.
A reasonable estimate of fair value of the notes payable to affiliate and
the amounts due to/from affiliates in the combined balance sheet is not
practicable to obtain because of the related party nature of these items
and the lack of quoted market prices.
Cash Equivalents
Cash equivalents principally consist of money market funds with maturities
of three months or less when purchased. The carrying amounts of Comcast
Satellite's cash equivalents, classified as available for sale securities,
approximate their fair values.
Investment
Comcast DBS' investment in Primestar is accounted for under the equity
method based on Comcast DBS' general partnership interest. Under the equity
method, Comcast DBS' investment in Primestar is recorded at original cost
and adjusted periodically to recognize Comcast DBS' proportionate share of
Primestar's net losses after the date of investment, additional
contributions made and dividends received.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over estimated useful lives as follows:
<TABLE>
<S> <C>
Satellite reception equipment.................................. 6 years
Other equipment................................................ 4 - 8 years
</TABLE>
F-154
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Improvements that extend asset lives are capitalized; other repairs and
maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets sold or retired are removed
from the accounts and the gain or loss on disposition is recognized as a
component of depreciation expense.
Subscriber Installation Costs
Subscriber installation costs (principally labor) are amortized on a
straight-line basis over the estimated average life of a subscriber of 4
years and are capitalized based on Comcast Satellite's net subscriber
additions.
Valuation of Long-Lived Assets
Comcast Satellite periodically evaluates the recoverability of its long-
lived assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Monthly programming and equipment rental revenue is recognized in the
period that services are delivered. Credit risk is managed by disconnecting
services to customers who are delinquent. Installation revenue is
recognized in the period the installation services are provided to the
extent of direct selling costs. To date, direct selling costs have exceeded
installation revenue.
Marketing and Direct Selling Costs
Marketing and direct selling costs are expensed as incurred.
Postretirement and Postemployment Benefits
The estimated costs of retiree benefits and benefits for former or inactive
employees, after employment but before retirement, are accrued and recorded
as a charge to operations during the years the employees provide services.
Comcast Satellite's retiree benefit obligation is unfunded and all benefits
are provided and paid by Comcast. Accordingly, Comcast Satellite's
liability for these costs is included in due to/from affiliates.
Income Taxes
Comcast Satellite and Comcast DBS recognize deferred tax assets and
liabilities for temporary differences between the financial reporting basis
and the tax basis of their assets and liabilities and expected benefits of
utilizing net operating loss carryforwards. The impact on deferred taxes of
changes in tax rates and laws, if any, applied to the years during which
temporary differences are expected to be settled, are reflected in the
combined financial statements in the period of enactment.
F-155
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. INVESTMENT IN PRIMESTAR
The original cost of Comcast DBS' investment in Primestar was $32.4 million
and $25.8 million as of December 31, 1996 and 1995, respectively.
Summarized financial information for Primestar for the years ended December
31, 1996, 1995 and 1994 is presented below (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues.................................... $412,999 $180,595 $27,841
Operating, selling, general and administra-
tive expenses.............................. 426,561 216,100 78,175
Depreciation and amortization............... 3,261 2,890 2,700
Operating loss.............................. (16,823) (38,395) (53,034)
Net loss (1)................................ (15,702) (42,037) (55,716)
COMCAST DBS' EQUITY IN NET LOSS............... (1,647) (4,385) (5,840)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
FINANCIAL POSITION
Current assets.......................................... $137,048 $ 72,638
Noncurrent assets....................................... 551,225 443,324
Current liabilities..................................... 584,907 37,911
Noncurrent liabilities.................................. 4,227 426,210
</TABLE>
--------
(1) Net loss also represents loss from continuing operations before
extraordinary items and cumulative effect of changes in accounting
principle.
Primestar has suffered recurring losses from operations and its 1997
operating budget reflects cash requirements which are in excess of the
current aggregate capital commitment of its partners. Primestar's credit
facility becomes due on September 30, 1998. Presently, the partners
determine the amount of additional capital commitments to Primestar on a
quarterly basis. Primestar is currently negotiating to refinance its credit
facility and Primestar's management believes either such refinancing will
occur prior to its expiration or that the due date of the credit facility
will be extended until refinancing occurs. To the extent not earlier
refinanced by Primestar, New Primestar will be required to refinance the
Primestar Credit Facility. There can be no assurance that Primestar or New
Primestar will be able to refinance the credit facility. Management of
Comcast DBS does not believe that these matters result in the impairment of
its investment in Primestar as of December 31, 1996.
Under the Primestar limited partnership agreement, Comcast DBS has agreed
to fund its share of any capital contributions and/or loans to Primestar
that might be agreed upon from time to time by the partners of Primestar.
Additionally, Comcast DBS, as a general partner of Primestar, is liable as
a matter of partnership law for all debts of Primestar in the event the
liabilities of Primestar were to exceed its assets. Primestar has
contingent liabilities related to legal and other matters arising in the
ordinary course of its business. Management of Primestar is unable to
assess the impact, if any, of such matters on Primestar's financial
position, results of operations or liquidity.
For the year ended December 31, 1994, investment income and other includes
$127,000 of interest income on an $8.9 million loan from Comcast DBS to
Primestar, which was repaid in 1994.
During the six months ended June 30, 1997, Comcast DBS contributed $3.0
million to Primestar.
As of June 30, 1997, indirect wholly owned subsidiaries of Comcast had
unused irrevocable standby letters of credit totaling $98.1 million to
cover potential fundings to Primestar.
F-156
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5.NOTES PAYABLE TO AFFILIATES
As of December 31, 1996 and 1995, notes payable to affiliate consist of the
following notes payable to a subsidiary of Comcast (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
-------- -------
<S> <C> <C>
Comcast Satellite Revolving Credit Note, interest at
10.00%, payable on demand............................... $124,900 $58,800
Comcast DBS Revolving Credit Note, interest at 9.50%,
payable on demand....................................... 6,571 --
-------- -------
$131,471 $58,800
======== =======
</TABLE>
Maximum available borrowings under the Comcast Satellite Revolving Credit
Note and the Comcast DBS Revolving Credit Note are $200.0 million and $20.0
million, respectively. The subsidiary of Comcast has agreed to not demand
payment of the Revolving Credit Notes until after December 31, 1997.
Accordingly, the Revolving Credit Notes have been classified as long-term
in the combined balance sheet.
During the six months ended June 30, 1997, Comcast Satellite and Comcast
DBS borrowed $30.0 million and $3.0 million, respectively, under their
respective Revolving Credit Notes.
6.CAPITAL STRUCTURE
As of December 31, 1996 and 1995, Comcast Satellite's common stock in the
combined balance sheet consists of 1,000 shares of $.01 par value common
stock authorized, with 100 shares issued and outstanding.
As of December 31, 1996 and 1995, Comcast DBS' common stock in the combined
balance sheet consists of 1,000 shares of $.01 par value common stock
authorized, with 100 shares issued and outstanding.
7.RELATED PARTY TRANSACTIONS
Comcast Satellite purchases certain services, including insurance and
employee benefits, from Comcast under cost-sharing arrangements on terms
that reflect Comcast's actual cost. Comcast Satellite reimburses Comcast
for certain other costs under cost-reimbursement arrangements. Under all of
these arrangements, Comcast Satellite incurred expenses of $1.6 million,
$1.4 million and $0.2 million in 1996, 1995 and 1994, respectively.
Comcast Satellite purchases programming services from Primestar for a fee
based upon the number of subscribers receiving programming services. In
addition, Primestar arranges for satellite capacity and uplink services and
provides national marketing and administrative support services. During the
years ended December 31, 1996, 1995 and 1994, expenses relating to such
services were $28.3 million, $11.4 million and $1.5 million, respectively.
As of December 31, 1996 and 1995, accounts payable and accrued expenses
include $7.2 million and $5.0 million, respectively, payable to Primestar
for such services.
8.INCOME TAXES
Comcast Satellite and Comcast DBS join with Comcast in filing a
consolidated federal income tax return. Comcast allocates income tax
expense or benefit to Comcast Satellite and Comcast DBS as if they were
filing separate federal income tax returns. Subsequent to the initial
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1993, tax benefits
F-157
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
from both losses and tax credits are made available to Comcast Satellite
and Comcast DBS as they are able to realize such benefits on a separate
return basis. Comcast Satellite and Comcast DBS are required to pay Comcast
for income taxes an amount equal to the amount of tax they would pay if
they filed separate tax returns.
The effective income tax benefit of Comcast Satellite and Comcast DBS
differs from the statutory amount because of the effect of the following
item (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal tax benefit at statutory rate........... $(8,528) $(7,183) $(3,995)
State income tax benefit, net of federal bene-
fit............................................ (532) (1,292) (616)
Change in valuation allowance................... 9,060 8,475 4,611
------- ------- -------
Income tax benefit.............................. $ -- $ -- $ --
======= ======= =======
</TABLE>
Significant components of Comcast Satellite's and Comcast DBS' net deferred
tax assets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets, principally net operating loss
carryforwards........................................ $ 24,320 $ 15,260
Less valuation allowance.............................. (24,320) (15,260)
-------- --------
Net deferred tax assets............................... $ -- $ --
======== ========
</TABLE>
9. STATEMENT OF CASH FLOWS--SUPPLEMENTAL INFORMATION
Comcast Satellite made cash payments for interest on its Revolving Credit
Note of $11.2 million in 1996 with the proceeds from a borrowing under such
note.
10. COMMITMENTS AND CONTINGENCIES
Commitments
Minimum annual rental commitments for office space and equipment under
noncancelable operating leases are as follows (dollars in thousands):
<TABLE>
<S> <C>
1997.................................................................... $415
1998.................................................................... 424
1999.................................................................... 332
2000.................................................................... 16
</TABLE>
Rental expense of $224,000, $183,000 and $76,000 has been charged to
operations in 1996, 1995 and 1994, respectively.
Contingencies
Comcast Satellite is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect Comcast Satellite's financial position, results of
operations or liquidity.
F-158
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $ $ 5,956
Accounts receivable, less allowance for doubtful
accounts of $914 and $887........................ 5,911 2,807
Other current assets.............................. 913 843
Due from affiliates............................... 99
-------- --------
Total current assets............................ 6,824 9,705
-------- --------
Investment in Primestar............................. 9,122 10,340
-------- --------
Property and equipment.............................. 139,019 93,726
Accumulated depreciation.......................... (31,090) (17,052)
-------- --------
Property and equipment, net....................... 107,929 76,674
-------- --------
Subscriber installation costs....................... 38,175 27,205
Accumulated amortization.......................... (13,030) (7,473)
-------- --------
Subscriber installation costs, net................ 25,145 19,732
-------- --------
$149,020 $116,451
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses............. $ 29,856 $ 24,376
Accrued interest on notes payable to affiliate.... 11,942 461
Due to affiliates................................. 93
-------- --------
Total current liabilities....................... 41,891 24,837
-------- --------
Notes payable to affiliate.......................... 174,436 131,471
-------- --------
Commitments and contingencies
Stockholder's deficiency
Common stock...................................... -- --
Additional capital................................ 31,801 31,633
Accumulated deficit............................... (99,108) (71,490)
-------- --------
Total stockholder's deficiency.................. (67,307) (39,857)
-------- --------
$149,020 $116,451
======== ========
</TABLE>
See notes to condensed combined financial statements.
F-159
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1997 1996 1997 1996
-------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service income....................... $ 81,057 $ 44,932 $ 30,248 $ 17,179
-------- -------- --------- ---------
Costs and expenses
Operating.......................... 53,117 27,201 19,966 13,013
Selling, general and administra-
tive.............................. 18,709 15,345 6,223 3,462
Depreciation and amortization...... 21,248 12,889 7,331 4,557
-------- -------- --------- ---------
93,074 55,435 33,520 21,032
-------- -------- --------- ---------
Operating loss....................... (12,017) (10,503) (3,272) (3,853)
Other (income) expense
Interest expense on notes payable
to affiliate...................... 11,481 5,427 4,252 2,144
Investment income and other........ (232) (58) (83) (4)
Equity in net loss (income) of
Primestar......................... 4,352 657 1,291 (15)
-------- -------- --------- ---------
15,601 6,026 5,460 2,125
-------- -------- --------- ---------
Net loss............................. $(27,618) $(16,529) $ (8,732) $ (5,978)
======== ======== ========= =========
</TABLE>
See notes to condensed combined financial statements.
F-160
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
CONDENSED COMBINED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Operating activities
Net loss................................................. $(27,618) $(16,529)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 21,248 12,889
Equity in net loss of Primestar........................ 4,352 657
-------- --------
(2,018) (2,983)
Increase in accounts receivable........................ (3,104) (149)
(Increase) decrease in other current assets............ (70) 2,634
Increase in accounts payable and accrued expenses...... 5,480 3,327
Increase in accrued interest on notes payable to affil-
iate.................................................. 11,481 5,427
-------- --------
Net cash provided by operating activities............ 11,769 8,256
-------- --------
Financing activities
Proceeds from notes payable to affiliate................. 42,965 32,900
Capital contributions.................................... 168 5,537
Net transactions with affiliates......................... 192 137
-------- --------
Net cash provided by financing activities............ 43,325 38,574
-------- --------
Investing activities
Capital contributions to Primestar....................... (3,134) (5,537)
Capital expenditures..................................... (46,946) (30,680)
Subscriber installation costs............................ (10,970) (10,613)
-------- --------
Net cash used in investing activities................ (61,050) (46,830)
-------- --------
(Decrease) increase in cash and cash equivalents........... (5,956) --
Cash and cash equivalents, beginning of period............. 5,956 --
-------- --------
Cash and cash equivalents, end of period................... $ -- $ --
======== ========
</TABLE>
See notes to condensed combined financial statements.
F-161
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
CONDENSED COMBINED STATEMENT OF STOCKHOLDER'S DEFICIENCY (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, January 1, 1997...................... $31,633 $(71,490) $(39,857)
Net loss...................................... -- (27,618) (27,618)
Capital contributions......................... 168 -- 168
------- -------- --------
Balance, September 30, 1997................... $31,801 $(99,108) $(67,307)
======= ======== ========
</TABLE>
See notes to condensed combined financial statements.
F-162
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
QUARTER ENDED SEPTEMBER 30, 1997
1.CONDENSED COMBINED FINANCIAL STATEMENTS
The condensed combined balance sheet as of December 31, 1996 has been
condensed from the audited combined balance sheet as of that date. The
condensed combined balance sheet as of September 30, 1997, the condensed
combined statement of operations for the nine and three months ended
September 30, 1997 and 1996, the condensed combined statement of cash
flows for the nine months ended September 30, 1997 and 1996 and the
condensed combined statement of stockholder's deficiency for the nine
months ended September 30, 1997 have been prepared by Comcast Satellite
Communications, Inc. ("Comcast Satellite") and Comcast DBS, Inc. ("Comcast
DBS," and together with Comcast Satellite, the "Companies") and have not
been audited by the Companies' independent auditors. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows as of September 30, 1997 and for all periods
presented have been made.
Certain information and note disclosures normally included in the
Companies' annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These condensed combined financial statements should be read in
conjunction with the Companies' December 31, 1996 audited combined
financial statements. The results of operations for the periods ended
September 30, 1997 are not necessarily indicative of operating results for
the full year.
2.RESTRUCTURING OF PRIMESTAR'S OPERATIONS
Comcast Corporation ("Comcast"), the Companies' parent, and Comcast DBS
have entered into an agreement (the "Restructuring Agreement") with
PRIMESTAR Partners L.P. ("Primestar") and the affiliates of each of the
other partners of Primestar, including TCI Satellite Entertainment, Inc.
("TSAT"), a publicly-traded company. Primestar, in which Comcast DBS holds
a 10.4% general and limited partnership interest, is principally engaged
in the business of acquiring, originating and/or providing television
programming services delivered by satellite through a network of
distributors, including Comcast Satellite, throughout the continental
United States. The Restructuring Agreement sets forth the principal terms
and conditions of a proposed transaction (the "Restructuring
Transaction"), through which Comcast Satellite's direct broadcast
satellite ("DBS") operations, Primestar and the Primestar-related
distribution businesses of the other partners of Primestar will be
consolidated into a newly-formed company ("New Primestar"). Comcast
Satellite provided DBS services, through a distributorship arrangement
with Primestar, to 169,000 subscribers as of September 30, 1997.
New Primestar will acquire the Primestar partnership interests,
subscribers and related assets, as applicable, of the parties to the
Restructuring Transaction, in exchange for (i) cash (or assumption of debt
in lieu of cash consideration), (ii) shares of Series A Common Stock of
New Primestar and (iii) shares of Series C Common Stock of New Primestar,
in each case in an amount determined pursuant to the Restructuring
Agreement. Comcast will continue to have the right to market and support
the Primestar programming services on an agency basis after consummation
of the Restructuring Transaction; however, the terms of such arrangement
have not yet been determined. Under the terms of the Restructuring
Agreement, upon closing of the Restructuring Transaction, and based upon
the number of subscribers as of September 30, 1997 it is expected that New
PRIMESTAR will assume approximately $75 million of the Companies' debt,
and that Comcast would own approximately 10% of New Primestar common
equity, both subject to adjustments based on the number of subscribers,
inventory amounts and other factors.
F-163
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
QUARTER ENDED SEPTEMBER 30, 1997
In June 1997, Primestar entered into an agreement with The News
Corporation Limited, MCI Telecommunications Corporation and American Sky
Broadcasting LLC ("ASkyB"), pursuant to which Primestar (or, under certain
circumstances, New Primestar) will acquire certain assets relating to a
high-power, DBS business. In exchange for such assets, ASkyB will receive
non-voting securities of New Primestar that will be convertible into non-
voting common stock of New Primestar and, accordingly, will reduce
Comcast's common equity interest in New Primestar to approximately 7% on a
fully diluted basis, subject to adjustment.
These transactions are not conditioned on each other and may close
independently. They are expected to close in 1998, subject to receipt of
all necessary governmental and regulatory approvals, including the
approval of the Federal Communications Commission. There can be no
assurance that such approvals will be obtained.
3.INVESTMENT IN PRIMESTAR
The original cost of Comcast DBS' investment in Primestar was $35.6
million and $32.4 million as of September 30, 1997 and December 31, 1996,
respectively. Summarized financial information for Primestar for the nine
and three months ended September 30, 1997 and 1996 is presented below
(dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues.......................... $450,973 $294,634 $158,804 $108,653
Operating, selling, general and
administrative expenses.......... 476,547 299,294 164,337 107,635
Depreciation and amortization..... 3,150 2,377 1,192 751
Operating (loss) income........... (28,724) (7,037) (6,725) 267
Net (loss) income (1)............. (40,111) (6,208) (10,900) 317
COMCAST DBS' EQUITY IN NET (LOSS)
Income............................. (4,352) (657) (1,291) 15
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
FINANCIAL POSITION
Current assets.............................................. $160,014
Noncurrent assets........................................... 560,238
Current liabilities......................................... 628,767
Noncurrent liabilities...................................... 4,023
</TABLE>
--------
(1) Net loss also represents loss from continuing operations before
extraordinary items and cumulative effect of changes in accounting
principle.
Primestar has suffered recurring losses from operations and its 1997
operating budget reflects cash requirements which are in excess of the
current aggregate capital commitment of its partners. Primestar's credit
facility becomes due on September 30, 1998. Presently, the partners
determine the amount of additional capital commitments to Primestar on a
quarterly basis. Primestar is currently negotiating to refinance its
credit facility and Primestar's management believes either such
refinancing will occur prior to its expiration or that the due date of the
credit facility will be extended until refinancing occurs. To the
F-164
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
QUARTER ENDED SEPTEMBER 30, 1997
extent not earlier refinanced by Primestar, New Primestar will be required
to refinance the Primestar Credit Facility. There can be no assurance that
Primestar or New Primestar will be able to refinance the credit facility.
Management of Comcast DBS does not believe that these matters result in
the impairment of its investment in Primestar as of September 30, 1997.
Under the Primestar limited partnership agreement, Comcast DBS has agreed
to fund its share of any capital contributions and/or loans to Primestar
that might be agreed upon from time to time by the partners of Primestar.
Additionally, Comcast DBS, as a general partner of Primestar, is liable as
a matter of partnership law for all debts of Primestar in the event the
liabilities of Primestar were to exceed its assets. Primestar has
contingent liabilities related to legal and other matters arising in the
ordinary course of its business. Management of Primestar is unable to
assess the impact, if any, of such matters on Primestar's financial
position, results of operations or liquidity.
As of September 30, 1997, indirect wholly owned subsidiaries of Comcast
had unused irrevocable standby letters of credit totaling $98.1 million to
cover potential fundings to Primestar.
4.NOTES PAYABLE TO AFFILIATE
As of September 30, 1997 and December 31, 1996, notes payable to affiliate
consist of the following notes payable to a subsidiary of Comcast (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Comcast Satellite Revolving Credit Note,
interest at 10.00%, payable on demand......... $164,900 $124,900
Comcast DBS Revolving Credit Note, interest at
9.50%, payable on demand...................... 9,536 6,571
-------- --------
$174,436 $131,471
======== ========
</TABLE>
In October 1997 and November 1997, Comcast Satellite borrowed an
additional $18.0 million from the Comcast Subsidiary under the Comcast
Satellite Revolving Credit Note. Maximum available borrowings under the
Comcast Satellite Revolving Credit Note and the Comcast DBS Revolving
Credit Note are $200.0 million and $20.0 million, respectively. As the
subsidiary of Comcast will not demand payment of the Revolving Credit
Notes until after September 30, 1998, the Revolving Credit Notes have been
classified as long-term in the condensed combined balance sheet.
5.RELATED PARTY TRANSACTIONS
Comcast Satellite purchases certain services, including insurance and
employee benefits, from Comcast under cost-sharing arrangements on terms
that reflect Comcast's actual cost. Comcast Satellite reimburses Comcast
for certain other costs under cost-reimbursement arrangements. Under all
of these arrangements, Comcast Satellite incurred expenses of $1.8
million, $1.1 million, $0.7 million and $0.4 million during the nine and
three months ended September 30, 1997 and 1996, respectively.
Comcast Satellite purchases programming services from Primestar for a fee
based upon the number of subscribers receiving programming services. In
addition, Primestar arranges for satellite capacity and uplink services
and provides national marketing and administrative support services.
During the nine and three months ended September 30, 1997 and 1996,
expenses relating to such services were $37.2 million, $19.2 million,
$13.9 million and $7.6 million, respectively. As of September 30, 1997 and
December 31,
F-165
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
QUARTER ENDED SEPTEMBER 30, 1997
1996, accounts payable and accrued expenses include $11.8 million and $7.2
million, respectively, payable to Primestar for such services.
6.CONTINGENCIES
Comcast Satellite is subject to legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect Comcast Satellite's financial position, results of
operations or liquidity.
F-166
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the
Company's (as defined in the Notes to Combined Financial Statements)
historical combined financial position as of September 30, 1997 and December
31, 1996, 1995, 1994, 1993 and 1992 and the combined results of operations for
the nine months ended September 30, 1997 and 1996, the periods November 15,
1996 to December 31, 1996 and January 1, 1996 to November 14, 1996 and the
years ended December 31, 1995, 1994, 1993 and 1992. The summary financial data
as of September 30, 1997 and for the nine months then ended are unaudited;
however, in the opinion of management, such unaudited financial data reflect
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the financial information for such period. Summary
financial data as of September 30, 1997 and December 31, 1996, 1995 and 1994
and for the nine months ended September 30, 1997 and 1996, the periods
November 15, 1996 to December 31, 1996 and January 1, 1996 to November 14,
1996 and the years ended December 31, 1995 and 1994 are derived from the
combined financial statements of the Company for the corresponding periods.
The historical data for the other periods presented has been derived from
unaudited information. The following information should be read in conjunction
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and is qualified in its entirety to the historical
combined financial statements, including the notes thereto, of the Company.
The combined financial statements have been prepared giving effect to the
merger of MediaOne, Inc. ("MediaOne") with and into U S WEST, Inc. ("U S
WEST") on November 15, 1996 (the "Merger"). The portion of the aggregate
purchase price attributed to the Company is based upon the estimated fair
value of the underlying investment in PrimeStar Partners L.P. ("PrimeStar")
and the related direct broadcast satellite ("DBS") operations.
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- --------------------------------------------
PERIOD PERIOD
NOVEMBER JANUARY 1
NINE MONTHS ENDED 15 TO TO
SEPTEMBER 30, DECEMBER NOVEMBER YEARS ENDED DECEMBER 31,
---------------------- 31, 14, ----------------------------------
1997 1996 1996 1996 1995 1994 1993 1992
--------- ----------- --------- --------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary Statement of Operations Data:
Revenues.................................. $ 77,955 $48,464 $10,561 $58,318 $37,050 $ 6,030 $ 1,755 $ 1,045
Operating, Selling, General and
Administrative Expense................... 65,591 41,412 9,804 50,303 32,704 8,059 2,759 2,520
Depreciation and Amortization............. 18,875 9,778 2,859 11,881 7,356 1,844 391 232
-------- ------- ------- ------- ------- ------- ------- -------
Operating Loss.......................... (6,511) (2,726) (2,102) (3,866) (3,010) (3,873) (1,395) (1,707)
Equity in Net Loss of PrimeStar........... 4,886 646 187 1,643 4,372 5,794 3,661 1,900
Other Expense (Income), Net............... (1,333) 4,009 (89) 4,248 1,535 (1,806) (1,101) (839)
-------- ------- ------- ------- ------- ------- ------- -------
Net Loss................................ $(10,064) $(7,381) $(2,200) $(9,757) $(8,917) $(7,861) $(3,955) $(2,768)
- --------------------------------------------------
======== ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------- ---------------------------------
YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------
1997 1996 1995 1994 1993 1992
------------- -------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Summary Balance Sheet
Data:
Property, Plant and
Equipment, Net........ $154,398 $132,636 $73,607 $21,460 $ 2,586 $2,359
Investment in
PrimeStar............. 31,984 33,931 5,391 2,674 9,222 --
Total Assets........... 257,237 230,136 104,800 39,429 18,496 6,918
Due to Parent.......... 209,882 178,698 115,143 50,873 29,346 13,836
Group Equity
(Deficiency).......... (12,264) (2,200) (27,825) (18,908) (11,047) (7,092)
</TABLE>
F-167
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Certain financial information concerning the Company's (as defined in the
Notes to Combined Financial Statements) operations is presented below. For
purposes of this table, the operations of the Predecessor Corporation (as
defined in the Notes to Combined Financial Statements) for the period January
1, 1996 to November 14, 1996 have been combined with those of the Successor
Corporation (as defined in the Notes to Combined Financial Statements) for the
period November 15, 1996 to December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Programming and Equipment.. $ 70,303 $ 40,636 $ 57,490 $ 26,356 $ 3,498
Installation............... 7,652 7,828 11,389 10,694 2,532
-------- -------- -------- -------- --------
Total Revenue............ 77,955 48,464 68,879 37,050 6,030
-------- -------- -------- -------- --------
Costs and Expenses:
Programming, Satellite,
National Marketing and
Distribution Charges from
PrimeStar................. 40,985 25,063 35,644 16,759 2,173
Charges from Parent........ 446 696 875 412 264
Other Operating............ 6,953 4,186 6,265 2,986 1,496
Other Selling, General and
Administrative............ 17,207 11,467 17,323 12,547 4,126
-------- -------- -------- -------- --------
65,591 41,412 60,107 32,704 8,059
-------- -------- -------- -------- --------
Operating Cash Flow (Deficit)
(1)......................... 12,364 7,052 8,772 4,346 (2,029)
Depreciation and
Amortization................ 18,875 9,778 14,740 7,356 1,844
-------- -------- -------- -------- --------
Operating Loss............... (6,511) (2,726) (5,968) (3,010) (3,873)
-------- -------- -------- -------- --------
Other Expense:
Interest to Parent......... 4,591 8,868 11,914 7,464 2,974
Equity in Net Loss of
PrimeStar................. 4,886 646 1,830 4,372 5,794
Other...................... 123 62 87 16 461
-------- -------- -------- -------- --------
Total.................... 9,600 9,576 13,831 11,852 9,229
-------- -------- -------- -------- --------
Loss Before Income Taxes..... $(16,111) $(12,302) $(19,799) $(14,862) $(13,102)
======== ======== ======== ======== ========
</TABLE>
- --------
(1) Operating Cash Flow is a commonly used measure of value and borrowing
capacity within the Company's industry, and is not intended to be a
substitute for a measure of performance or as an alternative to cash flows
from operating activities (measured in accordance with generally accepted
accounting principles). 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 Liquidity and Capital Resources below and
the combined statements of cash flows included in the accompanying
combined financial statements of the Company.
General
The Company distributes the direct broadcast satellite business ("DBS")
services of PrimeStar (as defined in the Notes to Combined Financial
Statements). PrimeStar acts as a wholesaler of DBS services nationwide,
providing
F-168
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
programming and satellite transmission services to local distributors,
including the Company, who in turn sell to, service and collect monthly fees
from subscribers. In addition, the Company leases equipment to subscribers as
part of its monthly billing for service. The Company served approximately
166,000 of PrimeStar's 1,815,000 subscribers as of September 30, 1997. In
addition, the Company holds MediaOne's investment in PrimeStar.
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company and should be
read in conjunction with the accompanying combined financial statements of the
Company.
Since July 1994, when PrimeStar completed its conversion from an analog to a
digital signal, the Company has experienced significant growth in subscribers
and thus, the number of authorized integrated receiver descramblers in service
("Authorized Units"). In this regard, the number of Authorized Units was
193,900, 162,500, 90,200, and 24,400 at September 30, 1997, December 31, 1996,
1995 and 1994, respectively. To the extent not otherwise described, increases
in the Company's revenue and operating, selling, general and administrative
expenses, as detailed below, are primarily related to such growth in
Authorized Units. The Company is operating in an increasingly competitive
environment. No assurance can be given that such increasing competition will
not adversely affect the Company's ability to continue to achieve significant
growth in Authorized Units and revenue.
Summary of Operations
The Company reported net losses of $10,064,000, $7,381,000, $11,957,000,
$8,917,000 and $7,861,000 during the nine months ended September 30, 1997 and
1996, and the years ended December 31, 1996, 1995 and 1994, respectively. The
Company believes that improvements in its results of operations are largely
dependent upon its ability to increase its subscriber base, and effectively
manage its pricing structure and costs. No assurance can be given that any
such improvements will occur.
The Years Ended December 31, 1996, 1995 and 1994
For purposes of this discussion, the twelve months ended December 31, 1996
refers to the Predecessor Corporation for the period January 1, 1996 to
November 14, 1996 combined with the Successor Corporation for the period
November 15, 1996 to December 31, 1996.
Revenue increased $31,829,000 or 86% in 1996 and $31,020,000 or 514% in
1995, as compared to the corresponding prior year. The Company's average
monthly revenue per Authorized Unit, excluding installation revenue, was
$38.02, $38.53 and $32.37 during 1996, 1995 and 1994, respectively. The 1%
decrease in the average monthly revenue per Authorized Unit in 1996 was
primarily the result of a 1996 promotional campaign. The 19% increase from
1994 to 1995 in the average monthly revenue per Authorized Unit is primarily
attributable to the full year effect of the higher basic service rates and the
increased availability of premium and pay-per-view services that resulted from
the conversion from an analog to a digital signal in July, 1994. The average
installation revenue from each Authorized Unit installed was $124, $180 and
$138 during 1996, 1995 and 1994, respectively. The decrease from 1995 to 1996
is primarily attributable to certain promotional campaigns that were in effect
during 1996.
PrimeStar provides programming services to the Company and other authorized
distributors in exchange for a fee based upon the number of subscribers
receiving programming services. PrimeStar also arranges for satellite capacity
and uplink services, and provides national marketing and administrative
support services, in exchange
F-169
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
for a separate authorization fee from each distributor, including the Company,
also based on such distributor's total number of subscribers. The aggregate
charges for such programming and authorization fees increased $18,885,000 or
113% and $14,586,000 or 671% during 1996 and 1995, respectively, as compared
to the corresponding prior year. The average aggregate monthly amount per
subscriber charged by PrimeStar was $27.50, $26.86 and $22.63 during 1996,
1995 and 1994, respectively. The increase in 1995 reflects higher programming
expenses incurred by PrimeStar following the conversion from an analog to a
digital signal in July 1994 and an increase in the number of channels
available to subscribers. Other operating expenses increased $3,279,000 or
110% and $1,490,000 or 100% during 1996 and 1995, respectively, as compared to
the corresponding prior year.
MediaOne provides certain corporate services to the Company. Fees related to
such services totaled $875,000, $412,000 and $264,000 for the years ended
December 31, 1996, 1995 and 1994, respectively, and are generally based upon
the estimated cost of the services provided.
Other selling, general and administrative expenses increased $4,776,000 or
38% and $8,421,000 or 204% during 1996 and 1995, respectively, as compared to
the corresponding prior year. These increases resulted primarily from certain
promotional campaigns that were in effect during 1996 and 1995 and increases
in wages and other costs.
Depreciation and amortization expense increased $7,384,000 or 100% and
$5,512,000 or 299% during 1996 and 1995, respectively, as compared to the
corresponding prior year, as the result of increases in the Company's
depreciable assets due primarily to increases in the amount of satellite
reception equipment deployed by the Company. Amortization expense for the
period November 15, 1996 to December 31, 1996 increased by $167,000 due to
amortization of intangibles recorded in connection with the Merger (as defined
in the Notes to Combined Financial Statements).
The Company's share of PrimeStar's net losses decreased $2,542,000 or 58%
and $1,422,000 or 25% during 1996 and 1995, respectively, as compared to the
corresponding prior year. Such decreases are primarily attributable to a
significant increase in the revenue derived by PrimeStar from the Company and
other distributors for the PrimeStar service. Historically, PrimeStar's
operating deficits have been funded by capital contributions from the Company
and the other partners of PrimeStar. To the extent that future subscriber
growth does not generate increases in PrimeStar's revenue sufficient to offset
its operating costs and expenses, the Company anticipates that any such
operating deficit would be funded by PrimeStar's then existing sources of
liquidity, or by increases in the above-described programming and
authorization fees charged by PrimeStar to the Company and other authorized
distributors.
The Company incurred interest expense of $11,914,000, $7,464,000 and
$2,974,000 during the years ended December 31, 1996, 1995 and 1994,
respectively. All such interest expense was incurred on advances from
MediaOne.
The Nine Months Ended September 30, 1997 and September 30, 1996
Revenue increased $29,491,000 or 61% for the nine months ended September 30,
1997 compared to the corresponding period in the prior year. This increase is
primarily attributable to a 42% increase in the number of subscribers to
approximately 166,000 as of September 30, 1997.
Programming and other charges from PrimeStar increased $15,922,000 or 64%
for the nine months ended September 30, 1997 compared to the corresponding
period in the prior year. These amounts are charged to the
F-170
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
Company on a per-subscriber basis, and have increased commensurately with the
growth in revenues. Other operating expenses increased $2,767,000 or 66% as
compared to the corresponding amounts in 1996 primarily due to the
aforementioned growth in the business.
Other selling, general and administrative expenses increased $5,740,000 or
50% primarily due to continued growth in the business and related increases in
marketing and sales costs.
Depreciation and amortization expense increased $9,097,000 or 93% as
compared to the corresponding period in the prior year. This increase is the
result of the growth in property, plant and equipment due to subscriber growth
and $990,000 in additional amortization expense due to intangibles recorded in
connection with the Merger (as defined in the Notes to Combined Financial
Statements). The Merger did not have a significant effect on depreciation
expense.
The Company's share of losses from PrimeStar increased $4,240,000 or 656%.
Approximately $714,000 of this increase results from amortization of the
excess of fair value over the underlying net assets of PrimeStar that was
recorded in connection with the Merger. The remaining increase in the
Company's share of PrimeStar's losses was caused by increased operating losses
of PrimeStar.
Interest expense decreased $4,277,000 or 48% for the nine months ended
September 30, 1997 as compared to the corresponding period in the prior year.
This decrease is primarily due to a decrease in interest charges from
MediaOne. All such interest expense was incurred on advances from MediaOne.
Liquidity and Capital Resources
Each of the partners of PrimeStar, including MediaOne, have entered into an
agreement whereby each partner's DBS subscribers and certain assets will be
contributed to a newly formed company, PRIMESTAR, Inc. In exchange, each
partner, including MediaOne, will receive a combination of cash and stock in
PRIMESTAR, Inc. The transaction is subject to various approvals and is
expected to close in early 1998. In a related transaction, an agreement has
been entered into whereby the satellite assets controlled by News Corp. and
its partner MCI Communications Corporation will be purchased by PRIMESTAR,
Inc. in exchange for non-voting convertible securities. The transaction is
subject to various approvals.
The Company believes that cash generated by operations may not be adequate
to meet its ongoing operating and capital expenditure requirements. Financing
from MediaOne will provide such funding. Amounts paid by MediaOne on behalf of
the Company are reflected in Accounts Payable--Affiliates and Due to Parent on
the accompanying combined balance sheets. Advances from MediaOne bear interest
at rates reflecting MediaOne's cost of capital. If funding from MediaOne was
not available, the Company may need to secure financing from external sources.
During the nine months ended September 30, 1997 and the years ended December
31, 1996, 1995 and 1994, the Company's operating activities provided (used)
cash of $12,485,000, $16,879,000, $2,397,000 and $(1,375,000), respectively.
Most of the cash provided by the Company's operating activities during these
periods is attributable to changes in the Company's receivables, prepaids,
accruals and payables ("Operating Assets and Liabilities"). The timing and
amount of changes in the balances of the Company's Operating Assets and
Liabilities are subject to a variety of factors, certain of which are outside
of the control of, or not easily predicted by, the Company.
F-171
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--(CONTINUED)
During the nine months ended September 30, 1997 and the years ended December
31, 1996, 1995 and 1994, the Company used cash of $39,647,000, $73,602,000,
$59,503,000 and $20,718,000, respectively, to fund capital expenditures. The
Company expects that the majority of estimated future capital expenditures
will be used for the acquisition and installation of satellite reception
equipment. The actual amount of capital to be required will be primarily a
function of (i) subscriber growth, and (ii) changes in the cost of equipment.
As of September 30, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $9,200,000.
In 1993 and 1994, PrimeStar issued Promissory Notes (the "Notes") totaling
$14,918,554 in connection with bridge financing for the construction of two
high-powered satellites. In March 1994, the Notes and accrued interest of
approximately $169,000 were repaid in full to the Company by PrimeStar.
The Company believes that the net proceeds from funds generated by the
Company's operating activities along with advances from MediaOne will be
sufficient to fund the Company's working capital, capital expenditures and
general corporate purposes.
A wholly owned subsidiary of MediaOne has issued two standby letters of
credit totaling approximately $98,125,000 as of September 30, 1997 on behalf
of PrimeStar (i) to guarantee a portion of debt incurred by PrimeStar in
connection with the construction of two high-powered satellites and (ii) in
connection with a long-term lease agreement entered into by PrimeStar to
secure additional medium-powered satellite capacity. Prior to the Merger,
these letters of credit were collateralized by certain marketable equity
securities of MediaOne. The standby letters of credit are currently guaranteed
by a subsidiary of U S WEST. As a result of these commitments and other
qualitative factors, the Company accounts for its approximate 10% investment
in PrimeStar using the equity method.
Pursuant to the PrimeStar Partnership Agreement, a subsidiary of MediaOne
has agreed to fund its share of any capital contributions and/or loans to
PrimeStar that might be agreed upon from time to time by the partners of
PrimeStar. Additionally, as a general partner of PrimeStar, such subsidiary
may be liable as a matter of partnership law for all debts of PrimeStar in the
event the liabilities of PrimeStar were to exceed its assets.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income", and SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information". These pronouncements will be effective in 1998. SFAS No.
130 establishes standards for reporting comprehensive income items and will
require that companies provide a separate statement of comprehensive income;
reported financial statement amounts will not be affected by this adoption.
SFAS No. 131 establishes standards for reporting information about the
operating segments in annual reports and interim reports.
F-172
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying combined balance sheet of MediaOne, Inc.--
Direct Broadcast Satellite Business (the "Company") as of December 31, 1996
and the related combined statements of operations, changes in group equity
(deficiency), and cash flows for the period November 15, 1996 (following the
merger of the Company's parent into a wholly-owned subsidiary of U S WEST,
Inc.) through December 31, 1996. We have also audited the combined balance
sheet of the Direct Broadcast Satellite Business of Continental Cablevision,
Inc. (the "Predecessor Corporation") as of December 31, 1995 and the related
combined statements of operations, changes in group equity (deficiency), and
cash flows for the twelve months ended December 31, 1994 and 1995, and the
period January 1, 1996 through November 14, 1996. These financial statements
are the responsibility of the Company and the Predecessor Corporation
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
PrimeStar Partners, L.P., the Company's investment in which is accounted for
using the equity method. The Company's equity of $33,931,000 and $5,391,000 in
PrimeStar Partners, L.P., at December 31, 1996 and 1995, respectively, and of
$187,000, $1,643,000, $4,372,000, and $5,794,000 in that company's net loss
for the periods November 15, 1996 to December 31, 1996 and January 1, 1996 to
November 14, 1996 and for the years ended December 31, 1995 and 1994,
respectively, are included in the accompanying financial statements. The
financial statements of PrimeStar Partners, L.P., were audited by other
auditors whose report (which includes an explanatory paragraph regarding
PrimeStar Partners, L.P.'s ability to continue as a going concern) has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for such company, is based solely on the report of such auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, MediaOne, Inc., formerly
Continental Cablevision, Inc. (the Company's parent) was acquired by U S WEST,
Inc. effective November 15, 1996. The transaction was accounted for using the
purchase method of accounting whereby the purchase price was allocated to the
assets acquired and liabilities assumed based on their respective fair value.
Accordingly, the balance sheet and the statements of operations, changes in
group equity (deficiency) and cash flows of the Predecessor Corporation for
the periods referred to in the first paragraph of this report are not
comparable with those presented for the Company.
In our opinion, based on our audits and the reports of the other auditors,
such combined financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 1996 and the results
of their operations and their cash flows for the period November 15, 1996
(following the merger of the Company's parent into a wholly-owned subsidiary
of U S WEST, Inc.) through December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the reports of the other auditors, the combined financial statements of the
Predecessor Corporation present fairly, in all material respects, the
financial position of the Predecessor Corporation at December 31, 1995 and the
results of their operations, and their cash flows for the twelve months ended
December 31, 1994 and 1995, and the period January 1, 1996 through November
14, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 8, 1997
F-173
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1997 1996 1995
------------- ----------- -------------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash.................................................................................. $ 1,476 $ 393 $ 132
Accounts receivable, net.............................................................. 8,168 4,214 5,961
Supplies.............................................................................. 3,370 3,239 2,044
Investment in PrimeStar............................................................... 31,984 33,931 5,391
Tax allocation receivable............................................................. 25,560 22,530 15,301
Deferred income taxes................................................................. -- -- 2,240
Property, plant and equipment, net.................................................... 154,398 132,636 73,607
Other assets, net..................................................................... 349 271 124
Goodwill, net......................................................................... 31,932 32,922 --
------- -------- --------
Total............................................................................. 257,237 $230,136 $104,800
======= ======== ========
LIABILITIES AND GROUP EQUITY (DEFICIENCY)
Accounts payable--trade............................................................... $ 4,113 $ 5,219 $ 2,372
Accounts payable--affiliates.......................................................... 30,263 23,195 10,246
Accrued expenses...................................................................... 11,826 8,778 4,864
Deferred income taxes................................................................. 13,417 16,446 --
Due to parent......................................................................... 209,882 178,698 115,143
------- -------- --------
Total liabilities................................................................. 269,501 232,336 132,625
------- -------- --------
Commitments and contingencies (note 8)................................................
Group equity (deficiency)............................................................. (12,264) (2,200) (27,825)
------- -------- --------
Total............................................................................. 257,237 $230,136 $104,800
- --------------------------------------------------
======= ======== ========
</TABLE>
See notes to combined financial statements.
F-174
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1997 1996
----------- -------------
(SUCCESSOR) (PREDECESSOR)
(UNAUDITED)
<S> <C> <C>
Revenues.................................. $ 77,955 $48,464
Costs and expenses:
Programming and other charges from
PrimeStar............................... 40,985 25,063
Charges from Parent...................... 446 696
Other operating.......................... 6,953 4,186
Other selling, general and
administrative.......................... 17,207 11,467
Depreciation and amortization............ 18,875 9,778
-------- -------
Total.................................. 84,466 51,190
-------- -------
Operating loss............................ (6,511) (2,726)
-------- -------
Other expense:
Interest to Parent....................... 4,591 8,868
Equity in net loss of PrimeStar.......... 4,886 646
Other.................................... 123 62
-------- -------
Total.................................. 9,600 9,576
-------- -------
Loss before income taxes.................. (16,111) (12,302)
Income tax benefit........................ 6,047 4,921
-------- -------
Net loss............................... $(10,064) $(7,381)
======== =======
<CAPTION>
PERIOD PERIOD
NOVEMBER 15 JANUARY 1
THROUGH THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 14, ---------------------------
1996 1996 1995 1994
------------ ------------- ------------- -------------
(SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Revenues.................................. $10,561 $58,318 $37,050 $ 6,030
Costs and expenses:
Programming and other charges from
PrimeStar............................... 5,393 30,251 16,759 2,173
Charges from Parent...................... 109 766 412 264
Other operating.......................... 1,108 5,157 2,986 1,496
Other selling, general and
administrative.......................... 3,194 14,129 12,547 4,126
Depreciation and amortization............ 2,859 11,881 7,356 1,844
------------ ------------- ------------- -------------
Total.................................. 12,663 62,184 40,060 9,903
------------ ------------- ------------- -------------
Operating loss............................ (2,102) (3,866) (3,010) (3,873)
------------ ------------- ------------- -------------
Other expense:
Interest to Parent....................... 1,234 10,680 7,464 2,974
Equity in net loss of PrimeStar.......... 187 1,643 4,372 5,794
Other.................................... 15 72 16 461
------------ ------------- ------------- -------------
Total.................................. 1,436 12,395 11,852 9,229
------------ ------------- ------------- -------------
Loss before income taxes.................. (3,538) (16,261) (14,862) (13,102)
Income tax benefit........................ 1,338 6,504 5,945 5,241
------------ ------------- ------------- -------------
Net loss............................... $(2,200) $(9,757) $(8,917) $(7,861)
============ ============= ============= =============
</TABLE>
See notes to combined financial statements.
F-175
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD PERIOD
NINE MONTHS NOVEMBER 15 JANUARY 1
ENDED SEPTEMBER 30, THROUGH THROUGH
------------------------- DECEMBER 31, NOVEMBER 14,
1997 1996 1996 1996
----------- ------------- ------------ -------------
(SUCCESSOR) (PREDECESSOR) (SUCCESSOR) (PREDECESSOR)
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss................................. $ (10,064) $ (7,381) $ (2,200) $ (9,757)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization........... 18,875 9,778 2,859 11,881
Equity in net loss of PrimeStar......... 4,886 646 187 1,643
Deferred income taxes................... (3,029) (348) (119) (504)
Changes in working capital:
Accounts receivable, supplies and
other.................................. (7,193) (4,118) (203) (6,608)
Accounts payable and accrued expenses... 9,010 11,514 1,571 18,129
--------- -------- -------- --------
Net cash provided (used) by operating
activities.............................. 12,485 10,091 2,095 14,784
--------- -------- -------- --------
Investing activities:
Expenditures for property, plant and
equipment............................... (39,647) (51,068) (13,855) (59,747)
Investments in PrimeStar................. (2,939) (5,528) (1,043) (5,528)
Advances under promissory note--
PrimeStar............................... -- -- -- --
Repayment of promissory note by
PrimeStar............................... -- -- -- --
--------- -------- -------- --------
Net cash used in investing activities.... (42,586) (56,596) (14,898) (65,275)
--------- -------- -------- --------
Financing activities:
Advances from parent, net................ 31,184 46,556 13,019 50,536
--------- -------- -------- --------
Net cash provided by financing
activities.............................. 31,184 46,556 13,019 50,536
--------- -------- -------- --------
Net increase in cash...................... 1,083 51 216 45
Cash at beginning of period............... 393 132 177 132
--------- -------- -------- --------
Cash at end of period..................... $ 1,476 $ 183 $ 393 $ 177
========= ======== ======== ========
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994
------------- -------------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C>
Operating activities:
Net loss................................. $ (8,917) $ (7,861)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization........... 7,356 1,844
Equity in net loss of PrimeStar......... 4,372 5,794
Deferred income taxes................... (656) 67
Changes in working capital:
Accounts receivable, supplies and
other.................................. (9,778) (8,654)
Accounts payable and accrued expenses... 10,020 7,435
------------- -------------
Net cash provided (used) by operating
activities.............................. 2,397 (1,375)
------------- -------------
Investing activities:
Expenditures for property, plant and
equipment............................... (59,503) (20,718)
Investments in PrimeStar................. (7,089) (8,166)
Advances under promissory note--
PrimeStar............................... -- (6,149)
Repayment of promissory note by
PrimeStar............................... -- 14,919
------------- -------------
Net cash used in investing activities.... (66,592) (20,114)
------------- -------------
Financing activities:
Advances from parent, net................ 64,270 21,527
------------- -------------
Net cash provided by financing
activities.............................. 64,270 21,527
------------- -------------
Net increase in cash...................... 75 38
Cash at beginning of period............... 57 19
------------- -------------
Cash at end of period..................... $ 132 $ 57
============= =============
</TABLE>
See notes to combined financial statements.
F-176
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (DEFICIENCY)
(SUCCESSOR, IN THOUSANDS)
<TABLE>
<CAPTION>
GROUP EQUITY
(DEFICIENCY)
------------
<S> <C>
Balance, November 15, 1996......................................... $ --
Net Loss......................................................... (2,200)
--------
Balance, December 31, 1996......................................... (2,200)
Net Loss (unaudited)............................................. (10,064)
--------
Balance, September 30, 1997 (unaudited)............................ $(12,264)
========
</TABLE>
See notes to combined financial statements.
F-177
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (DEFICIENCY)
(PREDECESSOR, IN THOUSANDS)
<TABLE>
<CAPTION>
GROUP EQUITY
(DEFICIENCY)
------------
<S> <C>
Balance, January 1, 1994........................................... $(11,047)
Net Loss......................................................... (7,861)
--------
Balance, December 31, 1994......................................... (18,908)
Net Loss......................................................... (8,917)
--------
Balance, December 31, 1995......................................... (27,825)
Net Loss......................................................... (9,757)
--------
Balance, November 14, 1996......................................... $(37,582)
========
</TABLE>
See notes to combined financial statements.
F-178
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(1)ORGANIZATION
The accompanying combined financial statements present the financial
position, results of operations, and cash flows of the direct broadcast
satellite ("DBS") television businesses of MediaOne, Inc. ("MediaOne",
formerly Continental Cablevision, Inc. ("CCI")). The accounts of the DBS
businesses (hereinafter referred to as the Company) include MediaOne's
investment in PrimeStar Partners L.P. ("PrimeStar"), a partnership
established for the purpose of providing wholesale DBS services
nationwide, and certain subsidiaries of MediaOne which distribute
PrimeStar programming services to subscribers for a monthly service fee.
MediaOne is a provider of broadband communications services with
operations and investments encompassing cable television systems,
international broadband communication ventures, telecommunications and
technology ventures and programming services. MediaOne was merged with and
into U S WEST, Inc. ("U S WEST") (the "Merger") on November 15, 1996 (the
"Merger Date"), and, as discussed below, the accompanying combined
financial statements reflect the change in accounting basis resulting from
the Merger. The "Predecessor Corporation" refers to the Company for
periods prior to the Merger Date and the "Successor Corporation" refers to
the Company for periods subsequent to the Merger Date. The "Company"
refers to both the Predecessor Corporation and the Successor Corporation.
MediaOne is a member of the U S WEST Media Group, one of two major groups
that make up U S WEST. The other major group of U S WEST, the
Communications Group, provides telecommunications services in fourteen
western and midwestern states.
The Company's funding needs for capital expenditures, investing
activities, and other general corporate needs are funded by cash provided
by the Company's operations and financing from MediaOne. Amounts paid by
MediaOne on behalf of the Company are reflected in Accounts Payable--
Affiliates and Due to Parent on the accompanying combined balance sheets.
Advances from MediaOne bear interest at rates reflecting MediaOne's cost
of capital.
Each of the partners of PrimeStar, including MediaOne, have entered into
an agreement whereby each partner's DBS subscribers and certain assets
will be contributed to a newly formed company, PRIMESTAR, Inc. In
exchange, each partner, including MediaOne, will receive a combination of
cash and stock in PRIMESTAR, Inc. The transaction is subject to various
approvals and is expected to close in early 1998. In a related
transaction, an agreement has been entered into whereby the satellite
assets controlled by News Corp. and its partner, MCI Communications
Corporation, will be purchased by PRIMESTAR, Inc. in exchange for non-
voting convertible securities. The transaction is subject to various
approvals.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements represent the DBS
businesses of MediaOne discussed above. The combined financial statements
have been prepared giving effect to the Merger of Continental Cablevision,
Inc. with and into U S WEST on November 15, 1996. The portion of the
aggregate purchase price attributed to the Company is based upon the
estimated fair value of the underlying investment in PrimeStar and the
related DBS operations. Unless otherwise noted, the accounting policies of
the Company described below are applicable to the accompanying combined
financial statements both before and after the Merger.
F-179
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
The Merger was accounted for as a purchase and, accordingly, the
accompanying combined financial statements include the operations of the
Successor Corporation since the Merger Date. The Company's combined
balance sheets at September 30, 1997 and December 31, 1996 include
estimates of the fair value of assets and liabilities acquired in
connection with the Merger. All such estimates are preliminary and the
determination of the fair value of assets and liabilities acquired will be
made after appraisals and other studies are completed. With respect to the
Company's assets, approximately $23,800,000 was allocated to the
investment in PrimeStar, based upon estimated fair value. In addition,
approximately $33,089,000 in goodwill was recorded resulting from deferred
taxes related to the investment in PrimeStar, recording of a valuation
allowance against the Company's net operating loss carryforwards (see Note
6) and the reversal of the Company's accumulated deficit at November 14,
1996. These items were accounted for in a manner consistent with the
treatment of such items at the parent company level.
Current assets and liabilities were recorded at historical carrying value,
as no factors were present which would indicate a change in the expected
amount to be realized or paid. Property, plant and equipment were recorded
at an amount which approximated the net book value of such assets prior to
the Merger; given the relatively short period such assets have been in
service, such amount was deemed to approximate replacement cost. Amounts
due to affiliates were recorded at the present value of amounts expected
to be paid.
Had the Merger occurred as of January 1, 1995, the Company's results of
operations on a pro forma basis would have been as follows (unaudited):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues........................................ $ 68,879 $ 37,050
Loss from operations............................ (7,126) (4,334)
Net loss........................................ (13,945) (11,193)
</TABLE>
All significant intercompany accounts and transactions have been
eliminated in the combined financial statements.
Interim Financial Information
The accompanying combined financial statements for the nine months ended
September 30, 1997 and 1996, including related disclosures in the Notes to
Combined Financial Statements, are unaudited. In the opinion of
management, such unaudited interim combined financial statements are
prepared on a basis consistent with the audited combined financial
statements. They contain all adjustments, consisting solely of normal
recurring adjustments and accruals, required for a fair presentation of
the information contained therein.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at each balance sheet
date and during each reporting period. Significant estimates included in
the combined financial statements include the assigned useful lives of
property, plant and equipment, the carrying value of the Company's
investment in PrimeStar, certain accruals and valuation allowances for
deferred tax assets. Actual results could differ from those estimates.
F-180
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
Revenue Recognition
Monthly service revenue, including rental income on equipment leased to
subscribers, is recognized in the period that services are delivered.
Installation revenue is recognized in the period the installation services
are provided to the extent of direct selling costs. To date, direct
selling costs have exceeded installation revenue and have been expensed as
incurred. Equipment is leased to subscribers generally on a month-to-month
basis, subject to cancellation by the subscriber.
Allocated Costs
The accompanying combined financial statements include allocations of
certain costs and expenses of MediaOne, primarily overhead incurred for
general and administrative functions. Costs are allocated from MediaOne to
the Company based primarily on the estimated cost of such services by a
third-party. Although such allocations are not necessarily indicative of
the costs that would have been incurred by the Company on a stand-alone
basis, management believes the resulting allocated amounts are reasonable.
Investment in PrimeStar
The Company's investment in PrimeStar, a limited partnership, is accounted
for using the equity method. The excess of cost over the underlying value
of the net assets of PrimeStar resulting from the Merger is being
amortized over a period of approximately 25 years (See Note 3).
Supplies and Property, Plant and Equipment
Supplies are stated at the lower of cost or market, using the first-in,
first-out method. Property, plant and equipment are stated at cost.
Depreciation is provided using the straight-line group method over
estimated useful lives of 3 to 15 years. Gains and losses on retirements
or sales of property, plant and equipment are generally charged to
accumulated depreciation. See Note 5 for additional information.
Impairment of Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" which requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of an asset may not be
recoverable. The effect of adopting SFAS No. 121 was not material to the
combined financial statements.
Income Taxes
Deferred tax liabilities and assets are recognized for the future tax
consequences of temporary differences between the financial reporting and
tax bases of existing assets and liabilities. In addition, future tax
benefits, such as net operating losses (to the extent not absorbed by
income generated by other subsidiaries of MediaOne included in the
combined income tax return), are recognized to the extent realization of
such benefits is more likely than not. See Note 6 for additional
information.
For federal income tax purposes, the Company's operations are included in
consolidated tax returns filed by CCI (in the case of the Predecessor
Corporation) or U S WEST (in the case of the Successor
F-181
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
Corporation). Allocation of income tax consequences to the Company is
calculated based upon the extent to which the benefits related to the
Company's operations are usable in the consolidated tax filings by other
members of the consolidated group. The Company records a tax allocation
receivable for such benefits. Any excess benefit over the amount
recoverable from an affiliate company is recorded as part of the Company's
deferred income tax assets (liabilities).
Fair Value of Financial Instruments
The estimated fair value of financial instruments is based upon pertinent
information available to management as of December 31, 1996 and 1995.
Although management is not aware of any factors which could significantly
affect the estimates provided, such amounts have not been comprehensively
revalued for purposes of these combined financial statements since that
date, and current estimates of fair value may differ significantly. At
December 31, 1996 and 1995, the carrying value of the Company's financial
instruments approximated fair value.
Allowance for Doubtful Accounts
The allowance for doubtful accounts at September 30, 1997 and December 31,
1996 and 1995 was $627,000, $1,422,000 and $593,000 respectively.
Goodwill
Goodwill represents amounts allocated to the Company by MediaOne in
connection with the Merger. Such allocation is based upon the fair values
of the related assets. Goodwill is being amortized to expense over 25
years using the straight-line method. Accumulated amortization of goodwill
aggregated $1,157,000 and $167,000 at September 30, 1997 and December 31,
1996.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income", and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". These pronouncements will be
effective in 1998. SFAS No. 130 establishes standards for reporting
comprehensive income items and will require that companies provide a
separate statement of comprehensive income; reported financial statement
amounts will not be affected by this adoption. SFAS No. 131 establishes
standards for reporting information about the operating segments in annual
reports and interim reports.
(3)INVESTMENT IN PRIMESTAR
The Company owns a 10.4% interest in PrimeStar. A wholly owned subsidiary
of MediaOne has issued two standby letters of credit totaling
approximately $98,125,000 as of September 30, 1997 on behalf of PrimeStar
(i) to guarantee a portion of debt incurred by PrimeStar in connection
with the construction of two high-powered satellites, and (ii) in
connection with a long-term lease agreement entered into by PrimeStar to
secure additional medium-powered satellite capacity. Prior to the Merger,
these letters of credit were collateralized by certain marketable equity
securities of MediaOne. The standby letters of credit are currently
guaranteed by a subsidiary of U S WEST.
F-182
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
The major components of PrimeStar's financial position and results of
operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1997 1996 1995
------------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Costs of satellites under construction..... $543,070 $525,746 $419,256
Property, plant and equipment.............. 17,073 18,131 9,990
Total assets............................... 720,252 688,273 515,962
Total liabilities.......................... 632,790 589,134 464,121
Partners' capital.......................... 87,462 99,139 51,841
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ---------------------------
1997 1996 1996 1995 1994
--------- --------- -------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 450,973 $ 294,634 $412,999 $180,595 $27,841
Depreciation and
amortization........... 2,856 2,390 3,261 2,890 2,700
Operating loss.......... (28,430) (7,050) (16,823) (38,395) (53,034)
Net loss................ (40,111) (6,208) (15,702) (42,037) (55,716)
</TABLE>
(4)TRANSACTIONS WITH PRIMESTAR
PrimeStar provides programming services to the Company and other
authorized distributors in exchange for a fee based on the number of
subscribers receiving the respective programming services. In addition,
PrimeStar arranges for satellite capacity and uplink services, and
provides national marketing and administrative support services in
exchange for a separate authorization fee which is also based upon the
number of subscribers. For the nine months ended September 30, 1997 and
1996 and the periods November 15, 1996 to December 31, 1996 and January 1,
1996 to November 14, 1996 and the years ended December 31, 1995 and 1994,
the Company recorded programming and authorization fees of $40,985,000,
$25,063,000, $5,393,000, $30,251,000, $16,759,000 and $2,173,000,
respectively. Amounts payable to PrimeStar for programming and
authorization fees were $11,919,000, $8,138,000 and $5,618,000 as of
September 30, 1997, December 31, 1996 and 1995 and are included in
Accounts Payable--Affiliates on the accompanying combined balance sheets.
In 1993 and 1994, PrimeStar issued Promissory Notes to the Company (the
"Notes") totaling $14,918,554 in connection with bridge financing for the
construction of two high-powered satellites. In March 1994, the Notes and
accrued interest of approximately $169,000 were repaid in full to the
Company by PrimeStar.
F-183
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
(5)PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Reception equipment........................................ $127,787 $78,136
Equipment and fixtures..................................... 7,468 3,853
-------- -------
Total.................................................... 135,255 81,989
Less--accumulated depreciation............................. 2,619 8,382
-------- -------
Property, plant and equipment--net....................... $132,636 $73,607
======== =======
</TABLE>
(6)INCOME TAXES
The Company is included in the consolidated tax filings made by CCI and,
since the date of the Merger, U S WEST. Net operating losses generated by
the Company are recognized as assets, to the extent such losses are not
used to offset taxable income generated by other subsidiaries of MediaOne
or U S WEST. To the extent such losses are absorbed by other subsidiaries,
the Company records the benefit of such losses in its financial statements
and reflects the amount due from such subsidiaries as a tax allocation
receivable, otherwise such losses are reflected in the deferred income tax
accounts.
Income tax benefit consists of:
<TABLE>
<CAPTION>
PERIOD PERIOD YEARS ENDED
NOVEMBER 15, 1996 JANUARY 1, 1996 DECEMBER 31,
THROUGH THROUGH ----------------
DECEMBER 31, 1996 NOVEMBER 14, 1996 1995 1994
----------------- ----------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal............. $ (960) $(4,723) $(4,891) $(4,909)
State and local..... (259) (1,277) (398) (399)
Deferred:
Federal............. (98) (396) (32) 147
State and local..... (21) (108) (624) (80)
------- ------- ------- -------
$(1,338) $(6,504) $(5,945) $(5,241)
======= ======= ======= =======
</TABLE>
Income tax benefit for all periods presented differs from the amounts
computed by applying the Federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
PERIOD PERIOD
NOVEMBER 15, 1996 JANUARY 1, 1996 YEARS ENDED
THROUGH THROUGH DECEMBER 31,
DECEMBER 31, 1996 NOVEMBER 14, 1996 1995 AND 1994
----------------- ----------------- -------------
<S> <C> <C> <C>
Computed "expected" tax
benefit................. (35.0)% (35.0)% (35.0)%
State and local income
taxes, net of Federal
income tax benefit...... (5.0) (5.0) (5.0)
Goodwill amortization.... 2.2 -- --
----- ----- -----
Total.................. (37.8)% (40.0)% (40.0)%
===== ===== =====
</TABLE>
F-184
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards........................ $ 9,789 $ 4,673
Investment in PrimeStar................................. (9,568) 724
Accrued expenses........................................ 949 247
Valuation allowance..................................... (9,789) --
Property, plant and equipment........................... (7,686) (2,875)
Other................................................... (141) (529)
-------- -------
Net deferred tax assets (liabilities)................. $(16,446) $ 2,240
======== =======
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
$8,900,000 and $889,000 for federal and state income tax purposes,
respectively, expiring through 2011.
Prior to the Merger, the Company recognized the full amount of available
net operating losses as an asset as realization was reasonably assured
when the Company's losses were combined with expected income and existing
temporary taxable differences of other MediaOne subsidiaries. Following
the Merger, certain limitations restrict the ability of MediaOne to fully
utilize its pre-Merger net operating loss carryforwards. Accordingly,
consistent with the treatment of such losses at the parent company level,
the Company recorded a valuation allowance of $9,789,000 as of the Merger
date which did not impact the recorded income tax benefit. If in future
periods, the realization of these tax loss carryforwards becomes more
likely than not, this valuation allowance will be allocated to reduce
first, goodwill, and then the amount of intangible asset allocated to the
Company's investment in PrimeStar.
(7)TRANSACTIONS WITH RELATED PARTIES
The Company participates in MediaOne's cash management system.
Accordingly, cash provided by the Company's operations is administered
centrally by MediaOne, which then funds the Company's capital expenditures
and general corporate purposes as needed. Amounts paid by MediaOne on
behalf of the Company are reflected in Accounts Payable--Affiliates and
Due to Parent on the accompanying combined balance sheets. In addition,
MediaOne provides certain corporate services to the Company. Fees related
to such services totaled $446,000, $696,000, $109,000, $766,000, $412,000
and $264,000 for the nine months ended September 30, 1997 and 1996 and the
periods November 15, 1996 to December 31, 1996 and January 1, 1996 to
November 14, 1996 and the years ended December 31, 1995 and 1994,
respectively. Advances from MediaOne bear interest at rates reflecting
MediaOne's cost of capital. Although Due to Parent has no maturity date,
MediaOne has committed to not calling such amounts prior to January 1,
1998 and to providing additional intercompany financing through January 1,
1998.
(8)COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into various operating lease
agreements, with total commitments of $783,000 as of December 31, 1996.
Commitments under such agreements for the years 1997-2001 approximate
$283,000, $209,000, $197,000, $34,000 and $19,000, respectively. Lease and
F-185
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
rental costs charged to operations for the periods November 15, 1996 to
December 31, 1996 and January 1, 1996 to November 14, 1996 and the years
ended December 31, 1995 and 1994 were $62,835, $439,843, $380,764, and
$216,300, respectively.
As of September 30, 1997, the Company's future minimum commitments to
purchase satellite reception equipment aggregated approximately
$9,200,000. In addition, under the PrimeStar Partnership Agreement, a
subsidiary of MediaOne has agreed to fund its share of any capital
contributions and/or loans to PrimeStar that might be agreed upon from
time to time by the partners of PrimeStar. Additionally, as a general
partner of PrimeStar, such subsidiary may be liable as a matter of
partnership law for all debts of PrimeStar in the event the liabilities of
PrimeStar were to exceed its assets.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such legal proceedings and claims will not have a material
effect on the combined financial position and results of operations of the
Company.
(9)RETIREMENT PLANS
The Company participates in a non-contributory benefit plan maintained by
MediaOne and, since the Merger Date, U S WEST, covering substantially all
employees. Benefits under the plan are determined based upon formulas
which reflect employees' years of service and the average of five
consecutive years of highest compensation. During the periods November 15,
1996 to December 31, 1996 and January 1, 1996 to November 14, 1996 and the
years ended December 31, 1995 and 1994, expense recorded by the Company
related to participation in this plan aggregated $3,046, $21,325, $11,173
and $8,228, respectively. Following the Merger discussed in Note 1, U S
WEST assumed MediaOne's obligation under this plan.
The Company also participates in a defined contribution plan maintained by
MediaOne covering substantially all employees. The Company's contribution
to this plan is based on a percentage of each participant's salary. During
the periods November 15, 1996 to December 31, 1996 and January 1, 1996 to
November 14, 1996 and the years ended December 31, 1995 and 1994, expense
recorded by the Company related to participation in this plan aggregated
$3,100, $22,406, $11,094 and $4,610, respectively.
(10)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly results of operations for 1997, 1996 and 1995 are summarized
below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1997
Revenues........................................ $23,177 $26,241 $28,537
Depreciation and amortization................... 5,324 6,062 7,489
Operating loss.................................. (1,469) (2,077) (2,965)
Net loss...................................... (2,355) (4,215) (3,494)
</TABLE>
F-186
<PAGE>
MEDIAONE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
IS UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 1,
1996 THROUGH
FIRST SECOND THIRD NOVEMBER 14,
QUARTER QUARTER QUARTER 1996
------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1996
Revenues.......................... $14,269 $16,303 $17,892 $ 9,854
Depreciation and amortization..... 2,753 3,102 3,923 2,103
Operating loss.................... (629) (827) (1,270) (1,140)
Net loss........................ (2,627) (1,956) (2,798) (2,376)
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Revenues.......................... $ 6,202 $ 7,978 $ 9,787 $13,083
Depreciation and amortization..... 1,351 1,150 1,800 3,055
Operating loss.................... (620) (639) (968) (783)
Net loss........................ (1,249) (2,494) (2,756) (2,418)
</TABLE>
F-187
<PAGE>
PRIMESTAR PARTNERS L.P.
SELECTED FINANCIAL DATA
The following table presents summary financial data relating to the
Partnership's (as defined in the Notes to Financial Statements) historical
financial position as of September 30, 1997 and 1996 and December 31, 1996,
1995, 1994, 1993 and 1992 and the results of operations for the nine months
ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995,
1994, 1993 and 1992. The summary financial data as of September 30, 1997 and
1996 and for the nine months then ended are unaudited; however, in the opinion
of management, such unaudited financial data reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the financial information for such period. Operating results
for the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1997. Summary
financial data as of December 31, 1996, 1995, 1994, 1993 and 1992 and the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 are derived from the
financial statements of the Partnership for the corresponding periods. The
historical data for the other periods presented has been derived from
unaudited information. The following information should be read in conjunction
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and is qualified in its entirety to the historical
financial statements, including the notes thereto, of the Partnership.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY STATEMENT OF OPERATIONS DATA:
Revenue.............................. $ 450,973 $ 294,634 $ 412,999 $ 180,595 $ 27,841 $ 10,861 $ 5,216
Operating, selling, general and
administrative expenses............. (480,303) (299,596) (426,561) (216,100) (78,175) (38,433) (27,716)
Depreciation and amortization........ (2,856) (2,390) (3,261) (2,890) (2,700) (1,849) (1,801)
--------- --------- --------- --------- --------- --------- ---------
Operating loss....................... (32,186) (7,352) (16,823) (38,395) (53,034) (29,421) (24,301)
Other (expense) income, net.......... (11,676) 856 1,121 (3,642) (2,682) 131 117
--------- --------- --------- --------- --------- --------- ---------
Net loss............................. $ (43,862) $ (6,496) $ (15,702) $ (42,037) $ (55,716) $ (29,290) $ (24,184)
========= ========= ========= ========= ========= ========= =========
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Cost of satellites under
construction........................ $ 543,070 $ 502,887 $ 525,746 $ 419,256 $ 289,607 $ 71,567 --
Total assets......................... $ 720,252 $ 655,824 $ 688,273 $ 515,962 $ 344,075 $ 91,842 $ 14,456
Borrowings under credit facility
expected to be refinanced........... $ 555,000 $ 440,000 $ 521,000 -- -- -- --
Long term obligations................ $ 4,023 -- $ 4,227 $ 426,210 $ 301,178 $ 85,343 $ 14,366
Net partner capital (deficit)........ $ 83,712 $ 98,345 $ 99,139 $ 51,841 $ 25,816 $ 3,232 $ (1,878)
</TABLE>
F-188
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
PRIMESTAR Partners, L.P. (the "Partnership") engages in the business of
transmitting television and audio programming services via a medium power
satellite to subscribers throughout the continental United States. The
Partnership's services are sold on a per subscriber basis to a network of
approximately 700 Distributors, all of which are owned by the Partnership's
partners. These Distributors re-sell the services and lease related reception
equipment to subscribers under the PRIMESTAR(R) brand name. In addition, the
Partnership has contracted with various national and regional consumer
electronics retailers to generate new customer acquisition leads which are
forwarded to Distributors for installation and ongoing customer service.
Unless otherwise stated herein, increases in the Partnership's revenue and
operating, selling, general and administrative expenses are primarily related
to subscriber growth. The Partnership's operating margins are almost entirely
derived from authorization fees paid on a per subscriber basis by its
Distributors as well as from a portion of revenues generated from customer
purchases of PRIMESTAR(R) pay-per-view (PPV) services. As of December 31,
1996, 1995 and 1994, the Partnership served approximately 1,566,000, 961,000
and 231,000 subscribers, respectively.
Since July 1994, when the Partnership completed its conversion from an
analog to a digital signal, the Partnership has experienced significant
subscriber growth. Improvements in the Partnership's results of operations are
largely affected by its Distributors' abilities to increase their subscriber
bases and by the Partnership's ability to effectively manage costs. The
Partnership operates in a highly competitive environment. No assurance can be
given that such increasing competition will not adversely affect the
Partnership's ability to sustain its historical growth rate in terms of
subscribers and/or revenue.
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Partnership and should be
read in conjunction with the accompanying financial statements of the
Partnership.
SUMMARY OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 VS. 1995
Operating results for the Partnership in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income:
Subscriber revenues--related parties..................... $412,999 $180,595
Interest................................................. 1,845 1,252
-------- --------
414,844 181,847
-------- --------
Expenses:
Operating................................................ 316,763 147,948
Selling, general and administrative...................... 109,798 68,152
Depreciation and amortization............................ 3,261 2,890
Interest expense......................................... 737 8
Loss on deferred option payments......................... -- 4,886
Gain on disposal of property and equipment............... (13) --
-------- --------
430,546 223,884
-------- --------
Net loss................................................. $(15,702) $(42,037)
======== ========
</TABLE>
F-189
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Revenues
Revenues increased $232,404,000 or 129% during 1996, as compared to the
corresponding prior year. This increase reflects aggregate subscriber growth
of approximately 605,000 or 63% during 1996, achieved through a series of
Partnership and Distributor marketing campaigns, as well as service
enhancements, and retail and other customer acquisition programs.
Interest
Interest income was $1,845,000 during 1996, an increase of $593,000 or 47%
during 1996, as compared to the corresponding prior year. This increase is
primarily due to improved cash management as well as larger average cash
balances as a result of timing of Partner capital contributions.
Operating Expenses
Operating expenses were $316,763,000 during 1996, an increase of
$168,815,000 or 114%, as compared to the corresponding prior year. This
increase was substantially due to increases in programming costs resulting
from subscriber growth, increased programming services carried by PRIMESTAR
and increased license fees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $109,798,000 during 1996,
an increase of $41,646,000 or 61%, as compared to the corresponding prior
year. Of this increase, approximately $16,000,000 was due to increases in
marketing expenses to advertise and promote the PRIMESTAR(R) service across a
variety of media including national television, radio and print. In addition,
during 1996 the Partnership for the first time incurred contractual payments
to a national electronics retail chain in exchange for new customer
acquisition leads as well as subsidy payments made to Distributors for free
programming promotions offered to new customers. These expenses contributed
approximately $8,000,000 to the increase in selling, general and
administrative expenses during 1996. The Partnership also incurred increases
in personnel and other administrative expenses to manage its expanding network
operations and promote the PRIMESTAR(R) service nationwide.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $3,261,000 during 1996, an
increase of $371,000 or 13%, as compared to the corresponding prior year. This
increase is primarily due to purchases of depreciable assets in support of
network operation expansion associated with subscriber growth.
Interest Expense
Interest expense was $737,000 during 1996, as compared to essentially no
interest expense in the corresponding prior year. The increase principally
relates to interest expense pertaining to amounts due under the Tempo Option
Agreement.
Loss on Deferred Option Payments
The loss on deferred option payments decreased by $4,886,000 during 1996 as
compared to the corresponding prior year. The Partnership did not incur any
costs related to its pursuit of licenses for other orbital locations during
1996. During 1995, the Partnership established a reserve for amounts
previously capitalized under the Tempo Option Agreement for costs associated
with the pursuit of channel capacity at a high power orbital location. This
decision resulted from the Federal Communication Commission's decision to
terminate this orbital license and sell it at public auction.
F-190
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 VS. 1994
Operating results for the Partnership in 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income:
Subscriber revenues--related parties..................... $180,595 $ 27,841
Interest................................................. 1,252 405
-------- --------
181,847 28,246
-------- --------
Expenses:
Operating................................................ 147,948 41,832
Selling, general and administrative...................... 68,152 36,343
Depreciation and amortization............................ 2,890 2,700
Interest Expense......................................... 8 61
Loss on deferred option payments......................... 4,886 1,767
Loss on disposal of property and equipment............... -- 1,259
-------- --------
223,884 83,962
-------- --------
Net loss................................................... $(42,037) $(55,716)
======== ========
</TABLE>
Revenues
Revenues increased $152,754,000 or 549% during 1995, as compared to the
corresponding prior year. This increase reflects aggregate subscriber growth
of approximately 730,000 achieved through enhancements to the PRIMESTAR
service as well as through a series of Partnership and Distributor marketing
campaigns. The weighted average monthly amount per subscriber charged by the
Partnership was $30 and $25 during the years ended December 31, 1995 and 1994,
respectively. The increase in the amount charged per subscriber from 1994 to
1995 reflects expanded programming services associated with the Partnership's
conversion from an analog to digital signal in July 1994.
Interest
Interest income was $1,252,000 during 1995, an increase of $847,000 or 209%,
as compared to the corresponding prior year. This increase is primarily
attributable to larger average cash balances as a result of timing of Partner
capital contributions used to finance the Partnership's operating deficits.
Operating Expenses
Operating expenses were $147,948,000 during 1995, an increase of
$106,116,000 or 254%, as compared to the corresponding prior year. Of this
increase, $100,203,000 was due to increases in programming costs resulting
from subscriber growth, increased programming services carried by PRIMESTAR
and increased license fees. In addition, increases in satellite expenses
resulting from higher technical service costs contributed $6,000,000 to the
overall increase in operating expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $68,152,000 during 1995,
an increase of $31,809,000 or 88%, as compared to the corresponding prior
year. Of this increase, $22,343,000 was due to increases in
F-191
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
marketing expenses to advertise and promote the PRIMESTAR(R) service across a
variety of media including national television, radio and print. The remainder
of the increase is primarily due to increases in administrative costs in
connection with the ongoing subscriber growth.
Loss on Deferred Option Payments
The loss on deferred option payment was $4,886,000 during 1995, an increase
of $3,119,000 as compared to the corresponding prior year. During 1995, the
Partnership established a reserve for amounts previously capitalized under the
Tempo Option Agreement for costs associated with the pursuit of channel
capacity at a high power orbital location. This decision resulted from the
Federal Communication Commission's decision to terminate this orbital license
and sell it at public auction.
Loss on Disposal of Property and Equipment
As stated in the general discussion above, during 1994 the Partnership
converted from an analog to a digital signal. As a result, the Partnership
disposed of the analog equipment used to run its network operations and
incurred a loss of $1,259,000 during 1994. There was no gain or loss
associated with the disposal of property and equipment during 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Partnership has relied upon capital contributions
from its Partners in order to fund the Partnership's working capital
requirements and capital expenditures. During the years ended December 31,
1996, 1995 and 1994, such capital contributions aggregated $63,000,000,
$68,062,500 and $78,300,000, respectively. In order to fund the Partnership's
operations through the creation of a newly-formed company (the Restructuring),
the Partners have agreed, under the PRIMESTAR Partnership Agreement, to
continue to fund their share of any capital contributions and/or loans to the
Partnership that might be agreed upon from time to time by the partners of
PRIMESTAR Partners, LP. Additionally, the general partners of the Partnership
are liable as a matter of partnership law for all debts of the Partnership in
the event the liabilities of the Partnership were to exceed its assets.
As an alternative to capital contributions, the Partnership executed a
$50,000,000 revolving credit facility with a financial institution on December
8, 1997. The credit facility, which is secured by the partnership's accounts
receivable, will serve as interim financing until the consummation of the
Restructuring Transaction occurs.
The Partnership has a $585,000,000 credit facility ("the Credit Facility")
used solely for financing the construction and launch of two high powered
satellites. The Credit Facility, which is collateralized by letters of credit
provided by all but one of the Partners, is scheduled to mature on September
30, 1998. The unused portion of the Credit Facility amounted to $44,000,000 at
December 31, 1996. The ultimate use of the remainder of the Credit Facility
obligation is dependent, in part, on the outcome of certain events. For
additional information concerning such events, see PRIMESTAR Partners
Restructuring, Asset Acquisition Agreement and High Power Satellite
disclosures in Note 2 to the Unaudited Financial Statements of the Partnership
as of September 30, 1997 and 1996.
The changes in the balances of prepaid and other current assets and of other
assets, net between December 31, 1996 and 1995 primarily relate to transponder
fee prepayments made between July 1995 and December 1996. Payments of
$16,198,000 and $12,362,000 made in 1996 and 1995, respectively, cover a one
year period
F-192
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
of transponder service beginning in March 1997. As of December 31, 1996 and
1995, prepaid and other current assets included transponder fee prepayments of
$21,420,000 and $0, respectively. Likewise, as of December 31, 1996 and 1995,
other assets, net included transponder fee prepayments of $7,140,000 and
$12,362,000, respectively.
During the years ended December 31, 1996, 1995 and 1994, the Partnership
used cash in operating activities of $47,000,000, $78,000,000 and $54,000,000,
respectively. Most of the cash used by the Partnership is attributable to
operating losses and changes in accounts receivable and prepaid and other
current assets, offset by changes in accounts payable and accrued expenses.
During the years ended December 31, 1996, 1995, and 1994, the Partnership
used cash of $116,000,000, $134,000,000 and $224,000,000, respectively,
primarily to fund the cost of constructing the high power satellites. In light
of the pending Restructuring and ASkyB Transactions, the Partnership is
evaluating alternative future plans with respect to one of the satellites,
Tempo DBS-2, which presently serves as a ground spare for the launched
satellite, Tempo DBS-1. Tempo DBS-1 is currently in the process of in-orbit
testing. The outcome of these alternatives could impact the amount of future
satellite expenditures and the carrying value of capitalized costs.
At December 31, 1996, the Partnership's future minimum operating lease
commitments for transponders aggregated approximately $262,000,000.
F-193
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
PRIMESTAR Partners L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' capital and of cash flows present fairly,
in all material respects, the financial position of PRIMESTAR Partners L.P. at
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 2 to the
financial statements, the Partnership has suffered recurring losses from
operations and its 1997 operating budget reflects cash requirements in excess
of the current aggregate capital commitment of its partners. In addition, the
Partnership's credit facility becomes due in June 1997. These matters raise
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 14, 1997, except as to Note 13,
which is as of March 9, 1997.
F-194
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 12,145 $ 10,956
Restricted cash.......................................... 803 689
Accounts receivable--related parties, net................ 91,024 60,444
Prepaid and other current assets......................... 33,076 549
-------- --------
Total current assets................................... 137,048 72,638
Property and equipment, net................................ 18,131 9,990
Costs of satellites under construction..................... 525,746 419,256
Other assets, net.......................................... 7,348 14,078
-------- --------
$688,273 $515,962
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Borrowings under credit facility expected to be
refinanced.............................................. $521,000 --
Current portion of satellite obligation.................. 255 --
Accounts payable and other accrued expenses.............. 47,623 $ 29,132
Accounts payable--related party.......................... 7,501 4,690
Accrued payroll.......................................... 3,990 2,373
Accrued interest......................................... 4,538 1,716
-------- --------
Total current liabilities.............................. 584,907 37,911
Borrowings under long-term credit facility................. -- 419,000
Long-term obligation--satellite............................ 4,227 --
Deferred rent--related party............................... -- 7,210
-------- --------
Total liabilities...................................... 589,134 464,121
-------- --------
Commitments and contingencies
Partners' capital:
Contributed capital...................................... 314,968 251,968
Accumulated loss......................................... (215,829) (200,127)
-------- --------
Total partners' capital.................................... 99,139 51,841
-------- --------
$688,273 $515,962
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-195
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Subscriber revenues--related parties........... $412,999 $180,595 $ 27,841
Interest....................................... 1,845 1,252 405
-------- -------- --------
414,844 181,847 28,246
-------- -------- --------
Expenses:
Operating...................................... 316,763 147,948 41,832
Selling, general and administrative............ 109,798 68,152 36,343
Depreciation and amortization.................. 3,261 2,890 2,700
Interest expense............................... 737 8 61
Loss on deferred option payments............... -- 4,886 1,767
(Gain) loss on disposal of property and
equipment..................................... (13) -- 1,259
-------- -------- --------
430,546 223,884 83,962
-------- -------- --------
Net loss......................................... $(15,702) $(42,037) $(55,716)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-196
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL LOSS TOTAL
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1993.................. $105,606 $(102,374) $ 3,232
Capital contributions......................... 78,300 -- 78,300
Net loss...................................... -- (55,716) (55,716)
-------- --------- --------
Balance at December 31, 1994.................. 183,906 (158,090) 25,816
Capital contributions......................... 68,062 -- 68,062
Net loss...................................... -- (42,037) (42,037)
-------- --------- --------
Balance at December 31, 1995.................. 251,968 (200,127) 51,841
Capital contributions......................... 63,000 -- 63,000
Net loss...................................... -- (15,702) (15,702)
-------- --------- --------
Balance at December 31, 1996.................. $314,968 $(215,829) $ 99,139
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-197
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(15,702) $(42,037) $ (55,716)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 4,178 2,890 2,700
Loss on deferred option payments.............. -- 4,886 1,767
(Gain) loss on disposal of property and
equipment.................................... (13) -- 1,259
Change in assets and liabilities:
Accounts receivable, related parties......... (30,580) (48,245) (10,379)
Deposits..................................... (28) 757 (808)
Prepaid and other assets..................... (23,637) (13,024) (1,220)
Accounts payable, accrued expenses, and
accrued interest............................ 22,930 18,984 7,767
Accounts payable--related party.............. 2,811 1,846 2,844
Deferred rent................................ (7,210) (3,968) (2,598)
-------- -------- ---------
Net cash used in operating activities....... (47,251) (77,911) (54,384)
-------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment and payments
on satellite construction..................... (116,345) (133,867) (224,097)
-------- -------- ---------
Cash flows from financing activities:
Increase in deferred financing fees............ -- -- (1,573)
Loans from partners............................ -- -- 48,184
Repayment of loans from partners............... -- -- (119,348)
Capital contributions.......................... 63,000 68,062 78,300
Borrowings under credit facility............... 102,000 129,000 290,000
Principal payments of long-term satellite
obligation.................................... (101) -- --
Increase in restricted cash.................... (114) (298) (391)
-------- -------- ---------
Net cash provided by financing activities... 164,785 196,764 295,172
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... 1,189 (15,014) 16,691
Cash and cash equivalents at beginning of year.. 10,956 25,970 9,279
-------- -------- ---------
Cash and cash equivalents at end of year........ $ 12,145 $ 10,956 $ 25,970
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-198
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1.ORGANIZATION AND BUSINESS
PRIMESTAR Partners, L.P. (the Partnership), was formed on February 8, 1990
as a Delaware limited partnership.
The purpose of the Partnership is to engage in the business of acquiring,
originating and/or providing television programming services delivered by
satellite to subscribers through a network of distributors throughout the
continental United States. Presently, there are approximately 700 such
distributors, all of which are owned by the Partnership's partners. In
addition, the Partnership purchases a portion of its programming services
from affiliates of certain partners. Such related party programming
expenses for the years ended December 31, 1996 and 1995 were approximately
$174,304 and $66,091, respectively
The Partnership currently delivers programming services from leased
transponders on a medium-powered satellite (K-2). This satellite will be
replaced when another medium-power satellite (GE-2), which was launched
January 30, 1997, becomes operational (see Notes 7 and 13). The Partnership
also has two high-powered satellites under construction, one of which will
be launched in the first quarter of 1997 (see Note 13). The other high-
powered satellite will be used as a ground spare or backup satellite until
the launched high-powered satellite is operational, or otherwise used,
deployed or disposed of as determined by the Partnership (see Note 6).
Satellites are subject to significant risks including manufacturing defects
affecting the satellite or its components, launch failure resulting in
damage to or destruction of the satellite, or incorrect orbital placement,
and damage in orbit caused by asteroids, space debris or electrostatic
storms. Such factors can prevent or limit commercial operation or reduce
the satellite's useful life.
Capital contributions:
In accordance with the limited partnership agreement (the Agreement),
capital contributions by the partners are required as follows:
. Cash contributions: Nine of the Partnership's ten partners made initial
contributions of an aggregate $38,000 in cash. Eight of those nine
partners and one former partner have contributed an additional aggregate
$270,300 in cash as of December 31, 1996 and have made additional
aggregate cash contributions of $28,400 in 1997.
. In-kind contribution: In return for an initial 15% ownership interest in
the Partnership, a partner leased certain satellite transponders to the
Partnership at below market rates. This in-kind contribution was
recorded at its estimated fair market value of $6,700 as of the
inception of the Partnership. (See Notes 7 and 10.)
Distributions and allocations:
Net profits and net losses are allocated to each partner in accordance with
their stated percentage ownership interests, as defined by the Agreement.
The amount of annual cash distributions, if any, is determined by the
Partners Committee. Such distributions are made to the partners on a pro
rata basis, in accordance with partners' respective stated percentage
ownership interests as of the date of such distributions. Liquidation
distributions and distributions of any net proceeds from capital
transactions are made pro rata to partners with positive capital account
balances (as defined), until such balances have been reduced to zero; the
balance of such distributions, if any, is distributed pro rata in
proportion to the partners' stated percentage
F-199
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ownership interests. For purposes of all distributions and allocations,
respective partners' percentage ownership interests are determined as
outlined in the Agreement.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY
Basis of Accounting and Liquidity:
The Partnership prepares its financial statements on the accrual basis of
accounting. The financial statements have been prepared assuming that the
Partnership will continue as a going concern. The Partnership has suffered
recurring losses from operations and its 1997 operating budget reflects
cash requirements which are in excess of the current aggregate capital
commitment of its partners. In addition, the Partnership's credit facility
becomes due in June 1997 (see Note 8). These matters raise substantial
doubt about the Partnership's ability to continue as a going concern.
Management believes that the Partnership has adequate capital to continue
normal operating activity through approximately April 1997. Presently, the
partners determine the amount of additional capital commitments on a
quarterly basis. The Partnership is currently negotiating to refinance its
credit facility and management believes either such refinancing will occur
prior to its expiration or that the due date of the current facility will
be extended until refinancing occurs. There can be no assurance the
Partnership will be able to refinance the credit facility.
Revenue Recognition:
Subscriber revenues are billed to distributors and recognized when related
programming services are delivered. Included in accounts receivable at
December 31, 1996 and 1995 are $39,489 and $27,244, respectively, of
unbilled programming services.
Cash and cash equivalents and restricted cash:
Cash and cash equivalents are defined as short-term, highly liquid
investments with original maturities of three months or less. Restricted
cash represents unexpended borrowings under the credit facility which must
be used for the satellite construction project and interest and fees
associated with the credit facility.
Property and Equipment:
Depreciation is provided over the estimated useful lives of the assets (5
to 7 years) using the straight-line method. Maintenance and repairs are
expensed as incurred and the cost of betterments are capitalized.
Intangible assets:
The intangible asset associated with the in-kind capital contribution is
being amortized over the term of the related lease agreement and is fully
amortized as of December 31, 1996 (see Note 7).
Deferred financing fees:
Deferred financing fees of $1,732 at December 31, 1996, 1995 and 1994,
relate to securing of the credit facility associated with the satellite
construction project (see Note 8). Fees are being amortized over the life
of the credit facility. Amortization expense was $577 for the years ended
December 31, 1996 and 1995 and $470 for the year ended December 31, 1994.
See Note 6 regarding capitalization of deferred financing fees.
F-200
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income tax reporting:
Federal and state income taxes are payable by the individual partners;
therefore, no provision or liability for income taxes is reflected in the
financial statements. Differences between bases of assets and liabilities
for tax and financial reporting purposes result primarily from expensing of
option payments, capitalization of startup costs and recognition of expense
relating to operating leases for tax purposes.
Fair value of financial instruments:
Financial instruments that are subject to fair value disclosure
requirements are carried in the financial statements at amounts that
approximate fair value.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Long-lived assets:
The Partnership adopted Statement of Financial Accounting Standards No. 121
(FAS 121), "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" in 1996. FAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and
for long-lived assets and certain intangibles to be disposed of. Under FAS
121, the Partnership will periodically review its long-lived assets to
assess recoverability in the period such impairment becomes evident. There
was no financial statement effect from the adoption of FAS 121.
3.ACCOUNTS RECEIVABLE--RELATED PARTIES
Accounts receivable--related parties, represents amounts due from
distributors, all of whom are owned by the partners, for programming
services. The partners and distributors are engaged in the business of
providing television programming through cable and satellite to
subscribers. Sales to the 5 largest of these distributors represented
approximately 14%, 9% and 11% of the Partnership's subscriber revenues for
1996, 1995 and 1994, respectively. The allowance for doubtful accounts was
$1,576, $812 and $146 at December 31, 1996, 1995 and 1994, respectively.
4.NOTES RECEIVABLE
On November 15, 1990, the Partnership assumed from a partner two revolving
credit promissory notes (the "Notes") related to amounts due from a third
party. In connection with the assumption, the Partnership agreed to
reimburse the partner for the total of all advances made to date under the
Notes plus accrued interest on such advances at a rate of 10% per annum.
Such reimbursement totaled approximately $767 and was paid in January 1991.
The Partnership also advanced approximately $151 to the third party.
Because of uncertainty regarding the ultimate collectibility of aggregate
advances, the Company had recorded a reserve for the full amount of the
notes.
Under the terms of the revolving credit promissory note with the third
party, the principal balance and all unpaid accrued interest is due and
payable in the event the third party enters into an agreement to transfer
F-201
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
its Direct Broadcast Satellite (DBS) construction permit or license. During
1994, the third party entered into an agreement to transfer the permit and,
as a result, in 1995, the Partnership recovered $450 representing principal
of $375 and interest of $75 through the repayment date. The balance of the
remaining Note and related reserve as of December 31, 1996 is approximately
$543.
5.PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 comprise the
following:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Construction in progress--control center.................... $ 6,323 $ --
Control center, compression/lab equipment................... 9,496 8,223
Other furniture and equipment............................... 7,147 5,540
------- ------
22,966 13,763
Accumulated depreciation.................................... (4,835) (3,773)
------- ------
$18,131 $9,990
======= ======
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $2,302, $1,932 and $1,271, respectively.
6.COSTS OF SATELLITES UNDER CONSTRUCTION
In 1990, the Partnership entered into an Option Agreement with an affiliate
of a Partner (the "Related Party"). The Related Party ultimately became a
FCC authorized Broadcast Satellite Services (BSS) satellite licensee with a
permit to construct, launch and operate BSS satellites within an 11
transponder authorization at the 119 degree BSS location. Under the Option
Agreement, the Partnership obtained the exclusive rights to lease or
purchase all of the Related Party's transponder capacity in satellite
locations allocated to the Related Party under the FCC permit. In
consideration of these rights, the Option Agreement required the
Partnership to reimburse the Related Party for actual costs incurred by the
Related Party related to maintaining the Option Agreement, not to exceed
$2,000. Since the Option Agreement is considered an integral part of the
Partnership's strategy to improve the distribution of its programming,
cumulative payments under the Option Agreement were capitalized and are to
be assigned to the cost of the leased or purchased channel capacity and
amortized over the life of the leased or purchased asset.
In 1993, through various arrangements entered into through the Related
Party, the Partnership also obtained the rights to a fixed price contract
with Space Systems/Loral, Inc. for the construction and launch of two
satellites. In 1994, the Partnership commenced construction of two BSS
satellites. Through December 31, 1996, 1995 and 1994, the Partnership
reimbursed the Related Party $457,685, $382,840 and $278,772, respectively,
for the construction of the satellites. Included in the cost of the
satellites under construction as of December 31, 1996 is approximately
$1,300, representing the amount due under the Option Agreement and other
costs related to the maintenance of the 11 transponder authorization. These
costs are included in accounts payable--related party as of December 31,
1996.
The total amount of interest cost (including amortization of deferred
financing fees and commitment fees) capitalized in conjunction with the
satellite construction project for the years ended December 31, 1996, 1995
and 1994 was $30,448, $25,521 and $10,432, respectively.
F-202
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership also incurred costs related to its pursuit of licenses for
other orbital locations. Through December 31, 1995, such costs totaled
approximately $6,700. Management determined that, for various reasons, such
costs may not be recoverable and reserved approximately $4,900 and $1,800
in 1995 and 1994, respectively. At December 31, 1996, $4,600 of such costs
remain in accounts payable--related party.
On February 7, 1997, the Partnership approved a resolution effective
December 31, 1996 reaffirming that the Partnership had unconditionally
exercised its option pursuant to the Option Agreement, authorized the
launch of one of the BSS satellites (Satellite No. 2) into the 119 degree
orbital location (the only full conus location available to the
Partnership) and ordered Satellite No. 1 to be used either as a spare or
back-up for Satellite No. 2 or to be deployed or disposed of as determined
by the Partnership (see Note 13). In addition, the Related Party and its
affiliates confirmed in writing that Satellite No. 1 would be used as a
spare or backup for Satellite No. 2 or otherwise deployed or disposed of as
determined by the Partnership. Consistent with the resolution, the
Partnership paid $73,786 to the Related Party in December 1996 to reimburse
the Related Party for 1996 satellite construction costs through December.
In addition, the Partnership agreed to reimburse the Related Party $7,535
for the amounts due under the Option Agreement for the exercise of the
option, for deployment of the DBS satellites and for other consulting,
legal and engineering expenses. As of December 31, 1996, Satellite No. 2
was scheduled for launch in the February-March 1997 timeframe.
7.OTHER ASSETS
Other assets at December 31, 1996 and 1995 comprise the following:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Bargain element of transponder lease (see Note 10)........ -- $ 6,706
Less: accumulated amortization............................ -- (5,747)
-------- -------
Net....................................................... -- 959
-------- -------
Prepaid transponder space (see Note 10)................... $ 28,560 12,362
Less: current portion..................................... (21,420) --
-------- -------
7,140 12,362
-------- -------
Deposits.................................................. 101 73
Deferred financing fees, net.............................. 107 684
-------- -------
$ 7,348 $14,078
======== =======
</TABLE>
8.SATELLITE CONSTRUCTION CREDIT FACILITY
On March 9, 1994, the Partnership entered into a $565,000 credit facility
with a consortium of 25 banks to provide financing for the construction and
launch of the satellites described in Note 6. The facility matures June 30,
1997 and borrowings are collateralized by letters of credit issued by each
of the general partners (or an affiliate) (the Partners/Partner
Affiliates). Borrowings bear interest, at the option of the Partnership, at
a rate per annum equal to any of the following:
1. The greater of the following (the "Alternate Base Rate")
(i) The prime rate of Chase Manhattan Bank
(ii) The weighted average of the rates for overnight funds plus 0.5%;
or
(iii) The secondary market rate for three-month certificates of
deposit plus 1%;
F-203
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. The sum of (a) 7/16% plus (b) LIBOR for interest periods of one, two,
three, six or, if made available by each of the banks, twelve months; or
3. The sum of (a) 9/16% plus (b) the CD rate for certificates of deposit
having a term of 30, 60, 90 or 180 days.
Interest is payable, to the extent bearing interest based on the Alternate
Base Rate, quarterly, in arrears and to the extent bearing interest based
on LIBOR or the CD rate, on the last day of the applicable interest period
(and, in the case of a CD or LIBOR rate loan having an interest period
longer than 90 days or three months, respectively, at intervals of 90 days
and three months, respectively, after the first day of such interest
period). Borrowings and prepayments shall be in the amount of $5 million in
the case of LIBOR and CD rate loans and $1 million in the case of Alternate
Base Rate loans, or in each case, any greater multiple of $1 million. The
Partnership will pay quarterly, in arrears, a commitment fee of 3/16% per
annum on the daily unused portion of the facility.
At December 31, 1996, LIBOR borrowings outstanding bear interest at rates
ranging from 5.94% to 6.06% and mature at varying dates through March 17,
1997. Also outstanding at December 31, 1996 is an Alternate Base Rate
borrowing bearing interest at 8.25%, which matured on January 3, 1997. As
borrowings mature, the Partnership refinances them under the same facility
as provided by the agreements. The Partnership intends to refinance the
credit facility, which matures on June 30, 1997, on a long-term basis.
Interest incurred for the years ended December 31, 1996, 1995 and 1994
totaled $29,607, $24,511 and $8,435, respectively. Commitment fees for the
years ended December 31, 1996, 1995 and 1994 totaled $245, $419 and $573,
respectively. The interest incurred and commitment fees were capitalized
into costs of satellites under construction.
9.LONG-TERM OBLIGATION--SATELLITE
Effective November 1996, the Partnership entered into an agreement which
provides for access to a medium-power satellite (K-2) through June 1997.
The agreement requires the Partnership to make payments of $48 per month
through July 2008. The present value of these payments was recorded as an
intangible asset and a long-term obligation using an interest rate of
7.32%. The intangible asset will be amortized over the expected service
life from mid-November 1996 through June 1997. Amortization expense for the
year ended December 31, 1996 totaled $917. Future minimum payments under
this agreement are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997................................................................. $ 575
1998................................................................. 575
1999................................................................. 575
2000................................................................. 575
2001................................................................. 575
Thereafter........................................................... 3,785
------
Total minimum payments............................................... 6,660
Less: amounts representing interest.................................. (2,178)
------
4,482
Less: current portion................................................ (255)
------
Long-term obligation................................................. $4,227
======
</TABLE>
F-204
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership will also lease transponders on the satellite (see Note
10).
10.COMMITMENTS
The Partnership has long-term lease commitments for office space, satellite
services, equipment and transponders which are accounted for as operating
leases.
At December 31, 1996, future minimum lease payment commitments under these
leases are as follows:
<TABLE>
<CAPTION>
TRANSPONDERS
----------------
YEAR K-2 GE-2 OTHER
---- ------- -------- ------
<S> <C> <C> <C>
1997................................................. $10,500 $ 14,500 $1,710
1998................................................. -- 42,040 1,671
1999................................................. -- 46,800 1,088
2000................................................. -- 46,800 537
2001................................................. -- 46,800 341
Thereafter........................................... -- 54,600 --
------- -------- ------
Total minimum rentals................................ $10,500 $251,540 $5,347
======= ======== ======
</TABLE>
The K-1 transponder lease arrangement, which terminated in November 1996
provided for fixed payments, as well as payments which escalated over the
term of the lease; further, the agreement provided for a deferral of
payments until later years. The Partnership recognized the expense related
to this agreement by amortizing the total commitments on a straight-line
basis. Deferred rent-related party in the accompanying balance sheet
represents the difference between the straight-line amortization and cash
payments.
In 1995, the Partnership entered into a satellite transponder service
agreement with an affiliate of a Partner for satellite service on 14
transponders on an FSS medium power satellite (GE-2) to be launched into
the 85 degree orbital location. This medium power satellite will replace
the satellite (K-2) currently used by the Partnership, which is nearing the
end of its useful life. Service on GE-2 was scheduled to commence in March
1997 (see Note 13). Under this agreement, the Partnership obtained
unprotected service on 14 transponders for a period of one year with an
option to extend the service for an additional one-year period. Payments of
$16,198 and $12,362 were made to the affiliate in 1996 and 1995,
respectively.
In 1996, the Partnership amended this agreement to provide the Partnership
with service on up to 24 transponders on the satellite. The agreement also
extended the initial term to four years at an annual rate of $46,800 when
the satellite is fully utilized. The term of this agreement was extendable
at the option of the Partnership, for the remainder of the useful life of
the satellite, along with protection afforded by another satellite (GE-3)
to be launched in the fourth quarter of 1997 (see Note 13).
At the beginning of 1996, the Partnership's business was being operated on
14 transponders on the K-1 medium power satellite operated at 85 degrees.
The K-1 satellite was expected to reach its useful end of life in the
fourth quarter of 1996. To assure continuity of service, the Partnership,
in 1995, had entered into an agreement with an affiliate of a Partner to
provide the Partnership with temporary satellite service through July 1997
(under certain conditions) on 14-15 transponders on another medium power
satellite (K-2) to be located at the 85 degree location. In November 1996,
all of the Partnership's operations were transferred from K-1 to K-2
successfully. Service on this satellite will continue until GE-2 is deemed
commercially operational (see Notes 9 and 13).
F-205
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A subsidiary of a partner provides satellite uplink services to the
Partnership. Total payments for such services were approximately $10,721,
$10,581 and $5,610 for 1996, 1995 and 1994, respectively.
In addition to the fixed minimum rentals above, all of the transponder
leases include variable charges, based upon the number of subscribers to
the Partnership's programming service, of one dollar per subscriber per
month for all subscribers up to and including 750,000 subscribers, fifty
cents per subscriber per month for all subscribers over 750,000 up to a
maximum of 2,000,000 subscribers, and no variable charge with respect to
any subscribers over 2,000,000. Such variable charges for the years ended
December 31, 1996, 1995 and 1994 were approximately $11,613, $5,550 and
$1,035, respectively.
Rent expense under operating leases for the years ended December 31, 1996,
1995 and 1994 was approximately $25,536, $23,500 and $22,208, respectively.
11.BENEFIT PLANS
In 1991, the Partnership established a 401(k) Retirement Savings Plan
covering substantially all employees who have completed one year of
service. The Plan permits eligible employees to contribute up to 10% of
their annual pre-tax compensation and the Partnership makes matching
contributions of up to 50% of participants first 5% of annual pre-tax
compensation. The Partnership may also make discretionary contributions to
the Plan. The Partnership's contributions to the Plan for the years ended
December 31, 1996, 1995 and 1994 totaled approximately $179, $80 and $61,
respectively.
The Partnership has a Long-Term Incentive Compensation Program for senior
management. Under the program participants may be awarded units with a
value of $1 based upon meeting certain performance objectives. Awarded
units vest pro rata at the end of years three through five subsequent to
the year of award. As of December 31, 1996 and 1995, 3,535 and 2,115 units
have been awarded with values of $3,535 and $2,115, respectively.
Compensation expense for the years ended December 31, 1996 and 1995 totaled
$755 and $471, respectively. Through December 31, 1996, 323 units with a
value of $323 have vested. Unit holders have the option to convert all or a
part of their accumulated and unpaid awards to common stock at the initial
offering price in the event of a public offering for the Partnership.
12.LITIGATION AND CONTINGENCIES
The Antitrust Division of the Department of Justice and the antitrust
bureaus of several states began a formal investigation into the affairs of
the Partnership in 1990. The Partnership complied with the discovery
demands and cooperated in the investigations. On June 9, 1993, complaints
and consent judgments were filed by the Department of Justice and the
attorneys general of forty states in the federal court for the Southern
District of New York alleging violations of federal and state antitrust law
by the Partnership and the partners in PRIMESTAR Partners. Five additional
states and the District of Columbia filed similar complaints in the same
court on August 18, 1993. The defendants agreed to settle the allegations
in all of the complaints for, and the Partnership paid $4,750 without any
admission of wrongdoing. Final consent judgments were entered by the
District Court (over the objections of certain third parties and attempted
intervenors) in all of the state actions on September 14, 1993. The time to
appeal the judgments in the state actions has expired. The final consent
judgment in the Department of Justice matter was entered by the District
Court (over the objections of certain third parties) on April 5, 1994. The
time to appeal the judgment expired on June 4, 1994. The consent judgment
on the states expires as of October 1997.
On March 16, 1994, the Partnership received a Civil Investigative Demand
(CID) from the Antitrust Division of the Department of Justice (DOJ)
relative to the DOJ's investigation of restraint of trade. The
F-206
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CID issued by the DOJ does not identify the Partnership as the subject of
the investigation. Management does not believe that the Partnership has
engaged in any unlawful conduct, but has cooperated with the DOJ in its
investigation. The DOJ informed the Partnership on January 24, 1996 that it
had concluded that it would not take any further action at that time nor
did it presently intend to institute any legal proceedings against the
Partnership. The DOJ further informed the Partnership that the
investigation would remain open and that it would continue to monitor
developments in this area; management, however, does not reasonably foresee
any additional activity on this matter.
In complying with the Satellite Home Viewer Act of 1994, the Partnership is
required to discontinue network service to certain of its subscribers who
are able to receive network services over the air. The Partnership has
received challenges from certain network affiliates. In response to such
challenges, the Partnership has disconnected the challenged broadcast
network service from certain subscribers. None of the networks or
affiliates has asserted any claim for damages under applicable law against
the Partnership. Discussions are continuing between representatives of the
Partnership and representatives of the networks and their affiliates
concerning reporting and signal measurement issues under the Act, and both
parties will be continuing negotiations toward a final written agreement.
If a written agreement is reached, management believes that it is unlikely
that the networks and their affiliates will initiate litigation against the
Partnership. In the event a written agreement is not reached, management
believes it is likely that the networks and their affiliates will initiate
litigation against the Partnership. The Act provides for remedies which can
include actual damages, injunctions, and statutory damages. Statutory
damages per claim are limited to five dollars per subscriber, per month, or
$250 in a six month period. At present the Partnership remains unable to
determine upon what basis such damages would be calculated or what their
amount might be. Therefore, management is unable at this time to assess the
impact, if any, of the unasserted claim on the Partnership's results of
operations, financial position or cash flows.
On April 16, 1996, the Partnership was served with a complaint from a third
party, now pending in the United States District Court. The Plaintiff
claims that the Partnership has infringed a patent on an "audio storage and
distribution system," supposedly involving the Partnership's digital
satellite TV systems. No specific amount of damages is claimed, but the
plaintiff requests compensatory damages (trebled), attorneys' fees and
costs, and injunctive relief. This is one of at least 18 similar cases
pending against different defendants. The Partnership has made a claim for
indemnification against a subsidiary of the equipment provider, which sold
the systems in question to the Partnership. Management is unable at this
time to assess the impact, if any, of the aforesaid claim on the
Partnership's results of operations, financial position or cash flows.
On April 25, 1996, the Partnership received oral notification of a claim
from a third party for alleged patent infringement in an unspecified amount
or, in the alternative, a claim for past and future license fees in an
amount to be negotiated, arising out of the Partnership's (and its
distributors) utilization of DigiCipher Equipment for the provision of the
Partnership's service to its distributors (and their customers). The
Partnership has made a claim for indemnification against the supplier of
the DigiCipher Equipment to the Partnership. Management is unable at this
time to assess the impact, if any, of the aforesaid claim on the
Partnership's results of operations, financial position or cash flows.
The Partnership is currently involved in a contractual dispute with a
multi-channel program provider, with respect to whether the Partnership has
a contractual obligation to add four (4) additional programming channels
upon the transition of its service to GE-2. The program provider has
threatened litigation if the matter is not successfully addressed. The
parties are currently in discussions to settle the matter. Notwithstanding
a failure by the parties to successfully resolve this matter, management
believes the matter will not have a material effect on the Partnership's
results of operations, financial position or cash flows.
F-207
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On November 21, 1996, the International Bureau of the Federal
Communications Commission ("FCC") granted EchoStar Satellite Corporation, a
consolidated subsidiary of EchoStar Communications Corp. (together with its
consolidated subsidiaries, "EchoStar") a conditional authorization to
construct, launch and operate a Ku-band domestic fixed satellite into the
orbital position at 83 degrees immediately adjacent to that occupied by GE-
2. Contrary to previous FCC policy, EchoStar was authorized to operate at a
power level of 130 watts. If EchoStar were to launch its high power
satellite authorized to 83 degrees and commence operations at that location
at a power level of 130 watts, it would likely cause harmful interferences
to the reception of the Partnership's signal by its customers.
On December 23, 1996, an affiliate of a Partner and the Partnership
separately requested reconsideration of the International Bureau's
authorization for EchoStar to operate at 83 degrees. These requests were
opposed by EchoStar and others. These reconsideration requests currently
are pending at the International Bureau. In addition, the affiliate and the
Partnership have attempted to resolve potential coordination problems
directly with EchoStar. It is uncertain whether any coordination between
the Partnership and EchoStar will resolve such interference. There can be
no assurance that the International Bureau will change slot assignments, or
power levels, in a fashion that eliminates the potential for harmful
interference. Management is unable at this time to assess the impact, if
any, of the aforesaid matter on the Partnership's results of operations,
financial position or cash flows.
13.SUBSEQUENT EVENTS
On February 19, 1997, the Partnership amended its four year unprotected
satellite service agreement with an affiliate of a Partner for service on
GE-2 (see Note 10). This amendment revised the agreement to a six year
protected arrangement with an option to extend to the end of life, if the
option is exercised by December 31, 1997. Under the amendment, annual
payments increase to $69,840 from $46,800. If, however, the Partnership
exercises the End of Life option of the agreement on or before December 31,
1997, the annual rate will be $62,640. GE-2 became commercially operational
on March 1, 1997.
The affiliate is constructing a spare satellite (GE-3) for this medium
power satellite, whereby effective upon the commercial operation date of
GE-3, the satellite would be available to the Partnership for the purpose
of providing orbital location protected service. Launch of GE-3 is
scheduled for the fourth quarter of 1997.
On March 8, 1997, Satellite No. 2 was successfully launched and is
currently undergoing deployment to its orbital location but awaits final
checkout on the number of transponders operating in accordance with the
specifications (see Note 6).
Effective March 9, 1997, each of the Partners/Partner Affiliates issued
letters of credit totaling $20,000, which increased the total credit
facility to $585,000 (see Notes 2 and 8).
F-208
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
PRIMESTAR Partners, L.P. (the "Partnership") engages in the business of
transmitting television and audio programming services via a medium power
satellite to subscribers throughout the continental United States. The
Partnership's services are sold on a per subscriber basis to a network of
approximately 700 Distributors, all of which are owned by the Partnership's
partners. These Distributors re-sell the services and lease related reception
equipment to subscribers under the PRIMESTAR(R) brand name. In addition, the
Partnership has contracted with various national and regional consumer
electronics retailers to generate new customer acquisition leads which are
forwarded to Distributors for installation and ongoing customer service.
Unless otherwise stated herein, increases in the Partnership's revenue and
operating, selling, general and administrative expenses are primarily related
to subscriber growth. The Partnership's operating margins are almost entirely
derived from authorization fees paid on a per subscriber basis by its
Distributors as well as from a portion of revenues generated from customer
purchases of PRIMESTAR(R) pay-per-view (PPV) services. As of September 30,
1997 and 1996, the Partnership served approximately 1,815,000 and 1,391,000
subscribers, respectively. Improvements in the Partnership's results of
operations are largely affected by its Distributors' abilities to increase
their customer bases and by the Partnership's ability to effectively manage
costs. The Partnership operates in an increasingly competitive environment. No
assurance can be given that such increasing competition will not adversely
affect the Partnership's ability to sustain its historical growth rate in
terms of subscribers and/or revenue.
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Partnership and should be
read in conjunction with the accompanying financial statements of the
Partnership.
SUMMARY OF OPERATIONS
Nine months ended September 30, 1997 vs. nine months ended September 30, 1996
Operating results for the Partnership for the nine months ended September
30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Income:
Subscriber revenues--related parties..................... $450,973 $294,634
Interest................................................. 1,747 1,302
-------- --------
452,720 295,936
-------- --------
Expenses:
Operating................................................ 367,622 227,578
Selling, general and administrative...................... 112,680 72,018
Depreciation and amortization............................ 2,856 2,390
Interest expense......................................... 13,130 459
(Gain) loss on disposal of property and equipment........ 294 (13)
-------- --------
496,582 302,432
-------- --------
Net loss................................................... $(43,862) $ (6,496)
======== ========
</TABLE>
F-209
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
Revenues
Revenues increased to $450,973,000 for the nine months ended 1997, as
compared to $294,634,000 for the same period in 1996. This increase of
$156,303,000 or 53% is primarily due to an increase of 424,000 subscribers
between September 30, 1996 and September 30, 1997. The Partnership's
subscriber growth has been achieved through PRIMESTAR service enhancements,
retail and other customer acquisition programs and a series of Partnership and
Distributor marketing campaigns. The weighted average aggregate monthly amount
per subscriber charged by the Partnership to Distributors was $30 and $28
during the first nine months of 1997 and 1996, respectively. The increase in
the amount charged per subscriber reflects expanded programming services
purchased by subscribers beginning in April 1997. These expanded services
became available to subscribers upon the Partnership's transfer of operations
to a new satellite (GE-2) which provided PRIMESTAR(R) with significant
increases in channel capacity.
Interest
Interest income increased to $1,747,000 for nine months ended 1997, as
compared to $1,302,000 for the same period in 1996, an increase of $445,000 or
34%. This increase is primarily due to improved cash management as well as
larger average cash balances resulting from the timing of Partner capital
contributions.
Operating Expenses
Operating expenses increased to $367,622,000 for the nine months ended
September 30, 1997, as compared to $227,578,000 for the nine months ended
September 30, 1996, an increase of $140,044,000 or 62%. This increase is
primarily due to programming cost increases resulting from subscriber growth
and increased programming services carried by PRIMESTAR. In addition,
increases in satellite expenses contributed $22,909,000 to the overall
increase in operating expenses as a result of the transfer of operations to
the GE-2 satellite.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $112,680,000 for
the nine months ended September 30, 1997 as compared to $72,018,000 for the
nine months ended September 30, 1996, an increase of $40,662,000 or 56%.
Approximately $18,970,000 of this increase is attributable to contractual
payments made to various national and regional consumer electronics retailers
in exchange for new customer acquisition leads and subsidy payments made to
Distributors for free programming promotions offered to new customers. Another
$4,624,000 of the overall increase relates to incentive payments made to
agents of the Partnership's Distributors for newly acquired subscribers.
Approximately $3,800,000 of the increase is attributable to severance costs
incurred in connection with the Partnership's decision to relocate its
corporate offices. The remainder of the increase is primarily due to increases
in marketing and administrative costs incurred in support of the ongoing
subscriber growth.
Interest Expense
Interest expense increased to $13,130,000 for the nine months ended
September 30, 1997, as compared to $459,000 for the corresponding period in
1996. In January 1997, construction activities were suspended on one of two
high power satellites under construction by the Partnership. This satellite
was placed in storage and will be used as a ground spare or backup satellite
until the other high power satellite is operational, or otherwise used,
deployed or disposed of as determined by the Partnership. Prior to 1997,
interest on both satellites was capitalized. Interest totaling $12,434,000
incurred on the satellite in storage during the nine months ended September
30, 1997 was expensed, accounting for 95% of the overall increase in interest
expense.
F-210
<PAGE>
PRIMESTAR PARTNERS L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1997 and 1996, capital
contributions used to fund the Partnership's working capital requirements and
capital expenditures aggregated $28,435,291 and $53,000,000, respectively.
The unused portion of the Partnership's Credit Facility amounted to
$30,000,000 at September 30, 1997. The ultimate use of the remainder of the
Credit Facility obligation is dependent, in part, on the outcome of certain
uncertainties. For additional information concerning such uncertainties, see
PRIMESTAR Partners Restructuring, Asset Acquisition Agreement and High Power
Satellites disclosures in Note 2 to the Unaudited Financial Statements of the
Partnership as of September 30, 1997 and 1996.
As an alternative to capital contributions, the Partnership executed a
$50,000,000 revolving credit facility with a financial institution on December
8, 1997,. The credit facility, which is secured by the Partnership's accounts
receivable, will serve as interim financing until the consummation of the
Restructuring Transaction occurs.
Prepaid and other current assets decreased $19,958,000 from December 31,
1996 to September 30, 1997. This decrease was primarily the result of the
amortization of prepaid transponder fees for the period March 1997 through
September 1997. Other assets at December 31, 1996 included approximately
$7,140,000 of long-term prepaid transponder fees. This amount was reclassified
to prepaid and other current assets as of September 30, 1997, accounting for
the decrease of $7,252,000 in other assets, net between December 31, 1996 and
September 30, 1997.
During the nine months ended September 30, 1997, the Partnership used cash
in operating activities of $23,828,000. Most of the cash used by the
Partnership is attributable to operating losses and changes in accounts
receivable, offset by changes in prepaid and other assets, accrued expenses
and accounts payable. The Partnership's operating activities used cash of
$28,264,000 for the nine months ended September 30, 1996. Most of the cash
used was a result of unfavorable changes in the Partnership's operating
assets.
During the nine months ended September 30, 1997 and 1996, the Partnership
used cash of $19,310,000 and $29,824,000, respectively to fund construction
costs of the high power satellites and to purchase Property, Plant and
Equipment.
At September 30, 1996, the Partnership's future minimum operating lease
commitments for transponders aggregated $242,000,000.
F-211
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 31,918 $ 12,145
Restricted cash................................... 138 803
Accounts receivable--related parties, net......... 114,839 91,024
Prepaid and other current assets.................. 13,118 33,076
-------- --------
Total current assets............................ 160,013 137,048
Property and equipment, net......................... 17,073 18,131
Costs of satellites under construction.............. 543,070 525,746
Other assets, net................................... 96 7,348
-------- --------
$720,252 $688,273
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Borrowings under credit facility expected to be
refinanced....................................... $555,000 $521,000
Current portion of satellite obligation........... 269 255
Accounts payable and other accrued expenses....... 64,350 47,623
Accounts payable--related party................... 3,717 7,501
Accrued payroll................................... 8,921 3,990
Accrued interest.................................. 260 4,538
-------- --------
Total current liabilities....................... 632,517 584,907
Long-term obligation--satellite..................... 4,023 4,227
-------- --------
Total liabilities............................... 636,540 589,134
-------- --------
Commitments and contingencies
Partners' capital:
Contributed capital............................... 343,403 314,968
Accumulated loss.................................. (259,691) (215,829)
-------- --------
Total partners' capital......................... 83,712 99,139
-------- --------
$720,252 $688,273
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-212
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Income:
Subscriber revenues--related parties....... $ 450,973 $ 294,634
Interest................................... 1,747 1,302
--------------- ---------------
452,720 295,936
--------------- ---------------
Expenses:
Operating.................................. 367,622 227,578
Selling, general and administrative........ 112,680 72,018
Depreciation and amortization.............. 2,856 2,390
Interest expense........................... 13,130 459
(Gain) loss on disposal of property and
equipment................................. 294 (13)
--------------- ---------------
496,582 302,432
--------------- ---------------
Net loss..................................... $ (43,862) $ (6,496)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-213
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<S> <C> <C> <C>
<CAPTION>
CONTRIBUTED ACCUMULATED TOTAL PARTNERS'
CAPITAL LOSS CAPITAL
----------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1, 1997.............. $314,968 $(215,829) $ 99,139
Capital contributions................... 28,435 -- 28,435
Net loss for the period................. -- (43,862) (43,862)
-------- --------- --------
Balance at September 30, 1997........... $343,403 $(259,691) $ 83,712
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-214
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (43,862) $ (6,496)
Adjustments to reconcile net loss to net cash (used in)
provided
by operating activities:
Depreciation and amortization......................... 6,523 3,542
(Gain) loss on disposal of property and equipment..... 294 (13)
Change in assets and liabilities:
Accounts receivable, related parties................ (23,815) (23,701)
Deposits............................................ 5 (8)
Prepaid and other assets............................ 23,431 (14,650)
Accounts payable, accrued expenses, and accrued in-
terest............................................. 17,379 16,149
Accounts payable--related party..................... (3,783) 4,123
Deferred rent....................................... (7,210)
--------- --------
Net cash used in operating activities............. (23,828) (28,264)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and payments on sat-
ellite construction.................................... (19,309) (29,824)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................... 28,435 53,000
Borrowings under credit facility........................ 34,000 21,000
Principal payments of long-term satellite obligation.... (190) --
Increase (decrease) in restricted cash.................. 665 274
--------- --------
Net cash provided by financing activities......... 62,910 74,274
--------- --------
Net increase in cash and cash equivalents................. 19,773 16,186
Cash and cash equivalents at beginning of period.......... 12,145 10,956
--------- --------
Cash and cash equivalents at end of period................ $ 31,918 $ 27,142
========= ========
NONCASH INVESTING ACTIVITIES:
Accounts payable for costs of satellites under construc-
tion................................................... -- $ 59,296
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-215
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1.ORGANIZATION AND BUSINESS
PRIMESTAR Partners, L.P. (the Partnership), was formed on February 8, 1990
as a Delaware limited Partnership.
The purpose of the Partnership is to engage in the business of acquiring,
originating and / or providing television programming services delivered
by satellite to subscribers through a network of distributors throughout
the continental United States. Presently, there are approximately 700 such
distributors, all of which are owned by the Partnership's partners. In
addition, the Partnership purchases a portion of its programming services
from affiliates of certain partners. Such related party programming
expenses for the nine months ended September 30, 1997 and 1996 were
approximately $179,247 and $123,347, respectively.
The Partnership currently delivers programming services from leased
transponders on a medium power satellite (GE-2), which became commercially
operational on March 1, 1997. The Partnership also has two high power
satellites, one of which was launched on March 8, 1997 and is currently
undergoing extended in-orbit testing (Tempo DBS-1) (see Note 2). Tempo
DBS-1 is expected to be available for commercial operation during the
first quarter of 1998 assuming that such in-orbit testing is completed
successfully. The other high power satellite (Tempo DBS-2) will be used as
a ground spare or backup satellite until the launched high power satellite
is operational, or otherwise used, deployed or disposed of as determined
by the Partnership. The implementation of any high power strategy is
subject to regulatory approval.
Satellites are subject to significant risks including manufacturing
defects affecting the satellite or its components, launch failure
resulting from damage to or destruction of the satellite, incorrect
orbital placement, and damage in orbit caused by asteroids, space debris
or electrostatic storms. Such factors can prevent or limit commercial
operation or reduce the satellite's useful life.
CAPITAL CONTRIBUTIONS:
In accordance with the limited partnership agreement (the agreement),
capital contributions by the partners are required as follows:
Cash contributions: Nine of the Partnership's ten partners made initial
contributions of an aggregate $38,000 in cash. Eight of those nine
partners and one former partner have contributed an additional aggregate
$298,700 in cash as of September 30, 1997, including additional aggregate
cash contributions of $28,400 during 1997. With these capital
contributions, management currently believes that the Partnership has
adequate capital to continue normal operating activity through February
1998.
In-kind contribution: In return for an additional 15% ownership interest
in the Partnership, a partner leased certain satellite transponders to the
Partnership at below market rates. This in-kind contribution was recorded
at its estimated fair market value of $6,700 as of the inception of the
Partnership.
DISTRIBUTIONS AND ALLOCATIONS:
Net profits and net losses are allocated to each partner in accordance
with their stated percentage ownership interests, as defined by the
Agreement. The amount of annual cash distributions, if any, is determined
by
F-216
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the Partners Committee. Such distributions are made to the partners on a
pro rata basis, in accordance with partners' respective stated percentage
ownership interests as of the date of such distributions. Liquidation
distributions and distributions of any net proceeds from capital
transactions are made pro rata to partners with positive capital account
balances (as defined), until such balances have been reduced to zero; the
balance of such distributions, if any, is distributed pro rata in
proportion to the partners' stated percentage ownership interests. For
purposes of all distributions and allocations, respective partners'
percentage ownership interests are determined as outlined in the
agreement.
LIQUIDITY:
The financial statements have been prepared assuming that the Partnership
will continue as a going concern. The Partnership has suffered recurring
losses from operations and its 1997 operating budget reflects cash
requirements which are in excess of the current aggregate capital
commitment of its partners. In addition, the Partnership's credit facility
becomes due on September 30, 1998 (see Note 4). These matters raise
substantial doubt about the Partnership's ability to continue as a going
concern.
On December 8, 1997, the Partnership executed a $50,000,000 revolving
credit facility with a financial institution. The facility will be used
for working capital and general operating purposes until the earlier of
the closing date of the Restructuring or December 7, 1998. Borrowings are
collateralized by a perfected first priority security interest in the
accounts receivable of the Partnership and are limited to 85% of eligible
accounts receivable. Borrowings bear interest, at the option of the
Partnership, at a rate per annum equal to Base Rate or LIBOR plus 1.25%.
Commitment fees are calculated at 1/4% per annum of the unused portion of
the facility and are payable quarterly in arrears.
Management believes that the Partnership has adequate capital to continue
normal operating activity through approximately February 1998. Presently,
the partners determine the amount of additional capital commitments on an
as needed basis. It is expected that refinancing of the Partnership's
credit facility will occur prior to its expiration, or that the due date
of the current facility will, again, be extended until refinancing occurs.
There can be no assurance that the Partnership will be able to refinance
the credit facility.
BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with instructions to Form S-4 and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the nine months ended September 30, 1997 are not necessarily
indicative of results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and
footnotes thereto included in this Form S-4.
2.RECENT DEVELOPMENTS
PRIMESTAR PARTNERS RESTRUCTURING:
The partners of the Partnership have entered into an agreement (the
"Restructuring Agreement") which sets forth the principal terms and
conditions of a proposed transaction (the "Restructuring Transaction")
whereby the Partnership will be reorganized into corporate form. The
reorganization will be achieved by combining all of the assets of the
Partnership, as well as certain Direct Broadcast Satellite (DBS) related
assets of each of the individual partners, into a new corporation
tentatively named PRIMESTAR, Inc. In return for their respective
contributions to PRIMESTAR, Inc., the partners will receive cash (or an
assumption of indebtedness by PRIMESTAR) and stock in PRIMESTAR, Inc.
PRIMESTAR, Inc. stock will be publicly traded.
F-217
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Restructuring Agreement itself is binding and although definitive
agreements are contemplated, they are not a condition to the consummation
of the restructuring. TSAT and PRIMESTAR, Inc. have entered into an
Agreement and Plan of Merger (the "TSAT Merger Agreement") providing for
the merger of TSAT into PRIMESTAR, Inc. As a result of this transaction
(the "TSAT Merger"), the control of TEMPO Satellite, Inc., a subsidiary of
TSAT and the holder of FCC Part 100 high power DBS authorizations, will be
transferred from TSAT to PRIMESTAR, Inc. This transaction is subject to
regulatory and other approvals, including the prior approval of the FCC.
As a result of the Restructuring Transaction, PRIMESTAR, Inc. will own all
of the general and limited partnership interests in the Partnership, and
the Partnership agreement will be terminated or amended to remove all of
its management provisions.
ASSET ACQUISITION AGREEMENT:
On June 11, 1997, MCIT (the principal domestic operating subsidiary of MCI
Communications Corporation ("MCI")), PRIMESTAR Partners L.P., The News
Corporation Limited ("News Corp."), American Sky Broadcasting L.L.C.
("ASkyB"), and for certain purposes only, each of the general and limited
partners of PRIMESTAR Partners L.P. entered into a binding Asset
Acquisition Agreement (the "Agreement").
The Agreement provides for the sale and assignment to PRIMESTAR, Inc. of
MCIT's DBS authorizations, the two high power satellites MCIT is
constructing, and other related contracts and assets (PRIMESTAR LHC, Inc.,
which will be a wholly-owned subsidiary of PRIMESTAR, Inc. will actually
hold the FCC authorizations). In consideration, ASkyB will receive non-
voting securities of PRIMESTAR, Inc. equal to approximately 31% (subject
to adjustment at closing) of the equity of the PRIMESTAR, Inc. on a fully
diluted basis.
The Agreement currently contemplates that these securities would consist
of both non-voting Convertible Preferred Stock and Convertible Notes.
Although the allocation between the non-voting Convertible Preferred Stock
and the Convertible Notes has not been finalized, the non-voting
Convertible Preferred Stock and the Convertible Notes both are convertible
into Series D non-voting Common Stock of PRIMESTAR, Inc. The Series D
Common Stock is automatically convertible into voting Series A Common
Stock upon transfer to a third party unaffiliated with ASkyB, New Corp.,
or an affiliate of either.
If the Restructuring Transaction whereby PRIMESTAR, Inc. will be created
is not completed prior to 270 days from the date of the Agreement and if
all conditions to closing of the Agreement have been satisfied, the
Agreement provides that MCIT, News Corp., and ASkyB may cause the DBS
authorizations, the satellites under construction, and related contracts
to be assigned in advance of the Restructuring Transaction. Should this
occur, PRIMESTAR LHC, Inc. will be owned by PRIMESTAR Partners L.P. until
consummation of the Restructuring Transaction.
This transaction is subject to regulatory and other approvals, including
the prior approval of the FCC.
HIGH POWER SATELLITE:
In April 1997, following an unusually intense solar disturbance, the
Partnership was notified of some reduction of electrical power on Tempo
DBS-1 (see Note 1). The Partnership does not currently know the extent of
such power reduction, and cannot confirm the precise causes thereof;
however, such condition could eventually affect the operation of Tempo
DBS-1, either alone or together with other events that may arise during
the expected life of the satellite.
CORPORATE OFFICE RELOCATION:
On August 6, 1997, the Partnership announced it will move its corporate
offices to the Denver, Colorado metro area as part of a streamlining
designed to enhance customer service and distribution. The
F-218
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
move to Denver is expected to begin early in 1998 after the Partnership's
transition to a public company is completed. At September 30, 1997,
accrued severance and stay bonus costs related to the relocation totaled
$3,750.
3.OTHER ASSETS
Other assets at September 30, 1997 and December 31, 1996 comprise the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Prepaid transponder space...................... $ 11,900 $ 28,560
Less: current portion.......................... (11,900) (21,420)
-------- --------
0 7,140
Deposits....................................... 96 101
Deferred financing fees, net................... -- 107
-------- --------
$ 96 $ 7,348
======== ========
</TABLE>
4.SATELLITE CONSTRUCTION CREDIT FACILITY
On March 9, 1994, the Partnership entered into a $565,000 credit facility
with a consortium of 25 banks to provide financing for the construction
and launch of two satellites. Effective March 9, 1997 the Partnership
increased the total credit facility to $585,000. The maturity date of the
credit facility has been extended from June 30, 1997 to September 30,
1998. Borrowings are collateralized by letters of credit issued by each of
the general partners (the Partners/Partner Affiliates).
At September 30, 1997, LIBOR borrowings outstanding under the credit
facility bear interest at a rate of 6.125% and mature at varying dates
through October 29, 1997. As borrowings mature, the Partnership refinances
them under the same facility as provided by the agreements. The
Partnership intends to refinance the credit facility on a long-term basis
prior to the consummation of the Restructuring Transaction described in
Note 2. Interest incurred and capitalized as costs of satellite under
construction for the nine months ended September 30, 1997 and 1996 totaled
$12,434 and $20,376, respectively. The Partnership determined that
construction activities had been suspended on one of the high power
satellites which had been in storage as of January 1, 1997. Accordingly,
interest incurred related to the financing of construction costs for this
satellite totaling $12,434 for the nine months ended September 30, 1997
was expensed.
5.COMMITMENTS
The Partnership has long-term lease commitments for office space,
satellite services, equipment and transponders which are accounted for as
operating leases.
At September 30, 1997, future minimum lease payment commitments under
these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, GE-2 OTHER
------------------------- -------- ------
<S> <C> <C>
1998..................................................... $ 34,900 $1,704
1999..................................................... 46,800 1,271
2000..................................................... 46,800 536
2001..................................................... 46,800 425
2002..................................................... 46,800 51
Thereafter............................................... 19,500 --
-------- ------
Total minimum rentals.................................. $241,600 $3,987
======== ======
</TABLE>
F-219
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In addition to the fixed minimum rentals above, all of the transponder
leases include variable charges, based upon the number of subscribers to
the Partnership's programming service, of one dollar per subscriber per
month for all subscribers up to and including 750,000 subscribers, fifty
cents per subscriber per month for all subscribers over 750,000 up to a
maximum of 2,000,000 and no variable charge with respect to any
subscribers over 2,000,000. Such variable charges for the nine months
ended September 30, 1997 and 1996 were approximately $10,859 and $8,376
respectively.
Rent expense under operating leases for the nine months ended September
30, 1997 and 1996 was approximately $37,366 and $17,919, respectively.
On February 19, 1997, the Partnership amended its four year unprotected
satellite service agreement with an affiliate of a Partner for service on
GE-2. This amendment revised the unprotected agreement to a six year
arrangement, along with orbital protection afforded by another satellite
(GE 3), with an option to extend the agreement until the end of life of
GE-2, if the option is exercised by December 31, 1997. The Partnership is
in discussions with an affiliate of a Partner regarding an extension of
the end of life option or a new end of life option. Management does not
know what the rates will be under either the extended or new end of life
option. Currently, the annual rate is $69,840. GE-3 was successfully
launched on September 4, 1997.
6.LITIGATION AND CONTINGENCIES
The Antitrust Division of the Department of Justice and the Antitrust
bureaus of several states began a formal investigation into the affairs of
the Partnership in 1990. The Partnership complied with the discovery
demands and cooperated in the investigations. On June 9, 1993, complaints
and consent judgments were filed by the Department of Justice and the
attorneys general of forty states in the federal court for the southern
district of New York alleging violations of federal and state antitrust
law by the Partnership and the partners in PRIMESTAR Partners. Five
additional states and the District of Columbia filed similar complaints in
the same court on August 18, 1993. The defendants agreed to settle the
allegations in all of the complaints, and the Partnership paid $4,750
without any admission of wrongdoing. Final consent judgments were entered
by the District Court (over the objections of certain third parties and
attempted intervenors) in all of the state actions on September 14, 1993.
The time to appeal the judgments in the state actions has expired. The
final consent judgment in the Department of Justice matter was entered by
the District Court (over the objections of certain third parties) on April
5, 1994. The time to appeal the judgment expired on June 4, 1994. The
consent judgment on the states expired in October 1997.
On March 16, 1994, the Partnership received a Civil Investigative Demand
(CID) from the Antitrust Division of the Department of Justice (DOJ)
relative to the DOJ's investigation of restraint of trade. The CID issued
by the DOJ does not identify the Partnership as the subject of the
investigation. Management does not believe that the Partnership has
engaged in any unlawful conduct, but has cooperated with the DOJ in its
investigation. The DOJ informed the Partnership on January 24, 1996 that
it had concluded that it would not take any further action at that time
nor did it presently intend to institute any legal proceedings against the
Partnership. The DOJ further informed the Partnership that the
investigation would remain open and that it would continue to monitor
developments in this area; management, however, does not reasonably
foresee any additional activity on this matter.
In complying with the Satellite Home Viewer Act of 1994, the Partnership
is required to discontinue network service to certain of its subscribers
who are able to receive network services over the air. The
F-220
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Partnership has received challenges from certain network affiliates. In
response to such challenges, the Partnership has disconnected the
challenged broadcast network service from certain subscribers. None of the
networks or affiliates has asserted any claim for damages under applicable
law against the Partnership. Discussions are continuing between
representatives of the Partnership and representatives of the networks and
their affiliates concerning reporting and signal measurement issues under
the Act, and both parties will be continuing negotiations toward a final
written agreement. If a written agreement is reached, management believes
that it is unlikely that the networks and their affiliates will initiate
litigation against the Partnership. In the event a written agreement is
not reached, management believes it is likely that the networks and their
affiliates will initiate litigation against the Partnership. The Act
provides for remedies which can include actual damages, injunctions, and
statutory damages. Statutory damages per claim are limited to five dollars
per subscriber, per month, up to $250 thousand in a six month period. At
present, the Partnership remains unable to determine upon what basis such
damages would be calculated or what their amount might be. Therefore,
management is unable at this time to assess the impact, if any, of the
unasserted claim on the Partnership's results of operations, financial
position or cash flows.
On April 25, 1996, the Partnership received oral notification of a claim
from a third party for alleged patent infringement in an unspecified
amount or, in the alternative, a claim for past and future license fees in
an amount to be negotiated, arising out of the Partnership's (and its
distributors) utilization of DigiCipher Equipment for the provision of the
Partnership's service to its distributors (and their customers). The
Partnership has made a claim for indemnification against the supplier of
the DigiCipher Equipment to the Partnership. Management is unable at this
time to assess the impact, if any, of the aforesaid claim on the
Partnership's results of operations, financial position or cash flows.
The Partnership has unresolved contractual dispute with a multichannel
program provider, with respect to whether the Partnership had a
contractual obligation to add four (4) additional programming channels
upon the transition of its service to GE-2. The program provider
previously threatened litigation if the matter is not successfully
addressed. The parties entered into a non-binding agreement to settle the
matter and intend to formalize their understanding in a final written
agreement. Notwithstanding a failure by the parties to successfully
resolve this matter, management believes the matter will not have a
material effect on the Partnership's results of operations, financial
position or cash flows.
On November 21, 1996, the International Bureau of the Federal
Communications Commission ("FCC") granted EchoStar Satellite Corporation,
a consolidated subsidiary of EchoStar Communications Corporation (together
with its consolidated subsidiaries, "EchoStar") a conditional
authorization to construct, launch and operate a Ku-band domestic fixed
satellite into the orbital position at 83 degrees immediately adjacent to
that occupied by GE-2. Contrary to previous FCC policy, EchoStar was
authorized to operate at a power level of 130 watts. If EchoStar were to
launch its high power satellite authorized to 83 degrees and commence
operations at that location at a power level of 130 watts, it would likely
cause harmful interference to the reception of the Partnership's signal by
its customers.
On December 23, 1996, an affiliate of a Partner and the Partnership
separately requested reconsideration of the International Bureau's
authorization for EchoStar to operate at 83 degrees. These requests were
opposed by EchoStar and others. These reconsideration requests currently
are pending at the International Bureau. In addition, the affiliate and
the Partnership have attempted to resolve potential coordination problems
directly with EchoStar. It is uncertain whether any coordination between
the Partnership and EchoStar will resolve such interference. There can be
no assurance that the International Bureau will change slot assignments,
or power levels, in a fashion that eliminates the potential for harmful
interference. Management is unable at this time to assess the impact, if
any, of the aforesaid matter on the Partnership's results of operations,
financial position or cash flows.
F-221
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In July 1997, the Partnership was named a defendant, along with Mike
Tyson, Don King, and various cable television and production companies, in
three class actions arising out of the broadcast of the Holyfield-Tyson II
fight as a "Pay-Per-View" special event. Plaintiffs allege that their
purchase of the event created a contract which was breached by Tyson
intentionally engaging in conduct designed to disqualify himself from the
event. The grantor of the rights for the Partnership to carry the event
has agreed to defend the Partnership in these matters. Management is
unable at this time to assess the impact, if any, of the aforesaid claim
on the Partnership's results of operation, financial position or cash
flows.
F-222
<PAGE>
APPENDIX A-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MERGER AND CONTRIBUTION AGREEMENT
DATED AS OF FEBRUARY 6, 1998,
AMONG
TCI SATELLITE ENTERTAINMENT, INC.
PRIMESTAR, INC.
TIME WARNER ENTERTAINMENT COMPANY L.P.
ADVANCE/NEWHOUSE PARTNERSHIP
COMCAST CORPORATION
COX COMMUNICATIONS, INC.
MEDIAONE OF DELAWARE, INC.
GE AMERICAN COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
Parties and Recitals...................................................... 1
ARTICLE I
Definitions
Section 1.01. Definitions................................................ 1
Section 1.02. Terms and Usage Generally.................................. 12
ARTICLE II
Subsidiary Transactions
Section 2.01. Subsidiary Transactions.................................... 12
ARTICLE III
Asset Transfers and Mergers
Section 3.01. Drop Down; Charter and By-Laws............................. 13
Section 3.02. Post-Drop Down Transactions................................ 13
Section 3.03. Primestar Customer Statement............................... 13
Section 3.04. Primestar Inventory Statement.............................. 13
Section 3.05. Consideration.............................................. 13
ARTICLE IV
Closing
Section 4.01. Closing Date............................................... 14
Section 4.02. Closing Adjustments on Primestar Inventory................. 14
Section 4.03. Adjustment for Primestar Customers......................... 15
Section 4.04. Adjustment for Capital Contributions....................... 17
Section 4.05. Netting.................................................... 17
ARTICLE V
Representations and Warranties
Section 5.01. Representations and Warranties of TSAT..................... 17
Section 5.02. Representations and Warranties of Certain Parties.......... 23
Section 5.03. Special Representation..................................... 25
ARTICLE VI
Covenants Relating to Business
Section 6.01. Alternative Transactions................................... 25
Section 6.02. Interim Operations of TSAT................................. 26
Section 6.03. Interim Operations of each Class C Holder.................. 27
Section 6.04. Other Actions.............................................. 28
A-1-(i)
<PAGE>
ARTICLE VII
Additional Covenants
<TABLE>
<C> <S> <C> <C>
Section 7.01. Preparation of Form S-4 and the Proxy
Statement/Prospectus; TSAT
Stockholders Meeting.................................. 28
Section 7.02. Listing Application................................... 29
Section 7.03. Access to Information; Confidentiality................ 29
Section 7.04. Commercially Reasonable Efforts; Notification......... 29
Section 7.05. Primestar Customers................................... 30
Section 7.06. GE Agreements......................................... 31
Section 7.07. Equipment............................................. 31
Section 7.08. Financing; Letters of Credit.......................... 31
Section 7.09. Agreements............................................ 31
Section 7.10. Compliance............................................ 31
Section 7.11. ASkyB Transaction..................................... 31
Section 7.12. Indemnification....................................... 32
Section 7.13. Tax Indemnification................................... 33
Section 7.14. Post-Closing Cooperation: Confidentiality............. 34
Section 7.15. TCI Agreements........................................ 34
Section 7.16. Employee Matters...................................... 35
Section 7.17. Other Stockholders Approvals.......................... 35
ARTICLE VIII
Conditions Precedent
Section 8.01. Conditions Precedent.................................. 35
Section 8.02. Conditions to obligations of each of Comcast, Cox,
MediaOne, TWE,
Newhouse and GE....................................... 35
Section 8.03. Conditions to Obligations of TSAT..................... 37
ARTICLE IX
Termination, Amendment and Waiver
Section 9.01. Termination........................................... 37
Section 9.02. Effect of Termination................................. 38
Section 9.03. Amendment............................................. 38
Section 9.04. Extension; Waiver..................................... 38
ARTICLE X
General Provisions
Section 10.01. Nonsurvival of Representations and Warranties ........ 38
Section 10.02. Notices............................................... 38
Section 10.03. Assignment............................................ 41
Section 10.04. Severability.......................................... 41
Section 10.05. Entire Agreement; No Third-Party Beneficiaries........ 41
Section 10.06. Governing Law......................................... 41
Section 10.07. Enforcement; Exclusive Jurisdiction................... 41
Section 10.08. Counterparts.......................................... 42
Section 10.09. Headings.............................................. 42
Exhibit A Valuation Methodology................................. 44
[OTHER ATTACHMENTS OMITTED]
</TABLE>
A-1-(ii)
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MERGER AND CONTRIBUTION AGREEMENT (the "Agreement"), dated as of February 6,
1998, among TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation,
PRIMESTAR, INC., a Delaware corporation, TIME WARNER ENTERTAINMENT COMPANY,
L.P., a Delaware limited partnership, ADVANCE/NEWHOUSE PARTNERSHIP, a New York
general partnership, COMCAST CORPORATION, a Pennsylvania corporation, COX
COMMUNICATIONS, INC., a Delaware corporation, MEDIAONE OF DELAWARE, INC., a
Delaware corporation, and GE AMERICAN COMMUNICATIONS, INC., a Delaware
corporation.
Recitals
1. The parties hereto are either general and limited partners of PRIMESTAR
Partners L.P. or affiliates of such partners, and desire to consummate the
transactions contemplated herein, pursuant to which (a) TSAT will contribute
to a newly formed wholly owned subsidiary of TSAT, PRIMESTAR, Inc., all of
TSAT's assets and liabilities other than its stock in Tempo Satellite, Inc.,
and PRIMESTAR, Inc. will acquire the partnership interests and certain related
Primestar assets from each of TWE, Newhouse, Comcast, Cox, MediaOne and GE,
(b) TSAT will agree to merge with and into PRIMESTAR, Inc., and (c) TSAT will
enter into certain other agreements with PRIMESTAR, Inc.;
2. For federal income tax purposes, the parties hereto intend that the
Restructuring Transaction (as defined below) qualify as an exchange under
Section 351 of the United States Internal Revenue Code of 1986, as amended
(the "Code"), and that the mergers under the Merger Agreements (as defined
below) each qualify as reorganizations under Section 368(a) of the Code;
3. The parties desire to make certain representations, warranties, covenants
and agreements in connection with the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
Article I
Definitions
Section 1.01. Definitions. As used in this Agreement, the following terms
shall have the following meanings:
"Accounting Firm" is defined in Section 4.02(a).
"Agency Agreement" means an Agency Agreement with the Company on the
terms set forth under the caption "Founders' Distribution Rights--Medium
Power Subscribers" in the Term Sheet and in form and substance reasonably
satisfactory to each of the Parties.
"Agreement" is defined in the preamble hereto.
"ASkyB Agreement" means the Asset Acquisition Agreement dated as of June
11, 1997, among The News Corporation Limited, MCI Telecommunications
Corporation, American Sky Broadcasting LLC, the Partnership, and, with
respect to specified provisions only, the partners in the Partnership.
"Asset Transfer Agreements" means the MediaOne Asset Transfer Agreement,
the Newhouse Asset Transfer Agreement and the TWE Asset Transfer Agreement.
"Assumed Employment Liabilities" of any Person means (i) all obligations
and liabilities of such Person or any of its subsidiaries in respect of the
Stay Bonuses, (ii) all obligations and liabilities of such Person or any of
its subsidiaries relating to the employment by the Company of any Selected
Employee of
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such Person after the Closing Date and (iii) all obligations and
liabilities of such Person or any of its subsidiaries relating to the
termination of employment of any Selected Employee of such Person after the
Closing Date.
"Benefit Plans" is defined in Section 5.01(j).
"BSS Authorizations" means the FCC construction permit and related
authorizations, including earth station permits, held by Tempo on the date
of this Agreement, as the same may be modified, renewed or expanded from
time to time after the date of this Agreement by the FCC or any other
Governmental Entity. For avoidance of doubt, the BSS Authorizations include
the permits, authorizations and earth station permits relating to the 119
degrees West Longitude orbital position and the permits, authorizations and
earth station permits relating to the 166 degrees West Longitude orbital
position.
"By-laws" means the Amended and Restated By-laws of the Company in the
form of Exhibit C hereto.
"Call Center Debt" means indebtedness, in an amount not in excess of
$23.75 million, incurred by TSAT to fund the acquisition by TSAT of TCI's
call center located in Boise, Idaho.
"Charter" means the Restated Certificate of Incorporation of the Company
in the form of Exhibit B hereto.
"Class A Stock" means Class A Common Stock, par value $.01 per share, of
the Company.
"Class B Stock" means Class B Common Stock, par value $.01 per share, of
the Company.
"Class C Holder" means any of Comcast, Cox, MediaOne (collectively with
the MediaOne Transferors), TWE and Newhouse.
"Class C Stock" means Class C Common Stock, par value $.01 per share, of
the Company.
"Class D Stock" means Class D Common Stock, par value $.01 per share, of
the Company.
"Closing" is defined in Section 4.01.
"Closing Date" is defined in Section 4.01.
"Code" is defined in the preamble hereto.
"Comcast" means Comcast Corporation, a Pennsylvania corporation.
"Comcast I Merger Agreement" means the agreement between the Company and
Comcast Sub I in substantially the form of the Form Merger Agreement.
"Comcast II Merger Agreement" means the agreement between the Company and
Comcast Sub II in substantially the form of the Form Merger Agreement.
"Comcast Sub I" means Comcast DBS, Inc. a Delaware corporation.
"Comcast Sub II" means Comcast Satellite Communications, Inc., a Delaware
corporation.
"Communications Act" is defined in Section 5.01(e).
"Company" means PRIMESTAR, Inc., a Delaware corporation and, prior to the
Effective Time, a wholly owned subsidiary of TSAT.
"Contributed Corporation" is defined in Section 7.13(b).
"Contribution Indemnitor" is defined in Section 7.13(b).
"Covered Taxes" means all Taxes, other than transfer Taxes applicable to
the conveyance and transfer of Primestar Assets and Primestar Liabilities
pursuant to any Asset Transfer Agreement. For avoidance of doubt, "transfer
Taxes" do not include any income Tax, capital gains Tax or similar Tax
attributable to the Pre-Closing Tax Period, even if such Tax is triggered
by the transfer of Primestar Assets and Primestar Liabilities or any
related assumption of indebtedness.
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"Cox" means Cox Communications, Inc., a Delaware corporation.
"Cox Merger Agreement" means the agreement between the Company and Cox
Sub in substantially the form of the Form Merger Agreement.
"Cox Sub" means Cox Satellite, Inc., a Delaware corporation.
"Customer Payment" of any Class C Holder means an amount (which may be a
positive or negative number) equal to:
(A) $1,100
multiplied by
(B) an amount equal to
(I) (x) the TSAT Customer Ratio multiplied by (y) the Initial
Primestar Customers of such Class C Holder minus
(II) the Final Primestar Customers of such Class C Holder.
"Customer Premises Equipment" of any Person means equipment and drop-
materials (other than IRDs, LNBs, Dishes and Primefinder Remotes), used in
the reception of the PRIMESTAR programming service and either located at a
Selected Office of such Person or installed in the home of any PRIMESTAR
subscriber or disconnected PRIMESTAR subscriber of such Person.
"DGCL" means the Delaware General Corporation Law.
"Digital Satellite Assets" is defined in Section 7.12(a).
"Digital Satellite Business" means the business of distributing
multichannel programming services directly to consumers in the United
States via digital broadcast satellite, including the rental and sale of
customer premises equipment relating thereto.
"Dish" means a satellite dish, including mount and assembly, for
reception of the PRIMESTAR programming service.
"Distributor Agreement" means a Distributor Agreement with the Company on
the terms set forth in the first paragraph under the caption "Founders'
Distribution Rights--High Power Subscribers" in the Term Sheet and in form
and substance reasonably satisfactory to each of the Parties.
"Drop Down" means the contribution of assets and liabilities by TSAT to
the Company pursuant to the Drop Down Agreement.
"Drop Down Agreement" means the TSAT Asset Transfer Agreement dated as of
February 6, 1998, between the Company and TSAT.
"Effective Time" means the time on the Closing Date at which the filing
of the certificates of merger under the Merger Agreements with the
Secretary of State of the State of Delaware in accordance with the DGCL
shall occur.
"Employee Stock Option" means any stock option to purchase shares of TSAT
A Stock or TSAT B Stock granted under the TSAT Stock Plans.
"ERISA" is defined in Section 5.01(k).
"Exchange Act" is defined in Section 5.01(e).
"Excluded Accounts Receivable" of any Person means all accounts
receivable of such Person and its subsidiaries relating to the distribution
of the PRIMESTAR programming service, including rental and sales fees, to
the extent that such accounts receivable relate to service periods ending
on or prior to the Closing
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Date, plus a pro rata portion of any such accounts receivable that relate
to any service period commencing on or prior to, and ending after, the
Closing Date (based on the numbers of days in such service period on or
prior to the Closing Date, and after the Closing Date, respectively (i.e.
the "earned" portion of such accounts receivable)).
"Excluded Liabilities" of any Person (other than TSAT) means (i)
indebtedness for borrowed money of such Person and its subsidiaries
incurred on or prior to the Closing Date, other than Primestar Debt, (ii)
accounts payable incurred on or prior to the Closing Date in respect of
such Person's Primestar Business, (iii) Covered Taxes attributable to the
operation or ownership of such Person's Primestar Assets and Partnership
Interest during the Pre-Closing Tax Period and (iv) Retained Employment
Liabilities of such Person. For purposes hereof, "accounts payable" of a
Person include all obligations of such Person to pay for goods and services
received by such Person on or prior to the Closing Date in respect of such
Person's Primestar Business, whether or not an invoice for such goods and
services shall have been received by such Person on or prior to the Closing
Date, including all obligations of such Person to the Partnership in
respect of programming and/or satellite services for periods ending on or
prior to the Closing Date. To the extent any such obligation relates to any
period that includes the Closing Date, such obligation shall be allocated
between "pre-closing" accounts payable and "post-closing" accounts payable
based on the numbers of days in such period on or prior to the Closing
Date, and after the Closing Date, respectively.
"FCC" is defined in Section 5.01(e).
"Field Assets" of any Person means the office equipment, furniture, tools
and vehicles located at a Selected Office of such Person and exclusively
used to support such Person's Primestar Business (but in the case of office
equipment, tools and vehicles, only to the extent used by such Person's
Selected Employees).
"Filed SEC Documents" is defined in Section 5.01(h).
"Final Primestar Customer Statement" is defined in Section 4.03(b).
"Final Primestar Customers" of any Person means the number of Primestar
Customers set forth on such Person's Final Primestar Customer Statement.
"Final Primestar Inventory" of any Person for any category of Primestar
Inventory set forth on Schedule 3.04 means the amount of such category of
Primestar Inventory set forth on such Person's Final Primestar Inventory
Statement.
"Final Primestar Inventory Statement" is defined in Section 4.02(a).
"Five Year Plan" is defined in Section 8.01(a).
"Form Asset Transfer Agreement" means the Asset Transfer Agreement in the
form of Exhibit H hereto.
"Form Merger Agreement" means the Agreement and Plan of Merger in the
form of Exhibit G hereto.
"Form S-4" is defined in Section 5.01(e).
"Founder" means each of Comcast, Cox, MediaOne, TWE, and TCI, in each
case, together with any or all of its affiliates that are controlled by it.
"GAAP" means U.S. generally accepted accounting principles as in effect
from time to time.
"GE" means GE American Communications, Inc., a Delaware corporation.
"GE Merger Agreement" means the agreement between the Company and GE Sub
in substantially the form of the Form Merger Agreement.
"GE Sub" means GE Americom Services, Inc., a Delaware corporation.
"Glue Letters" means the two letters, each dated July 30, 1993, from the
Partnership to Tempo, relating to the Option Agreement.
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"Governmental Entity" is defined in Section 5.01(e).
"HP Agency Agreement" means an HP Agency Agreement with the Company on
the terms set forth in the second paragraph under the caption "Founders'
Distribution Rights--High Power Subscribers" in the Term Sheet and in form
and substance reasonably satisfactory to each of the Parties.
"HSR Act" is defined in Section 5.01(e).
"Included Options" means the options, SARs and restricted stock listed on
Schedule 1.01-A.
"Indemnitor" is defined in Section 7.13(c).
"Initial Primestar Customers" of any Person means the number of Primestar
Customers set forth on such Person's Primestar Customer Statement (prior to
any adjustment pursuant to Section 4.03(a)).
"Interim Financing Debt" means (i) any indebtedness of TSAT or the
Company under any credit facility or other financing arrangement which
indebtedness is incurred to fund the payment of cash consideration to (or
the assumption of indebtedness of) Comcast, Cox, MediaOne, Newhouse, TWE or
GE (or their respective affiliates) pursuant to this Agreement and (ii) any
indebtedness of TSAT incurred to fund the payment of arrangement fees,
commitment fees and any other fees or expenses charged by the lenders
and/or arrangers of the indebtedness referred to in clause (i) above.
"Inventory Payment" of any Class C Holder means an amount (which may be a
positive or negative number) equal to (A) the product of (x) the Final
Primestar Customers of such Class C Holder and (y) the TSAT Inventory Ratio
minus (B) the Primestar Inventory Valuation of such Class C Holder.
"IRD" means an Integrated Receiver Decoder.
"Letters of Credit" means letters of credit provided by Comcast, Cox,
MediaOne, TWE, Newhouse, TCI or their respective affiliates, to Loral and
GE on behalf of the Partnership.
"Liens" is defined in Section 5.01(b).
"LNB" means a Low Noise Block Converter.
"Loral" means Space Systems/Loral, Inc., a Delaware corporation.
"Loral Contract" means Contract Amendment No. 4, dated July 19, 1993, to
Contract No. TPO-1-290 between Tempo and Loral for Tempo Direct Broadcast
Satellite System (DBSS).
"Losses" is defined in Section 7.12.
"Malone" means John C. Malone.
"Malone Letter" means the letter dated the date hereof from Malone to
each Party.
"Material Adverse Change" or "Material Adverse Effect" with respect to:
(A) TSAT or the Company means any change or effect (or any
development that, insofar as can reasonably be foreseen, is likely to
result in any change or effect) that (i) is materially adverse to the
business, properties, assets, condition (financial or otherwise) or
results of operations or prospects of TSAT or the Company, as
applicable, and its subsidiaries taken as a whole or (ii) would impair
the ability of TSAT or the TSAT Sub to perform its obligations under
any of its Relevant Agreements or (iii) would prevent the consummation
of all or any part of the Restructuring Transaction, the TSAT Merger or
the Tempo Sale; or
(B) any Class C Holder or GE means any change or effect (or any
development that, insofar as can reasonably be foreseen, is likely to
result in any change or effect) that (i) is materially adverse to the
business, properties, assets, condition (financial or otherwise) or
results of operations or prospects of, in the case of a Class C Holder,
such Class C Holder's Primestar Business or (ii) would impair the
ability of such Class C Holder or any of its Subsidiaries, if any, or
GE or its Subsidiary, as applicable,
A-1-5
<PAGE>
to perform its obligations under any of its Relevant Agreements or
(iii) would prevent the consummation of all or any part of the
Restructuring Transaction, the TSAT Merger or the Tempo Sale.
Notwithstanding anything to the contrary contained herein, a change
or effect (or any development that, insofar as can reasonably be
foreseen, is likely to result in a change or effect) that affects the
business of distributing the PRIMESTAR programming service in general
shall not constitute a "Material Adverse Change" or a "Material Adverse
Effect".
"MediaOne" means MediaOne of Delaware, Inc., a Delaware corporation.
"MediaOne Asset Transfer Agreement" means the agreement among the
Company, MediaOne and the MediaOne Transferors in substantially the form of
the Form Asset Transfer Agreement.
"MediaOne Sub" means MediaOne Satellite I, Inc., a Delaware corporation.
"MediaOne Transferors" means each of (i) Continental Satellite Company,
Inc., a Massachusetts corporation, (ii) Continental Satellite Company of
Chicago, Inc., an Illinois corporation, (iii) Continental Satellite Company
of Minnesota, Inc., a Minnesota corporation, (iv) Continental Satellite
Company of New England, Inc., a New Hampshire corporation, (v) Continental
Satellite Company of Michigan, Inc., a Michigan corporation, (vi)
Continental Satellite Company of Ohio, Inc., an Ohio corporation, (vii)
Continental Satellite Company of Virginia, Inc., a Virginia corporation,
and (viii) MediaOne Satellite II, Inc., a Delaware corporation.
"Merger Agreements" means the Comcast I Merger Agreement, the Comcast II
Merger Agreement, the Cox Merger Agreement and the GE Merger Agreement.
"MergerIndemnitor" is defined in Section 7.13(a).
"Monthly Fee" is defined in Section 7.08(c).
"Multiemployer Pension Plans" is defined in Section 5.01(k).
"NASDAQ" means the Nasdaq NMS Stock Market.
"Newhouse" means Advance/Newhouse Partnership, a New York general
partnership.
"Newhouse Asset Transfer Agreement" means the agreement between the
Company and Newhouse in substantially the form of the Form Asset Transfer
Agreement.
"Newhouse Voting Agreement" means the Voting Agreement between TWE and
Newhouse in substantially the form of Exhibit E hereto.
"Notice of Disagreement" is defined in Section 4.02(a).
"Option Agreement" means the Option Agreement dated as of February 8,
1990, between Tempo and the Partnership.
"Partnership" means PRIMESTAR Partners L.P., a Delaware limited
partnership.
"Partnership Agreement" means the Partnership Agreement of the
Partnership, as amended from time to time.
"Partnership Interest" means a partnership interest in the Partnership.
"Party" means any of Comcast, Cox, GE, MediaOne, TSAT, TWE and Newhouse.
"Pension Plans" is defined in Section 5.01(k).
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, trust, business association or other
entity.
"Post-Closing Accounts Receivable" means all accounts receivable of the
Company and its subsidiaries relating to the distribution of the PRIMESTAR
programming service, including rental and sales
A-1-6
<PAGE>
fees in respect of Dishes, to the extent that such accounts receivable
relate to service periods commencing after the Closing Date, plus a pro
rata portion of any such accounts receivable that relate to any service
period commencing on or prior to, and ending after, the Closing Date (based
on the numbers of days in such service period on or prior to the Closing
Date, and after the Closing Date, respectively (i.e. the "unearned" portion
of such accounts receivable)).
"Post-Closing Tax Period" means a 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.
"Pre-Closing Tax Period" means a 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.
"Primary Executives" is defined in Section 5.01(m).
"Primefinder Remote" means a "Primefinder Remote" remote control device
for selection of channels of the PRIMESTAR programming service by program
category.
"Primestar Assets" of any Person means:
(i) each PRIMESTAR subscriber of such Person's Primestar Business as
of the Closing Date (whether or not such PRIMESTAR subscriber is
counted as a Primestar Customer hereunder), together with any
subscription contract, equipment rental contract or other agreement
with such subscriber relating to such Person's Primestar Assets and all
rights, claims and causes of action thereunder (other than Excluded
Accounts Receivable);
(ii) all leases, contracts and other agreements relating exclusively
to such Person's Primestar Business and all rights, claims and causes
of action thereunder (other than Excluded Accounts Receivable);
(iii) such Person's Primestar Inventory;
(iv) all IRDs, LNBs and Dishes installed in the home of any PRIMESTAR
subscriber of such Person;
(v) such Person's Unrecovered Inventory;
(vi) all Customer Premises Equipment held for use (wherever located,
whether in warehouses or in transit) in such Person's Primestar
Business or installed in the home of any current or disconnected
PRIMESTAR subscriber of such Person;
(vii) all rights, claims and causes of action, including under
warranties, of such Person in respect of (A) such Person's Primestar
Inventory, (B) such Person's Unrecovered Inventory, (C) outstanding
purchase orders of such Person in respect of IRDs, LNBs, Dishes and
Primefinder Remotes, (D) supply agreements to which such Person is a
party (or beneficiary) for IRDs, LNBs, Dishes and Primefinder Remotes
and (E) such Person's Customer Premises Equipment;
(viii) all Primestar Records of such Person; and
(ix) all Field Assets of such Person.
"Primestar Business" of any Person means such Person's business of
distributing the PRIMESTAR programming service.
"Primestar Customer" of any Person as of any date of determination means
each PRIMESTAR subscriber of such Person's Primestar Business having an
"active" account (as defined below) on such date, determined in accordance
with the subscriber's receivable status on such date as follows: (i) a
subscriber who has a receivable balance of not more than 60 days from the
first day of the service period to which such receivable balance relates
(without giving effect to older balances that do not exceed $10 in the
aggregate) shall count as one full Primestar Customer; (ii) a subscriber
who has a receivable balance of at least 61 but not more than 90 days from
the first day of the service period to which such receivable balance
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<PAGE>
relates (without giving effect to older balances that do not exceed $10 in
the aggregate) shall count as one half of a Primestar Customer; and (iii) a
subscriber who has a receivable balance of 91 days or more from the first
day of the service period to which such receivable balance relates shall
not be counted as a Primestar Customer. For purposes hereof, a PRIMESTAR
subscriber shall have an "active" account as of any date of determination
if (x) it is then authorized to receive service or (y) it has been de-
authorized, but has not yet been "hard" disconnected (as indicated by such
Person's billing system), and such subscriber has not voluntarily requested
de-authorization or disconnection. "Active" accounts shall not include
complimentary ("comp"), demonstration ("demo"), or other free accounts
(other than accounts which are provided one or two free months of service
in connection with any marketing, customer service or similar promotion).
"Primestar Customer Statement" is defined in Section 3.03.
"Primestar Debt" of any Person means the amount of indebtedness of such
Person to be assumed by the Company as set forth in Section 3.05, if any.
"Primestar Inventory" of any Person means all IRDs, LNBs, Dishes and
Primefinder Remotes held for use (wherever located, whether in warehouses
or in transit) in such Person's Primestar Business, or, in the case of
Primefinder Remotes, installed in the home of any PRIMESTAR subscriber of
such Person; provided, however, that "Primestar Inventory" of any Person
shall not include (i) IRDs, LNBs or Dishes installed in the home of any
PRIMESTAR subscriber of such Person or (ii) Unrecovered Inventory of such
Person.
"Primestar Inventory Statement" is defined in Section 3.04.
"Primestar Inventory Valuation" of any Person means the sum of the
amounts determined by taking the product, for each category of Primestar
Inventory set forth on Schedule 3.04, of (x) such Person's Final Primestar
Inventory of such category and (y) the dollar value set forth on Schedule
3.04 for such category of Primestar Inventory.
"Primestar Liabilities" of any Person means all obligations and
liabilities of such Person of any nature, whether known or unknown,
absolute, accrued, contingent or otherwise, and whether due or to become
due, arising out of, relating to, or otherwise in respect of, (i) such
Person's Primestar Business, Primestar Assets or Partnership Interest, (ii)
the operation by such Person or any of its subsidiaries or affiliates of
the Digital Satellite Business, (iii) in the case of Comcast, Newhouse, TWE
and GE, such Person's Primestar Debt, together with all arrangement fees,
commitment fees and any other fees or expenses charged by the lenders
and/or arrangers of any such indebtedness that becomes Interim Financing
Debt and (iv) such Person's Assumed Employment Liabilities, other than, in
any such case, Excluded Liabilities, all of which are expressly excluded.
"Primestar Records" of any Person means all PRIMESTAR subscriber lists,
billing records, subscriber and supplier correspondence (in any form or
medium) used or held for use in such Person's Primestar Business, other
than any of the foregoing directly relating to such Person's Excluded
Accounts Receivable or Excluded Liabilities.
"Proceeding" is defined in Section 10.07(b).
"Providing Person" means any of Comcast, Cox, MediaOne, TWE and Newhouse,
as the case may be.
"Proxy Statement/Prospectus" is defined in Section 5.01(e).
"Recent Customer Reduction" is defined in Section 4.03(b).
"Recent Primestar Subscriber" of any Person means any Primestar Customer
of such Person included on such Person's Primestar Customer Statement who
became a subscriber of such Person's Primestar Business 90 days or less
prior to the Closing Date, or in the case of subscribers receiving one (or
two) initial
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"free" month(s) for promotional purposes, 120 days or less (or 150 days or
less, as applicable) prior to the Closing Date.
"Registration Rights Agreement" means the Registration Rights Agreement
among the Specified Class B Holders, the Class C Holders, GE and the
Company in substantially the form of Exhibit F hereto.
"Reimbursement Agreement" means a Reimbursement Agreement with the
Company in substantially the form of Exhibit I hereto.
"Relevant Agreements" means, (a) with respect to TSAT, this Agreement,
the Drop Down Agreement, the TSAT Stockholders Agreement, the TSAT Merger
Agreement, the TSAT Tempo Agreement, and any agreement or instrument to be
delivered by TSAT under any of the foregoing agreements; (b) with respect
to the Company, this Agreement, the Drop Down Agreement, the TSAT
Stockholders Agreement, the TSAT Merger Agreement, the TSAT Tempo
Agreement, each of the Asset Transfer Agreements, each of the Merger
Agreements, and any agreement or instrument to be delivered by the Company
under any of the foregoing agreements; and (c) with respect to any other
Person, this Agreement, any Asset Transfer Agreement, any Merger Agreement,
and any agreement or instrument to be delivered by such Person under any of
the foregoing agreements, in each case to the extent such Person is named
as a party thereto.
"Representor" is defined in Section 5.02.
"ResNet Debt" means up to $12 million in indebtedness incurred by TSAT to
fund the acquisition by TSAT of a 4.99% interest in each of ResNet
Communications, LLC and ResNet Communications, Inc.
"Restricted Stock Award" means any award of shares of TSAT A Stock or
TSAT B Stock granted under the TSAT Stock Plans.
"Restructuring Transaction" means the transactions contemplated by this
Agreement, the Drop Down Agreement, the Merger Agreements and the Asset
Transfer Agreements.
"Retained Employment Liabilities" of any Person means (i) all obligations
and liabilities relating to the employment or termination of employment of
any Selected Employee of such Person's Primestar Business by such Person or
any of its subsidiaries on or prior to the Closing Date and (ii) all
obligations and liabilities relating to the employment or termination of
employment of any Terminated Employee of such Person's Primestar Business
by such Person or any of its subsidiaries at any time.
"Revised Primestar Customer Statement" is defined in Section 4.03(b).
"Roll-up Plan" is defined in the Proxy Statement/Prospectus.
"SAR" means a stock appreciation right granted under a TSAT Stock Plan.
"Satellite Debt" means indebtedness of Tempo Satellite, Inc. to the
Partnership reflecting amounts advanced by the Partnership to fund certain
payments under the Satellite Construction Agreement dated as of February
22, 1990 between Tempo Satellite, Inc. and Space Systems/Loral, Inc.
"Satellite Financing" means any financing of the Partnership in respect
of satellites that is supported by Letters of Credit.
"Satellite LOC Debt" means all reimbursement obligations of TSAT and its
subsidiaries to TCI (or, in the case of letters of credit for the account
of TSAT, to the issuer thereof) in respect of letters of credit supporting
Satellite Financing, but only to the extent such letters of credit are not
drawn upon on or prior to the Closing Date.
"SEC Documents" is defined in Section 5.01(f).
"Securities Act" is defined in Section 5.01(f).
"Selected Employee" means any full-time employee of any Class C Holder's
Primestar Business engaged full-time in Primestar Business operations who
is informed in writing by the Company (or such
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Class C Holder at the direction of the Company) on or prior to March 20,
1998 that he or she will be employed by the Company.
"Selected Office" of any Person means an office of such Person listed on
Schedule 1.01-B.
"Senior Subordinated Discount Notes" means the 12 1/4% Senior
Subordinated Discount Notes due 2007 of TSAT.
"Senior Subordinated Notes" means the 10 7/8% Senior Subordinated Notes
due 2007 of TSAT.
"Specified Class B Holder" has the meaning set forth in the Stockholders
Agreement.
"Stay Bonus" means a bonus, in an amount equal to 50% of an employee's
monthly base salary and accruing on a monthly basis from December 1, 1997
until the date such employee's employment is terminated, payable to any
full-time employee of any Class C Holder's Primestar Business engaged full-
time in Primestar Business operations who is (i) informed in writing by
such Class C Holder (at the direction of the Company) that he or she will
not be employed by the Company after the Closing Date or (ii) offered
employment by the Company but chooses not to accept such offer but only if
the position offered is not "comparable" to such employee's position with
such Class C Holder's Primestar Business or would require a relocation to
an office that is more than 55 miles from such employee's current office.
"Stockholders Agreement" means the Stockholders Agreement among the
Specified Class B Holders, the Class C Holders, GE and the Company in
substantially the form of Exhibit D hereto.
"Subsidiary" means, (i) with respect to Comcast, Comcast Sub I and
Comcast Sub II, (ii) with respect to Cox, Cox Sub, (iii) with respect to
GE, GE Sub and (iv) with respect to MediaOne, MediaOne Sub and each
MediaOne Transferor.
"Super-majority Vote" shall have the meaning assigned thereto in the
Partnership Agreement.
"Supplemental Indentures" means supplemental indentures providing for
assumption by the Company on the Closing Date of the Senior Subordinated
Discount Notes and the Senior Subordinated Notes, which supplemental
indentures shall be in form reasonably satisfactory to the Parties and
which shall not otherwise effect any amendment or modification of the
indentures under which such notes were issued without the prior approval of
the Partnership by a Super-majority Vote.
"Taxes" is defined in Section 5.01(l).
"Tax Sharing Agreement" means the Tax Sharing Agreement dated as of June
11, 1997, between TCI and TSAT.
"TCI" means Tele-Communications, Inc., a Delaware corporation.
"TCIC Credit Facility" means the Amended and Restated Credit Agreement
dated as of February 19, 1997, between TCIC and TSAT.
"Tempo" means Tempo Satellite, Inc., an Oklahoma corporation.
"Tempo Assets" means the BSS Authorizations, the Tempo Satellites, the
Loral Contract, and all rights, claims and causes of action under the Loral
Contract, all insurance claims in respect of the Tempo Satellites, and
Tempo's rights under the Tempo Option.
"Tempo Option" means the Option Agreement and the Glue Letters, together
with the option granted to the Partnership thereunder.
"Tempo Sale" is defined in the TSAT Tempo Agreement.
"Tempo Satellites" means the satellites constructed under the Loral
Contract.
"Terminated Employee" means (i) any full-time employee of any Class C
Holder's Primestar Business engaged full-time in Primestar Business
operations who is informed in writing by the Company (or such
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Class C Holder at the direction of the Company) on or prior to March 20,
1998 that he or she will not be employed by the Company, (ii) any full-time
employee of any Class C Holder not engaged full-time in Primestar Business
operations and (iii) any part-time employee of any Class C Holder's
Primestar Business.
"Term Sheet" means the Summary of Business Terms attached to the letter
dated June 11, 1997, from the Partnership to the Parties (or their
affiliates).
"Transition Services Agreement" means the Transition Services Agreement
dated as of December 4, 1996, between TCI and TSAT.
"Transition Services Term Sheet" means a term sheet governing transition
arrangements between the Company and Comcast, Cox, MediaOne and TWE in form
and substance reasonably satisfactory to each of such Parties.
"TSAT" means TCI Satellite Entertainment, Inc., a Delaware corporation.
"TSAT A Stock" means Series A Common Stock, par value $1.00 per share, of
TSAT.
"TSAT B Stock" means Series B Common Stock, par value $1.00 per share, of
TSAT.
"TSAT Closing Date" is defined in the TSAT Merger Agreement.
"TSAT Credit Agreement Amendment" means an amendment to the Credit
Agreement dated as of February 19, 1997, between TSAT and the lenders under
the Credit Agreement, to permit the Restructuring Transaction, which
amendment shall have been approved by a Super-majority Vote.
"TSAT Customer Ratio" means the ratio of (x) the Final Primestar
Customers of TSAT to (y) the Initial Primestar Customers of TSAT.
"TSAT Debt" means, as of any date of determination, (i) the principal of
and premium (if any) in respect of (A) indebtedness of TSAT and its
subsidiaries for borrowed money and (B) indebtedness of TSAT and its
subsidiaries evidenced by notes, debentures, bonds or other similar
instruments; (ii) the capitalized amount of all obligations of TSAT and its
subsidiaries required to be classified and accounted for as capital leases
for financial reporting purposes in accordance with GAAP; (iii) all
obligations of TSAT and its subsidiaries for the deferred purchase price of
property or under title retention agreements (excluding trade accounts
payable arising in the ordinary course of business); (iv) all reimbursement
obligations of TSAT and its subsidiaries in respect of letters of credit,
banker's acceptances and similar instruments; and (v) all guarantees (and
similar instruments) issued by TSAT and its subsidiaries in respect of
obligations of the type listed in clauses (i) through (iv) above of any
other Person; provided, that the term "TSAT Debt" shall not include Call
Center Debt, Interim Financing Debt, ResNet Debt, Satellite Debt or
Satellite LOC Debt.
"TSAT Inventory Ratio" means the ratio of (x) the Primestar Inventory
Valuation of TSAT to (y) the Final Primestar Customers of TSAT.
"TSAT Merger Agreement" means the Agreement and Plan of Merger dated as
of February 6, 1998, between the Company and TSAT.
"TSAT Merger" means the merger of TSAT with and into the Company, with
the Company as the surviving corporation, pursuant to the TSAT Merger
Agreement.
"TSAT Stockholders Agreement" means the Stockholders Agreement among the
Company, Malone and TSAT in substantially the form of Exhibit N hereto.
"TSAT Stockholder Approval" is defined in Section 5.01(e).
"TSAT Stockholders Meeting" is defined in Section 5.01(g).
"TSAT Stock Plans" means (i) the TSAT 1996 Stock Incentive Plan and (ii)
the TSAT 1997 Nonemployee Director Stock Option Plan.
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"TSAT Sub" means the Company until consummation of the Closing.
"TSAT Tempo Agreement" means the TSAT Tempo Agreement dated as of
February 6, 1998, between the Company and TSAT.
"TWE" means Time Warner Entertainment Company, L.P., a Delaware limited
partnership.
"TWE Asset Transfer Agreement" means the agreement between the Company
and TWE in substantially the form of the Form Asset Transfer Agreement.
"Unrecovered Inventory" of any Person means all IRDs, LNBs, Dishes and
Primefinder Remotes installed in the home of any disconnected PRIMESTAR
subscriber of such Person.
"Up-Front Fee" is defined in Section 7.08(c).
"US West" means U S WEST Media Group, Inc., a Delaware corporation.
"US West Guarantee" means the Guarantee Agreement dated as of the date
hereof among US West, Comcast, Cox, TSAT, TWE and Newhouse.
"Voting Agreements" means (i) the Voting Agreement dated as of June 12,
1997, among Donne F. Fisher, a division of TWE, Comcast, TSAT, Cox,
MediaOne, Newhouse and GE; (ii) the Voting Agreement dated as of June 12,
1997, among Malone, a division of TWE, Comcast, TSAT, Cox, MediaOne,
Newhouse and GE; and (iii) the Voting Agreement dated as of June 12, 1997,
among TCI, a division of TWE, Comcast, TSAT, Cox, MediaOne, Newhouse and
GE.
Section 1.02. Terms and Usage Generally. The definitions in Article I shall
apply equally to both the singular and plural forms of the terms defined
therein. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. All references herein to
Articles or Sections shall be deemed to be references to Articles or Sections
of this Agreement, unless the context shall otherwise require. The words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation". All accounting terms not defined in this
Agreement shall have the meanings determined by GAAP. The words "hereof",
"herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. Unless otherwise expressly provided herein, any
agreement, instrument or statute defined or referred to herein or in any
agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
Article II
Subsidiary Transactions
Section 2.01. Subsidiary Transactions. Concurrently with the execution and
delivery of this Agreement:
(a) TSAT and the Company are executing and delivering the Drop Down
Agreement, the TSAT Merger Agreement and the TSAT Tempo Agreement;
(b) TSAT, Malone and the Company are executing and delivering the TSAT
Stockholders Agreement;
(c) Comcast Sub I and the Company are executing and delivering the
Comcast I Merger Agreement;
(d) Comcast Sub II and the Company are executing and delivering the
Comcast II Merger Agreement;
(e) Cox Sub and the Company are executing and delivering the Cox Merger
Agreement;
(f) GE Sub and the Company are executing and delivering the GE Merger
Agreement;
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(g) MediaOne, the MediaOne Transferors and the Company are executing and
delivering the MediaOne Asset Transfer Agreement;
(h) Newhouse and the Company are executing and delivering the Newhouse
Asset Transfer Agreement; and
(i) TWE and the Company are executing and delivering the TWE Asset
Transfer Agreement.
Article III
Asset Transfers and Mergers
Section 3.01. Drop Down; Charter and By-laws. Upon the terms and subject to
the conditions set forth in this Agreement, immediately prior to the Effective
Time, TSAT shall consummate the Drop Down in accordance with the terms of the
Drop Down Agreement, and concurrently therewith, the Charter shall be filed
with the Delaware Secretary of State in accordance with the DGCL, and the
Charter and the By-laws shall become effective.
Section 3.02. Post-Drop Down Transactions. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time:
(a) each of Comcast Sub I, Comcast Sub II, Cox Sub and GE Sub,
respectively, shall merge with and into the Company, in each case in
accordance with the respective terms of the Comcast I Merger Agreement, the
Comcast II Merger Agreement, the Cox Merger Agreement and the GE Merger
Agreement; and
(b) each of MediaOne and the MediaOne Transferors (other than MediaOne
Satellite II, Inc.), Newhouse and TWE, respectively, shall assign and
transfer all of such Party's right, title and interest in, to and under
such Party's Primestar Assets and Partnership Interest to the Company, and
the Company shall assume all of such Party's Primestar Liabilities, and
MediaOne Satellite II, Inc., will contribute all the issued and outstanding
capital stock of MediaOne Sub to the Company, in each case in accordance
with the respective terms of the MediaOne Asset Transfer Agreement, the
Newhouse Asset Transfer Agreement and the TWE Asset Transfer Agreement.
Section 3.03. Primestar Customer Statement. On the day immediately preceding
the Closing Date, TSAT and each Class C Holder shall deliver to each other
Party a statement, certified by an officer of such Person (a "Primestar
Customer Statement"), setting forth the number of Primestar Customers of such
Person as of 4 p.m. New York time on such day, as determined in good faith by
such Person, and such number shall be deemed to be the number of Primestar
Customers of such Person as of the Closing Date for purposes of the
transactions contemplated by Section 3.05.
Section 3.04. Primestar Inventory Statement. On the Closing Date, TSAT and
each Class C Holder shall deliver to each other Party a statement, certified
by an officer of such Person (a "Primestar Inventory Statement"), setting
forth the Primestar Inventory transferred (whether by asset transfer or
merger) to the Company or a subsidiary thereof by or on behalf of such Person
on the Closing Date as set forth in Sections 3.01 or 3.02. Such Primestar
Inventory shall be stated by category in accordance with the categories and
subclassifications set forth in the definition of Primestar Inventory and on
Schedule 3.04.
Section 3.05. Consideration. At the Closing, TSAT will receive (pursuant to
the Drop Down Agreement) from the Company, in connection with the transactions
described above, shares of Class A Stock of the Company and shares of Class B
Stock of the Company, in such amounts as are determined in accordance with the
methodology set forth in Exhibit A hereto as of the Closing Date. At the
Closing, each of Comcast, Cox, MediaOne, Newhouse and TWE will receive
(directly, or through one or more of its Subsidiaries, in each case pursuant
to the Merger Agreements and/or Asset Transfer Agreements to which it or any
of its Subsidiaries is a party) from the Company, in connection with the
transactions described above, (i) shares of Class A Stock
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of the Company and shares of Class C Stock of the Company and (ii) in the case
of Cox and MediaOne, an amount of cash, and in the case of Comcast, Newhouse
and TWE, an assumption of indebtedness by the Company, in each case in such
amounts as are determined in accordance with the methodology set forth in
Exhibit A hereto as of the Closing Date. At the Closing, GE will receive
(indirectly, through its Subsidiary, pursuant to the GE Merger Agreement to
which its Subsidiary is a party) from the Company, in connection with the
transactions described above, (i) shares of Class A Stock of the Company and
(ii) an assumption of indebtedness by the Company, in each case in such
amounts as are determined in accordance with the methodology set forth in
Exhibit A hereto as of the Closing Date. The numbers set forth in Exhibit A
are for illustrative purposes only and are not binding on the parties hereto.
Article IV
Closing
Section 4.01. Closing Date. (a) Subject to the terms and conditions of this
Agreement, the closing of the Restructuring Transaction (the "Closing") shall
take place (i) at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825
Eighth Avenue, New York, New York, 10019, on the later of (x) March 31, 1998
and (y) the first business day following the date on which the last to be
fulfilled or waived of the conditions set forth in Article VIII shall be
fulfilled or waived in accordance herewith or (ii) at such other time, date or
place as the Parties may agree (the "Closing Date").
(b) At the Closing:
(i) the transactions described in Article III shall be consummated as
provided therein, in the Drop Down Agreement and in the applicable Merger
Agreements and Asset Transfer Agreements, and appropriately executed
documents to be delivered pursuant to the Drop Down Agreement, the Merger
Agreements and Asset Transfer Agreements shall be delivered by the
applicable parties;
(ii) the Company shall deliver to TSAT, Comcast, Cox, MediaOne, TWE,
Newhouse and GE (in connection with the Drop Down Agreement and the
applicable Merger Agreements and Asset Transfer Agreements) (x)
certificates representing the shares of Class A Stock, Class B Stock and
Class C Stock as provided in Section 3.05, which shares (when delivered to
such Parties pursuant to such agreements) shall have been duly authorized,
validly issued, fully paid and nonassessable, (y) in the case of Comcast,
TWE, Newhouse and GE, an instrument assuming the amount of debt determined
pursuant to Section 3.05 and (z) in the case of Cox and MediaOne, the
amount of cash determined pursuant to Section 3.05;
(iii) the Company shall deliver to Comcast, Cox, MediaOne and TWE, by
wire transfer of immediately available funds, each such Party's respective
Up-Front Fee;
(iv) TSAT, Comcast, Cox, MediaOne, TWE and Newhouse shall deliver to the
Company a list of its Primestar subscribers as of the day immediately
preceding the Closing Date, in paper and magnetic form;
(v) the Company and the appropriate Parties shall deliver to one another
duly executed counterparts of the Stockholders Agreement, the Registration
Rights Agreement and the Reimbursement Agreements;
(vi) TWE and Newhouse shall deliver to one another duly executed
counterparts of the Newhouse Voting Agreement; and
(vii) the Company and each of the Founders shall deliver to one another
duly executed counterparts of an Agency Agreement, an HP Agency Agreement
and a Distributor Agreement.
Section 4.02. Closing Adjustments on Primestar Inventory. (a) During the 45
day period following the Closing Date, the Company and its independent
auditors shall be permitted to review the working papers relating to each
Person's Primestar Inventory Statement delivered pursuant to Section 3.04, and
each Providing Person shall cooperate in good faith with the Company to
respond to any questions the Company may have in respect
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of such Providing Person's Primestar Inventory Statement. At or prior to the
conclusion of such 45 day period, the Company shall give written notice to
each Party of its agreement with a Primestar Inventory Statement (in which
case such Primestar Inventory Statement shall be deemed final and binding upon
each Party), or of its disagreement with the statement (a "Notice of
Disagreement"). Any such Notice of Disagreement shall specify in detail the
nature of such disagreement. If a Notice of Disagreement is received in a
timely manner, then the applicable Primestar Inventory Statement, as revised
in accordance with clause (x) or (y) below, shall become final and binding
upon each Party on the earlier of (x) the date the Company and the applicable
Providing Person resolve in writing the differences they have with respect to
the matter specified in a Notice of Disagreement or (y) the date any disputed
matters are finally resolved in writing by the Accounting Firm, as described
below; provided, that if any matter in respect of any Providing Person's
Primestar Inventory Statement is submitted to the Accounting Firm, then the
Company shall submit TSAT's Primestar Inventory Statement to the Accounting
Firm so that the Accounting Firm may review and revise (if necessary) TSAT's
Primestar Inventory Statement, and TSAT's Primestar Inventory Statement as so
reviewed and/or revised shall become final and binding upon each Party. Upon
becoming final and binding as set forth above, a Primestar Inventory Statement
shall become a "Final Primestar Inventory Statement".
During the 30 day period following the delivery of a Notice of Disagreement,
the Company and the applicable Providing Person shall seek in good faith to
resolve in writing any differences they have with respect to the matters
specified in the Notice of Disagreement. During such period such Providing
Person and its auditors shall have access to the working papers of the Company
and its auditors prepared in connection with the Notice of Disagreement. At
the end of such 30 day period, the Company and such Providing Person shall
submit to an independent accounting firm (the "Accounting Firm") for review
and resolution any and all matters which remain in dispute and which were
properly included in the Notice of Disagreement. The Accounting Firm shall be
such nationally recognized independent public accounting firm as shall be
agreed upon by the Company and all the Providing Persons in writing. The
Company and each applicable Providing Person shall jointly request, and shall
use their respective commercially reasonable efforts to cause, the Accounting
Firm to render a decision resolving the matters submitted to it within 75 days
following submission. The Company and each other Party hereby agree that
judgment may be entered upon the determination of the Accounting Firm in any
court having jurisdiction over the Party against which such determination is
to be enforced. The fees and expenses of an Accounting Firm shall in each case
be borne equally by the Company and the applicable Providing Person.
(b) Within 5 business days after the Final Primestar Inventory and Final
Primestar Customers of TSAT and each Class C Holder shall have been determined
in accordance with Sections 4.02 and 4.03, the Company shall calculate each
Class C Holder's Inventory Payment. If a Class C Holder's Inventory Payment is
a positive number, such Class C Holder shall pay that amount to the Company.
If a Class C Holder's Inventory Payment is a negative number, the Company
shall pay the absolute value of that amount to such Class C Holder. Any such
payment shall be made by wire transfer of immediately available funds within 5
business days after written notice from the Company to the applicable Class C
Holder of the amount thereof.
Section 4.03. Adjustment for Primestar Customers. (a) During the 45 day
period following the Closing Date, the Company and its independent auditors
shall be permitted to review the working papers relating to each Person's
Primestar Customer Statement delivered pursuant to Section 3.03 to determine
whether the number of Primestar Customers set forth therein has been
overstated (including overstatements described in Section 7.05, and excluding
overstatements in respect of delinquencies of Recent Primestar Subscribers
which is addressed in Section 4.03(b)), and each Providing Person shall
cooperate in good faith with the Company to respond to any questions the
Company may have in respect of such Providing Person's Primestar Customer
Statement. At or prior to the conclusion of such 45 day period, the Company
shall give written notice to each Party of its agreement with a Primestar
Customer Statement (in which case such Primestar Customer Statement shall be
deemed final and binding upon each Party), or shall deliver a Notice of
Disagreement. Any such Notice of Disagreement shall specify in detail the
nature of such disagreement and the amount by which the Company believes
Primestar Customers have been overstated. If a Notice of Disagreement is
received in a timely manner, then the applicable Primestar Customer Statement,
as adjusted in accordance with clause (x) or (y) below, shall
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become final and binding upon each Party on the earlier of (x) the date the
Company and the applicable Providing Person resolve in writing the differences
they have with respect to the matter specified in a Notice of Disagreement or
(y) the date any disputed matters are finally resolved in writing by the
Accounting Firm, as described below; provided, that if any matter in respect
of any Providing Person's Primestar Customer Statement is submitted to the
Accounting Firm, then the Company shall submit TSAT's Primestar Customer
Statement to the Accounting Firm so that the Accounting Firm may review and
revise (if necessary) TSAT's Primestar Customer Statement, and TSAT's
Primestar Customer Statement as so reviewed and/or revised shall become final
and binding upon each Party.
During the 30 day period following the delivery of a Notice of Disagreement,
the Company and the applicable Providing Person shall seek in good faith to
resolve in writing any differences they have with respect to the matters
specified in such Notice of Disagreement. During such period such Providing
Person shall have access to the working papers of the Company and its auditors
prepared in connection with the Notice of Disagreement. At the end of such 30
day period, the Company and such Providing Person shall submit to the
Accounting Firm for review and resolution any and all matters which remain in
dispute and which were properly included in the Notice of Disagreement. The
Company and each applicable Providing Person shall jointly request, and shall
use their respective commercially reasonable efforts to cause, the Accounting
Firm to render a decision resolving the matters submitted to it within 75 days
following submission. The Company and each other Party hereby agree that
judgment may be entered upon the determination of the Accounting Firm in any
court having jurisdiction over the Party against which such determination is
to be enforced. The fees and expenses of the Accounting Firm shall be borne
equally by the Company and the applicable Providing Person.
(b) On the 151st day following the Closing Date, the Company shall
determine, for each Person's Primestar Customer Statement (as adjusted
pursuant to Section 4.03(a)), the number of Recent Primestar Subscribers on
such statement which, if subjected to the delinquency tests set forth in the
definition of Primestar Customer as of such 151st day, would count as less
than one full Primestar Customer (for each such Person, the aggregate amount
of such reductions is referred to as such Person's "Recent Customer
Reduction"). The Company shall prepare and deliver to each Providing Person a
revised Primestar Customer Statement (a "Revised Primestar Customer
Statement") for TSAT and each Providing Person, which shall set forth a number
of Primestar Customers equal to (x) the number of Primestar Customers set
forth on such Person's Primestar Customer Statement (as adjusted pursuant to
Section 4.03(a)) minus (y) such Person's Recent Customer Reduction (as
determined by the Company), and the Company shall cooperate in good faith with
each Providing Person to respond to any questions such Providing Person may
have in respect of such Providing Person's Revised Primestar Customer
Statement. During the 30 day period following receipt by the applicable
Providing Person of such Providing Person's Revised Primestar Customer
Statement, such Providing Person and its independent auditors shall be
permitted to review the working papers relating to such Revised Primestar
Customer Statement. At the conclusion of such 30 day period, such Providing
Person shall give written notice to the Company of its agreement with such
Revised Primestar Customer Statement (in which case such Revised Primestar
Customer Statement shall be deemed final and binding upon each Party), or
shall deliver a Notice of Disagreement. Any such Notice of Disagreement shall
specify in detail the nature of such disagreement. If a Notice of Disagreement
is received in a timely manner, then the applicable Revised Primestar Customer
Statement, as further revised in accordance with clause (x) or (y) below,
shall become final and binding upon each Party on the earlier of (x) the date
the Company and the applicable Providing Person resolve in writing the
differences they have with respect to the matter specified in a Notice of
Disagreement or (y) the date any disputed matters are finally resolved in
writing by the Accounting Firm, as described below; provided, that if any
matter in respect of any Providing Person's Revised Primestar Customer
Statement is submitted to the Accounting Firm, then the Company shall submit
TSAT's Revised Primestar Customer Statement to the Accounting Firm so that the
Accounting Firm may review and further revise (if necessary) TSAT's Revised
Primestar Customer Statement, and TSAT's Revised Primestar Customer Statement
as so further reviewed and/or revised shall become final and binding upon each
Party. Upon becoming final and binding as set forth above, a Revised Primestar
Customer Statement shall become a "Final Primestar Customer Statement".
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During the 30 day period following the delivery of a Notice of Disagreement,
the Company and the applicable Providing Person shall seek in good faith to
resolve in writing any differences they have with respect to the matters
specified in the Notice of Disagreement. During such period the Company and
its auditors shall have access to the working papers of such Providing Person
and its auditors prepared in connection with the Notice of Disagreement. At
the end of such 30 day period, the Company and such Providing Person shall
submit to the Accounting Firm for review and resolution any and all matters
which remain in dispute and which were properly included in the Notice of
Disagreement. The Company and each applicable Providing Person shall jointly
request, and shall use their respective commercially reasonable efforts to
cause, the Accounting Firm to render a decision resolving the matters
submitted to it within 75 days following submission. The Company and each
other Party hereby agree that judgment may be entered upon the determination
of the Accounting Firm in any court having jurisdiction over the Party against
which such determination is to be enforced. The fees and expenses of an
Accounting Firm shall in each case be borne equally by the Company and the
applicable Providing Person.
(c) Within 5 business days after the Final Primestar Customer Statement of
TSAT and each Class C Holder shall have been determined, the Company shall
calculate each Class C Holder's Customer Payment. If a Class C Holder's
Customer Payment is a positive number, such Class C Holder shall pay that
amount to the Company. If a Class C Holder's Customer Payment is a negative
number, the Company shall pay the absolute value of that amount to such Class
C Holder. Any such payment shall be made by wire transfer of immediately
available funds within 5 business days after written notice from the Company
to the applicable Class C Holder of the amount thereof.
Section 4.04. Adjustment for Capital Contributions. Within 10 days after the
Closing Date, the Company shall reimburse each Class C Holder and GE (by wire
transfer of immediately available funds) for 100% of any capital contributions
made to the Partnership after March 31, 1997 by such Party, as evidenced by
the Partnership's records of such contributions; provided, that for avoidance
of doubt, such reimbursement shall not include any payment in respect of
interest on any such amount.
Section 4.05. Netting. Any payments pursuant to this Article IV by the
Company to any Person on any payment date may be netted against payments due
to the Company on such date from such Person pursuant to this Article IV, and
in such event the Company shall deliver written notice to such Person setting
forth the calculation of such netting.
Article V
Representations and Warranties
Section 5.01. Representations and Warranties of TSAT. TSAT represents and
warrants to each other Party as follows:
(a) Organization, Standing and Corporate Power. Each of TSAT and each of
its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and authority to carry
on its business as now being conducted. Each of TSAT and each of its
subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to
be so qualified or licensed (individually or in the aggregate) would not
have a Material Adverse Effect on TSAT. TSAT has delivered to each other
Party complete and correct copies of its certificate of incorporation and
by-laws and the certificates of incorporation and by-laws of its
subsidiaries, in each case as amended to the date of this Agreement.
(b) Subsidiaries. (A) Schedule 5.01(b) lists each subsidiary of TSAT. All
the outstanding shares of capital stock of the TSAT Sub and each such other
subsidiary have been validly issued and are fully paid
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and nonassessable and, except as set forth in Schedule 5.01(b), are
directly owned by TSAT, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature
whatsoever (collectively, "Liens"). Except for the capital stock of its
subsidiaries and except for the ownership interests set forth in Schedule
5.01(b), TSAT does not own, directly or indirectly, any capital stock or
other ownership interest in any corporation, partnership, limited liability
company, joint venture or other entity.
(B) The TSAT Sub was formed by TSAT solely for the purpose of engaging in
the transactions contemplated by this Agreement. The TSAT Sub does not have
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) other than those under this Agreement, the Drop
Down Agreement, the Merger Agreements, the Asset Transfer Agreements, the
TSAT Merger Agreement, the TSAT Tempo Agreement and the TSAT Stockholders
Agreement.
(c) Tempo. Tempo's sole assets and liabilities consist of the Tempo
Assets and the liabilities associated therewith (including Tempo's
obligations to the Partnership in respect of advances by the Partnership to
Tempo). All agreements to which Tempo is a party or bound are listed on
Schedule 5.01(c). Except as set forth on Schedule 5.01(c), Tempo has no
indebtedness for borrowed money and has no other obligations of the type
set forth in the definition of "TSAT Debt".
(d) Capital Structure. The authorized capital stock of TSAT consists of
185,000,000 shares of TSAT A Stock, 10,000,000 shares of TSAT B Stock and
5,000,000 shares of preferred stock, par value $.01 per share. The
authorized capital stock of the TSAT Sub is as set forth in Schedule
5.01(b). At the close of business on February 6, 1998, (i) 58,237,114
shares of TSAT A Stock, 8,465,324 shares of TSAT B Stock and no shares of
preferred stock were issued and outstanding, (ii) no shares of TSAT A Stock
and no shares of TSAT B Stock were held by TSAT in its treasury, and (iii)
3,700,000 shares of TSAT A Stock and no shares of TSAT B Stock were
reserved for issuance pursuant to the TSAT Stock Plans. Except as set forth
above, at the close of business on February 6, 1998, no shares of capital
stock or other voting securities of TSAT were issued, reserved for issuance
or outstanding. Except as set forth in Schedule 5.01(d), there are no
outstanding SARs which were not granted in tandem with a related Employee
Stock Option. Ten shares of common stock of the TSAT Sub are issued and
outstanding and held by TSAT. All outstanding shares of capital stock of
TSAT and the TSAT Sub are, and all shares which may be issued pursuant to
the TSAT Stock Plans will be, when issued, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights. Except
as set forth in Schedule 5.01(d), there are not any bonds, debentures,
notes or other indebtedness of TSAT having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote)
on any matters on which stockholders of TSAT may vote. Schedule 5.01(d)
sets forth a complete list of all outstanding options (together with
applicable exercise prices) to purchase capital stock of TSAT. Except as
set forth in Schedule 5.01(d), there are not any securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which TSAT or any of its subsidiaries is a
party or by which any of them is bound obligating TSAT or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other voting securities of TSAT
or of any of its subsidiaries or obligating TSAT or any of its subsidiaries
to issue, grant, extend or enter into any such security, option, warrant,
call, right, commitment, agreement, arrangement or undertaking. There are
not any outstanding contractual obligations of TSAT or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of TSAT or any of its subsidiaries.
(e) Authority; Noncontravention. TSAT and the TSAT Sub each have the
requisite corporate power and authority to enter into their respective
Relevant Agreements and, subject to approval and adoption of the Roll-up
Plan by the holders of 66 2/3% of the total voting power of the outstanding
shares of TSAT A Stock and TSAT B Stock, voting together as a class (the
"TSAT Stockholder Approval"), to consummate the transactions contemplated
by each of its Relevant Agreements. The execution and delivery by TSAT and
the TSAT Sub of their respective Relevant Agreements and the consummation
by TSAT and the TSAT Sub of the Restructuring Transaction, the TSAT Merger
and the Tempo Sale have been duly authorized by all necessary corporate
action on the part of TSAT and the TSAT Sub, subject to the TSAT
Stockholder Approval. Each Relevant Agreement of TSAT and the TSAT Sub has
been (or upon execution will be) duly
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executed and delivered by TSAT and/or the TSAT Sub and constitutes (or upon
execution will constitute) a valid and binding obligation of TSAT and/or
the TSAT Sub, enforceable against TSAT and/or the TSAT Sub in accordance
with their respective terms. The execution and delivery of each Relevant
Agreement of TSAT and the TSAT Sub does not, and the consummation of the
Restructuring Transaction, the TSAT Merger and the Tempo Sale, and
compliance with the provisions of such Relevant Agreements will not,
conflict with, or result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancelation or acceleration of any obligation or to loss of a
material benefit under, or result in the creation of any Lien upon any of
the properties or assets of TSAT or any of its subsidiaries under, (i) the
certificate of incorporation or by-laws of TSAT or the comparable charter
or organizational documents of any of its subsidiaries, (ii) except as
disclosed on Schedule 5.01(e), any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to TSAT or any of its
subsidiaries or their respective properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to TSAT or any of its subsidiaries or their
respective properties or assets, other than, in the case of clause (ii),
any such conflicts, violations, defaults, rights or Liens that individually
or in the aggregate would not have a Material Adverse Effect on TSAT. No
consent, approval, order or authorization of, or registration, declaration
or filing with, any Federal, state or local government or any court,
administrative agency or commission or other governmental authority or
agency, domestic or foreign, including, without limitation, the European
Community (a "Governmental Entity"), is required by or with respect to TSAT
or any of its subsidiaries in connection with (I) the execution and
delivery of any Relevant Agreement of TSAT or the TSAT Sub or (II) the
consummation by TSAT or the TSAT Sub of the Restructuring Transaction,
except for (i) the filing of a premerger notification and report form by
TSAT under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(together with the rules and regulations promulgated thereunder, the "HSR
Act"), (ii) applicable approvals of the Federal Communications Commission
(the "FCC") pursuant to the Communications Act of 1934, as amended, and any
regulations promulgated thereunder (the "Communications Act"), (iii) the
filing with the SEC of (x) a proxy statement relating to the TSAT
Stockholder Approval (as amended or supplemented from time to time, the
"Proxy Statement/Prospectus"), (y) a registration statement of the Company
on Form S-4 in connection with the issuance of capital stock of the Company
in the TSAT Merger (the "Form S-4") and (z) such reports under Section
13(a) of the Securities Exchange Act of 1934, as amended (together with the
rules and regulations promulgated thereunder, the "Exchange Act"), as may
be required in connection with this Agreement and the Restructuring
Transaction, (iv) the filing of a certificate of merger under the TSAT
Merger Agreement and each other Merger Agreement with the Delaware
Secretary of State and appropriate documents with the relevant authorities
of other states in which TSAT is qualified to do business and (v) such
other consents, approvals, orders, authorizations, registrations,
declarations and filings as are set forth on Schedule 5.01(e).
(f) SEC Documents; Undisclosed Liabilities. TSAT has filed all required
reports, schedules, forms, statements and other documents with the SEC
since January 1, 1996 (the "SEC Documents"). As of their respective dates,
the SEC Documents complied in all material respects with the requirements
of the Securities Act of 1933 (together with the rules and regulations
promulgated thereunder, the "Securities Act"), or the Exchange Act, as the
case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Except to the extent that information contained in
any SEC Document has been revised or superseded by a later filed SEC
Document, none of the SEC Documents contains any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of TSAT included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared
in accordance with generally accepted accounting principles (except, in the
case
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of unaudited statements, as permitted by Form 1O-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position
of TSAT and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-
end audit adjustments). Except as set forth in the Filed SEC Documents or
in Schedule 5.01(f), neither TSAT nor any of its subsidiaries has any
liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by generally accepted accounting
principles to be set forth on a consolidated balance sheet of TSAT and its
consolidated subsidiaries or in the notes thereto.
(g) Information Supplied. None of the information supplied or to be
supplied by TSAT or any of its subsidiaries for inclusion or incorporation
by reference in (i) the Form S-4 will, at the time the Form S-4 is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading, or (ii) the
Proxy Statement/Prospectus will, at the date it is first mailed to TSAT's
stockholders or at the time of the meeting of TSAT's stockholders held to
vote on approval and adoption of the Roll-up Plan, including, for avoidance
of doubt, this Agreement, the Drop Down Agreement, the TSAT Merger
Agreement and the TSAT Tempo Agreement (the "TSAT Stockholders Meeting"),
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The financial statements of TSAT included in the Form
S-4 and the Proxy Statement/Prospectus will comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, and will be prepared
in accordance with generally accepted accounting principles (except, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and will fairly present the consolidated
financial position of TSAT and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). The Proxy
Statement/Prospectus will comply as to form in all material respects with
the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by TSAT with respect to
statements made or incorporated by reference therein based on information
supplied by any other Party for inclusion or incorporation by reference in
the Proxy Statement/Prospectus.
(h) Absence of Certain Changes or Events. Except as disclosed in the SEC
Documents filed and publicly available prior to the date of this Agreement
(the "Filed SEC Documents") or in Schedule 5.01(h), since the date of the
most recent audited financial statements included in the Filed SEC
Documents, TSAT has conducted its business only in the ordinary course, and
there has not been (i) any Material Adverse Change in TSAT, (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of TSAT's capital
stock, (iii) any split, combination or reclassification of any of its
capital stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for shares of
its capital stock, (iv) (x) any granting by TSAT or any of its subsidiaries
to any executive officer or director of TSAT or any of its subsidiaries of
any increase in compensation, except in the ordinary course of business
consistent with prior practice or as was required under employment
agreements in effect as of the date of the most recent audited financial
statements included in the Filed SEC Documents, (y) any granting by TSAT or
any of its subsidiaries to any such executive officer or director of any
increase in severance or termination pay, except as was required under any
employment, severance or termination agreements in effect as of the date of
the most recent audited financial statements included in the Filed SEC
Documents or (z) any entry by TSAT or any of its subsidiaries into any
employment, severance or termination agreement with any such executive
officer or director, (v) any damage, destruction or loss, whether or not
covered by insurance, that has or is likely to have a Material Adverse
Effect on TSAT, or (vi) any change in accounting methods, principles or
practices by TSAT materially affecting its assets, liabilities or business,
except insofar as may have been required by a change in generally accepted
accounting principles.
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<PAGE>
(i) Litigation. Except as disclosed in the Filed SEC Documents or in
Schedule 5.01(i), there is no suit, action or proceeding pending or, to the
knowledge of TSAT, threatened against or affecting TSAT or any of its
subsidiaries (and TSAT is not aware of any basis for any such suit, action
or proceeding) that, individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect on TSAT, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against TSAT or any of its subsidiaries having, or
which, insofar as reasonably can be foreseen, in the future would have, any
such effect.
(j) Absence of Changes in Benefit Plans. Except as disclosed in the Filed
SEC Documents or in Schedule 5.01(j), since the date of the most recent
audited financial statements included in the Filed SEC Documents, there has
not been any adoption or amendment in any material respect by TSAT or any
of its subsidiaries of any collective bargaining agreement or any bonus,
pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, stock option, phantom stock, retirement,
vacation, severance, disability, death benefit, hospitalization, medical or
other plan, arrangement or understanding (whether or not legally binding)
providing benefits to any current or former employee, officer or director
of TSAT or any of its subsidiaries (collectively, "Benefit Plans"). Except
as disclosed in the Filed SEC Documents, there exist no employment,
consulting, severance, termination or indemnification agreements,
arrangements or understandings between TSAT or any of its subsidiaries and
any current or former employee, officer or director of TSAT or any of its
subsidiaries.
(k) ERISA Compliance. (i) Schedule 5.01(k) contains a list and brief
description of all "employee pension benefit plans" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (sometimes referred to herein as "Pension Plans"), "employee
welfare benefit plans" (as defined in Section 3(1) of ERISA) and all other
Benefit Plans maintained, or contributed to, by TSAT or any of its
subsidiaries for the benefit of any current or former employees, officers
or directors of TSAT or any of its subsidiaries. TSAT has delivered to each
other Party true, complete and correct copies of (v) each Benefit Plan (or,
in the case of any unwritten Benefit Plans, descriptions thereof), (w) the
most recent annual report on Form 5500 filed with the Internal Revenue
Service with respect to each Benefit Plan (if any such report was
required), (x) the most recent summary plan description for each Benefit
Plan for which such summary plan description is required, (y) each trust
agreement and group annuity contract relating to any Benefit Plan and (z)
the most recent actuarial and financial valuations prepared with respect to
each Benefit Plan.
(ii) Except as disclosed in Schedule 5.01(k), all Pension Plans intended
to be qualified under Section 401(a) of the Code have been the subject of
determination letters from the Internal Revenue Service to the effect that
such Pension Plans are so qualified and exempt from Federal income Taxes
under Section 501(a) of the Code, and no such determination letter has been
revoked nor, to the knowledge of TSAT, has revocation been threatened, nor
has any such Pension Plan been amended since the date of its most recent
determination letter or application therefor in any respect that would
adversely affect its qualification or materially increase its costs.
(iii) Each Benefit Plan has been administered in material compliance with
its terms and the applicable provisions of ERISA, the Code and all other
applicable laws. No event has occurred that could reasonably be expected to
result in material liability with respect to the Benefit Plans. There are
no pending or, to the knowledge of TSAT, threatened investigations, claims
or lawsuits (other than routine benefit claims) with respect to the Benefit
Plans that could reasonably be expected to result in material liability to
the Benefit Plans, TSAT or its subsidiaries.
(iv) No Pension Plan that TSAT or any of its subsidiaries maintains, or
to which TSAT or any of its subsidiaries is obligated to contribute, other
than any Pension Plan that is a "multiemployer plan" (as such term is
defined in Section 4001(a)(3) of ERISA; collectively, the "Multiemployer
Pension Plans"), had, as of the respective last annual valuation date for
each such Pension Plan, an "unfunded benefit liability" (as such term is
defined in Section 4001(a)(18) of ERISA), based on actuarial assumptions
which have been furnished to each other Party. None of the Pension Plans
has an "accumulated funding deficiency" (as such
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<PAGE>
term is defined in Section 302 of ERISA or Section 412 of the Code),
whether or not waived. None of the Pension Plans has an "accumulated
funding deficiency" (as such term is defined in Section 302 of ERISA or
Section 412 of the Code), whether or not waived. None of TSAT, any of its
subsidiaries, any officer of TSAT or any of its subsidiaries or any of the
Benefit Plans which are subject to ERISA, including the Pension Plans, any
trusts created thereunder or any trustee or administrator thereof, has
engaged in a "prohibited transaction" (as such term is defined in Section
406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary
responsibility that could subject TSAT, any of its subsidiaries or any
officer of TSAT or any of its subsidiaries to the Tax or penalty on
prohibited transactions imposed by such Section 4975 or to any liability
under Section 502(i) or (1) of ERISA. Neither any of such Benefit Plans nor
any of such trusts has been terminated, nor has there been any "reportable
event" (as that term is defined in Section 4043 of ERISA) with respect to
any of the Benefit Plans during the last five years. Neither TSAT nor any
of its subsidiaries has incurred a "complete withdrawal" or a "partial
withdrawal" (as such terms are defined in Section 4203 and Section 4205,
respectively, of ERISA) since the effective date of such Sections 4203 and
4205 with respect to any of the Multiemployer Pension Plans.
(v) With respect to any Benefit Plan that is an employee welfare benefit
plan, except as disclosed in Schedule 5.01(k), (x) each such Benefit Plan
that is a "group health plan", as such term is defined in Section
5000(b)(1) of the Code, complies with the applicable requirements of
Section 4980B(f) of the Code and (y) each such Benefit Plan (including any
such Plan covering retirees or other former employees) may be amended or
terminated without material liability to TSAT or any of its subsidiaries on
or at any time after the Effective Time.
(vi) Except as disclosed in Schedule 5.01(k), consummation of the
transactions contemplated by this Agreement will not result in any
increased compensation or benefits, or the acceleration of the payment of
any increased compensation or benefits for any current or former employee
or director of TSAT or its subsidiaries.
(l) Taxes. Except as disclosed in Schedule 5.01(l), each of TSAT and each
of its subsidiaries has filed all material Tax returns and reports required
to be filed by it and has paid (or TSAT has paid on its behalf) all
material Taxes required to be paid by it, and the most recent financial
statements contained in the Filed SEC Documents reflect an adequate reserve
for all material Taxes payable by TSAT and its subsidiaries for all taxable
periods and portions thereof through the date of such financial statements.
No deficiencies for any material Taxes have been proposed, asserted or
assessed against TSAT or any of its subsidiaries, and no requests for
waivers of the time to assess any such Taxes are pending. As used in this
Agreement, "Taxes" shall include all Federal, state, local and foreign
income, property, sales, excise and other taxes, tariffs or governmental
charges of any nature whatsoever.
(m) No Excess Parachute Payments. Other than payments that may be made to
the persons listed on Schedule 5.01(m) (the "Primary Executives"), any
amount that could be received (whether in cash or property or the vesting
of property) as a result of the Restructuring Transaction by any employee,
officer or director of TSAT or any of its affiliates who is a "disqualified
individual" (as such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any employment, severance or termination agreement,
other compensation arrangement or Benefit Plan currently in effect would
not be characterized as an "excess parachute payment" (as such term is
defined in Section 280G(b)(1) of the Code). Set forth in Schedule 5.01(m)
is (i) the maximum amount that could be paid to each Primary Executive as a
result of the transactions contemplated by this Agreement and the TSAT
Merger Agreement under all employment, severance and termination
agreements, other compensation arrangements and Benefit Plans currently in
effect and (ii) the "base amount" (as such term is defined in Section
280G(b)(3) of the Code) for each Primary Executive calculated as of the
date of this Agreement.
(n) Voting Requirements. The TSAT Stockholder Approval is the only vote
of the holders of any class or series of TSAT's capital stock necessary to
approve the Roll-up Plan, including, for avoidance of doubt, this
Agreement, the Drop Down Agreement, the TSAT Merger Agreement, the TSAT
Tempo Agreement, the Restructuring Transaction, the TSAT Merger and the
Tempo Sale, and the respective transactions contemplated by such
agreements.
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(o) State Takeover Statutes. The Board of Directors of TSAT has
unanimously approved the Roll-up Plan, including, for avoidance of doubt,
the Restructuring Transaction, the TSAT Merger, the Tempo Sale, the Voting
Agreements, this Agreement, the TSAT Merger Agreement, the TSAT Tempo
Agreement and the TSAT Stockholders Agreement, and such approval is
sufficient to render inapplicable to the Roll-up Plan, the Restructuring
Transaction, the TSAT Merger, the Tempo Sale, the Voting Agreements, this
Agreement, the TSAT Merger Agreement, the TSAT Tempo Agreement and the TSAT
Stockholders Agreement, the provisions of Section 203 of the DGCL.
(p) Brokers; Schedule of Fees and Expenses. Except for Merrill Lynch &
Co. Incorporated, no broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the Restructuring Transaction,
the TSAT Merger and the Tempo Sale, based upon arrangements made by or on
behalf of TSAT. The estimated fees and expenses incurred and to be incurred
by TSAT in connection with this Agreement, the TSAT Merger Agreement, the
TSAT Tempo Agreement, the Restructuring Transaction, the TSAT Merger and
the Tempo Sale (including the fees of TSAT's legal counsel) are set forth
in Schedule 5.01(p).
(q) Opinion of Financial Advisor. TSAT has received the opinion of
Merrill Lynch & Co. Incorporated, dated as of a date on or about the date
of this Agreement, a complete and correct copy of which has been provided
to each Party.
Section 5.02. Representations and Warranties of Certain Parties. Each of
Comcast, Cox, GE, MediaOne, TWE and Newhouse, severally and not jointly,
represents and warrants (each in such capacity, a "Representor") to each other
Party as follows:
(a) Organization, Standing and Corporate Power. Such Representor and each
of its Subsidiaries, if any, is a corporation or partnership duly organized
or formed, validly existing and, in the case of a corporation, in good
standing, under the laws of the jurisdiction in which it is incorporated or
formed and has the requisite corporate or partnership power and authority
to carry on its business as now being conducted. Such Representor and each
of its Subsidiaries, if any, is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions
where the failure to be so qualified or licensed (individually or in the
aggregate) would not have a Material Adverse Effect on such Representor.
(b) Subsidiaries; All Assets. (A) The authorized capital stock of such
Representor's Subsidiaries, if any, and the number of shares of such
capital stock that are issued and outstanding, are as set forth on such
Representor's Schedule 5.02(b)(A). Except as set forth on such
Representor's Schedule 5.02(b)(A), no shares of capital stock or other
voting securities of any of such Representor's Subsidiaries, if any, are
issued, reserved for issuance or outstanding. All the outstanding shares of
capital stock of each of such Representor's Subsidiaries, if any, have been
validly issued, fully paid and nonassessable and are owned, directly or
indirectly, by such Representor free and clear of all Liens.
(B) Except as disclosed on such Representor's Schedule 5.02(b)(B), on and
as of the Closing Date: (i) the sole assets of each Subsidiary of such
Representor, if any, will be Primestar Assets and Partnership Interests and
such Subsidiary's rights under its Merger Agreement or Asset Transfer
Agreement; (ii) no Subsidiary of such Representor will own, directly or
indirectly, any capital stock or other ownership interest in any
corporation, partnership, limited liability company, joint venture or other
entity, other than Partnership Interests; (iii) no Subsidiary of such
Representor will have any obligations or liabilities of any nature, whether
known or unknown, absolute, accrued, contingent or otherwise, and whether
due or to become due, other than Primestar Liabilities (which shall not
include any Primestar Debt unless such Representor is Comcast, Newhouse,
TWE or GE), and such Subsidiary's obligations under its Merger Agreement or
Asset Transfer Agreement; and (iv) no Subsidiary of such Representor will
have any employees other than Selected Employees.
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(c) Authority; Noncontravention. Such Representor and each of its
Subsidiaries, if any, has the requisite corporate power and authority to
enter into its Relevant Agreements and to consummate the transactions
contemplated by each of its Relevant Agreements. The execution and delivery
by such Representor and each of its Subsidiaries, if any, of its Relevant
Agreements and the consummation by such Representor and such Subsidiaries
of the Restructuring Transaction have been duly authorized by all necessary
corporate or partnership action on the part of such Representor and such
Subsidiaries. Each Relevant Agreement of such Representor and each of its
Subsidiaries, if any, has been (or upon execution will be), duly executed
and delivered by such Representor or Subsidiary, as applicable, and
constitutes (or upon execution will constitute) a valid and binding
obligation of such Representor or Subsidiary, as applicable, enforceable
against such Representor or Subsidiary, as applicable, in accordance with
their respective terms. The execution and delivery of each Relevant
Agreement of such Representor or any of its Subsidiaries, if any, does not,
and the consummation of the Restructuring Transaction and compliance with
the provisions of such Relevant Agreements will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancelation
or acceleration of any obligation or to loss of a material benefit under,
or result in the creation of any Lien upon any of the properties or assets
of such Representor or Subsidiary under, (i) its certificate of
incorporation or by-laws or partnership agreement, as applicable, (ii) any
loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable
to such Representor or Subsidiary or their properties or assets or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to such Representor or Subsidiary or their
respective properties or assets, other than, in the case of clause (ii),
any such conflicts, violations, defaults, rights or Liens that individually
or in the aggregate would not have a Material Adverse Effect on such
Representor. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to such Representor or any of its subsidiaries
in connection with (I) the execution and delivery of any Relevant Agreement
of such Representor or any of its Subsidiaries, if any, or (II) the
consummation by such Representor or any of its Subsidiaries, if any of the
Restructuring Transaction, except for (i) the filing of a premerger
notification and report form by such Representor under the HSR Act, (ii)
applicable approvals of the FCC pursuant to the Communications Act, (iii)
the filing with the SEC of (x) the Proxy Statement/Prospectus, (y) the Form
S-4 and (z) such reports under Section 13(a) of the Exchange Act, as may be
required in connection with this Agreement and the Restructuring
Transaction, (iv) the filing of a certificate of merger and appropriate
documents with the relevant authorities of other states in which such
Representor is qualified to do business and (v) such other consents,
approvals, orders, authorizations, registrations, declarations and filings
as are set forth on such Representor's Schedule 5.02(c).
(d) Information Supplied. None of the information supplied or to be
supplied by such Representor or any of its subsidiaries for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form
S-4 is filed with the SEC, at any time it is amended or supplemented or at
the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, or
(ii) the Proxy Statement/Prospectus will, at the date it is first mailed to
TSAT's stockholders or at the time of the TSAT Stockholders Meeting,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. The financial statements of such Representor's
Primestar Business included in the Form S-4 and the Proxy
Statement/Prospectus will comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, and will be prepared in accordance with
generally accepted accounting principles (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and will fairly present the consolidated financial position of
such Representor's Primestar Business as of the dates thereof and the
consolidated results of operations and cash flows of such Representor's
Primestar Business for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
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(e) Absence of Certain Changes or Events. Except as disclosed in such
Representor's Schedule 5.02(e), since June 11, 1997, such Representor has
conducted its Primestar Business (directly or through its Subsidiaries, if
any) only in the ordinary course, and there has not been (i) any Material
Adverse Change in such Representor's Primestar Business or (ii) any damage,
destruction or loss, whether or not covered by insurance, that has or is
likely to have a Material Adverse Effect on such Representor.
(f) Litigation. Except as disclosed on such Representor's Schedule
5.02(f), there is no suit, action or proceeding pending or, to the
knowledge of the Representor, threatened against or affecting such
Representor or such Representor's Primestar Assets or Partnership Interest
or any Subsidiary of such Representor (and the Representor is not aware of
any basis for any such suit, action or proceeding) that, individually or in
the aggregate, could reasonably be expected to have a Material Adverse
Effect on such Representor, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against
such Representor or any of its Primestar Assets or Partnership Interest or
any Subsidiary of such Representor having, or which, insofar as reasonably
can be foreseen, in the future would have, any such effect.
(g) Taxes. Such Representor and each of its Subsidiaries, if any, have
filed all material Tax returns and reports required to be filed by them and
have paid all material Taxes required to be paid by them, with respect to
their Primestar Assets and Partnership Interest. Except as disclosed on
such Representor's Schedule 5.02(g), no deficiencies for any material Taxes
have been proposed, asserted or assessed against such Representor or any of
its Subsidiaries, and no requests for waivers of the time to assess any
such Taxes are pending.
(h) Employee Matters. Neither the Representors, their Subsidiaries nor
any entity required to be treated with the Representors as a single
employer under Section 414 of the Code has any unsatisfied liability under
Title IV of ERISA (other than insurance premiums not yet due). Each of the
employee benefit plans (as defined in Section 3(3) of ERISA) covering any
current or former employee of the Subsidiaries or the Primestar Business
(the "Representors' Benefit Plans") is in material compliance with ERISA,
the Code and all other applicable laws. No event or condition has occurred
with respect to the Representors' Benefit Plans that could give rise to any
liability of the Subsidiaries or the Primestar Business.
Section 5.03. Special Representation. (a) Comcast represents and warrants to
each other Party that Comcast Sub I and Comcast Sub II, together, hold all of
the Primestar Assets and Partnership Interests of Comcast's Primestar
Business.
(b) Cox represents and warrants to each other Party that Cox Sub holds all
of the Primestar Assets and Partnership Interests of Cox's Primestar Business;
(c) MediaOne represents and warrants to each other Party that MediaOne, the
MediaOne Transferors, and MediaOne Sub, together, hold all of the Primestar
Assets and Partnership Interests of US West's Primestar Business.
(d) TWE and Newhouse, jointly and severally, represent and warrant to each
other Party that except as disclosed on TWE's Schedule 5.03(d), TWE and
Newhouse together hold all of the Primestar Assets and Partnership Interests
of TWE's and Newhouse's Primestar Business.
(e) GE represents and warrants to each other Party that GE Sub holds all of
the Partnership Interests of GE.
Article VI
Covenants Relating to Business
Section 6.01. Alternative Transactions. (a) Prior to the Closing Date, TSAT
agrees that neither it nor any of its subsidiaries shall, nor shall it or any
of its subsidiaries permit their respective officers, directors, employees,
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agents and representatives to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any proposal or
offer (including any proposal or offer to its stockholders) with respect to a
merger, acquisition, consolidation or similar transaction that would impede,
interfere with, delay, postpone, discourage or adversely affect the
transactions contemplated in this Agreement, or could reasonably be expected
to have such effect. Prior to the Closing Date, neither the Board of Directors
of TSAT nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to any other Party, the approval or
recommendation by such Board of Directors or any such committee of the Roll-up
Plan, including, for avoidance of doubt, the Restructuring Transaction, the
TSAT Merger, the Tempo Sale, the Voting Agreements, this Agreement, the TSAT
Merger Agreement, the TSAT Tempo Agreement or the TSAT Stockholders Agreement
or (ii) approve or recommend, or propose to approve or recommend, any
alternative transaction of the type described in the first sentence of this
Section 6.01.
(b) Each of TSAT, Comcast, Cox, GE, MediaOne, TWE and Newhouse, severally
and not jointly, agrees that prior to the Closing Date, it will not, and it
will not permit any of its subsidiaries to, sell, or agree to sell, all or any
part of its Primestar Assets or Partnership Interests to any other Person,
except for sales of Primestar Inventory in the ordinary course of business
consistent with past practice; provided, that the foregoing shall not apply to
any transfers between TWE and Newhouse and their affiliates; and provided,
further, that the foregoing shall not apply to any indirect transfer resulting
from a merger of, a sale of substantially all the assets of, a spin-off by, or
a similar transaction involving all or any significant part of, any of
Comcast, Cox, GE, US West, TWE, Time Warner Inc. or Newhouse (so long as the
successor entity that succeeds to its predecessor(s) obligations under this
Agreement, after giving effect to such transaction, continues to (x) be bound
by the provisions of this Agreement to the same extent as such predecessor(s)
and (y) hold, directly or indirectly, substantially all the cable systems that
such predecessor(s) held prior to consummation of such transaction).
Section 6.02. Interim Operations of TSAT. For the period from June 11, 1997
until the Closing Date, TSAT:
(a) shall not (and shall cause each of its subsidiaries not to), take any
action that would result in any representation or warranty of TSAT being
untrue in any material respect;
(b) shall (and shall cause each of its subsidiaries to), conduct its
business and operations according to its ordinary course of business
consistent with past practice;
(c) shall use its commercially reasonable efforts to preserve intact its
and its subsidiaries' business organization;
(d) shall use its commercially reasonable efforts to keep available the
services of its and its subsidiaries' officers and employees;
(e) except for the amendments to the Company's certificate of
incorporation and by-laws as contemplated by Section 3.01, shall not (and
shall cause each of its subsidiaries not to) amend its certificate of
incorporation or by-laws;
(f) shall not (and shall cause each of its subsidiaries not to) authorize
for issuance, issue, sell, deliver, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than (i) shares
issued upon exercise of any rights, warrants or options outstanding as of
June 11, 1997 or, in the case of Benefit Plans existing as of June 11,
1997, any rights, warrants or options authorized under such existing plans
and shares issued upon exercise thereof and (ii) Employee Stock Options
issued to directors, officers or other employees of TSAT in the ordinary
course of business and consistent with past practice);
(g) shall not (and shall cause each of its subsidiaries not to) (i)
split, combine or reclassify any shares of its capital stock, (ii) declare,
set aside or pay any dividend or make any other distribution or payment
with respect to any shares of its capital stock or any other ownership
interests (whether in stock or property or a combination thereof) or (iii)
directly or indirectly purchase, redeem or otherwise acquire any shares of
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or options or warrants or rights relating to its capital stock or that of
any of its subsidiaries, or make any commitment for any such action;
(h) shall not (and shall cause each of its subsidiaries not to) (i)
create, incur, assume, maintain or permit to exist any long term debt or
short term debt for borrowed money (other than (x) under lines of credit
and other credit facilities of TSAT existing on the date of this Agreement
and described in Schedule 6.02(h) and debt securities outstanding on the
date of this Agreement and in respect of capitalized lease obligations, not
to exceed $525,000,000 in the aggregate, and (y) the Interim Financing
Debt, (ii) issue or sell any debt securities, (other than borrowings under
existing lines of credit in the ordinary course of business), (iii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
Person except the Partnership and/or TSAT's wholly owned subsidiaries, or
(iv) make any loans, advances or capital contributions to or investments in
any other Person other than in the ordinary course of business and
consistent with past practice;
(i) shall not make any change to its (or any of its subsidiaries')
accounting (including Tax accounting) methods, principles, practices, or
policies, other than those required by GAAP and except, in the case of Tax
accounting methods, principles or practices, in the ordinary course of
business of TSAT or any of its subsidiaries;
(j) shall not make any payment in respect of indebtedness for borrowed
money (other than payments in accordance with the terms of such
indebtedness (as they existed as of June 11, 1997 if incurred prior to such
date));
(k) shall not (and shall cause each of its subsidiaries not to), sell,
lease, transfer, mortgage, subject to any Lien or otherwise dispose of, any
of its properties or assets except in the ordinary course of business;
(l) shall not (and shall cause each of its subsidiaries not to), acquire
or agree to acquire (x) by merging or consolidating with, or by purchasing
a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, joint venture, association or
other business organization or division thereof or (y) any assets that are
material, individually or in the aggregate, to TSAT and its subsidiaries
taken as a whole, except purchases of inventory in the ordinary course of
business consistent with past practice;
(m) shall not (and shall cause each of its subsidiaries not to), purchase
or acquire any property or assets from or otherwise engage in any
transactions with, any Person that is affiliated with (i) TSAT, (ii) Malone
or (iii) TCI, other than in the ordinary course of business and consistent
with past practice and on terms and conditions not less favorable to TSAT
than could be obtained on an arm's length basis from unrelated third
parties;
(n) shall not (and shall cause the Company not to) amend, modify, deliver
any consent under or terminate, or agree to amend, modify, deliver any
consent under or terminate, any provision of the TSAT Stockholders
Agreement, the TSAT Merger Agreement or the TSAT Tempo Agreement, unless
each other Party shall have consented thereto;
(o) shall (and shall cause the Company to), comply with its respective
obligations under the TSAT Stockholders Agreement, the TSAT Merger
Agreement and the TSAT Tempo Agreement;
(p) shall cause the Company not to waive any defaults under the TSAT
Stockholders Agreement, the TSAT Merger Agreement or the TSAT Tempo
Agreement, unless each other Party shall have consented thereto; and
(q) shall not, and shall cause the Company not to, agree to do any of the
foregoing.
Section 6.03. Interim Operations of each Class C Holder. For the period from
June 11, 1997 until the Closing Date, GE, with respect to clause (a) below
only, and each Class C Holder, with respect to its Primestar Business,
Primestar Assets and its Subsidiaries, if any:
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(a) except as otherwise provided in the Transition Term Sheet, shall not,
and shall cause its Subsidiaries not to, take any action that would result
in any representation or warranty of such Class C Holder or GE being untrue
in any material respect;
(b) except for transactions required in connection with consummation of
the Restructuring Transaction and except as otherwise provided in the
Transition Term Sheet, shall conduct its Primestar Business according to
its ordinary course of business consistent with past practice;
(c) except as otherwise provided in the Transition Term Sheet, shall use
its commercially reasonable efforts to preserve intact the organization of
its Primestar Business; and
(d) except as otherwise provided in the Transition Term Sheet, and except
for the orderly transitioning of Terminated Employees, shall use its
commercially reasonable efforts to keep available the services of the
officers and employees of its Primestar Business, to the extent failure to
do so would have a Material Adverse Effect on such Class C Holder.
Section 6.04. Other Actions. Subject to Section 7.04(b), each of TSAT and
each Class C Holder and (for purposes of clauses (a) through (c) below) GE,
hereby agrees to take no action that would reasonably be expected to cause:
(a) the failure of any such Party to perform and comply in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by such Party on or prior to the
Closing Date;
(b) the failure of any such Party to obtain all necessary approvals or
appropriate consents of any United States Federal or state governmental
entity or any other third party in connection with the consummation of the
transactions contemplated herein, including approvals and consents under
the HSR Act and applicable FCC rules and regulations;
(c) the institution of any suit, action or proceeding challenging,
seeking to restrain, prohibiting or adversely affecting in any material
respect the consummation of the transactions contemplated herein; or
(d) any Material Adverse Effect, in the case of TSAT, on TSAT, and in the
case of each Class C Holder, on such Class C Holder.
Article VII
Additional Covenants
Section 7.01. Preparation of Form S-4 and the Proxy Statement/Prospectus;
TSAT Stockholders Meeting. (a) Each Party shall cooperate in the preparation
of the Proxy Statement/Prospectus and the Form S-4 and all pre- and post-
effective amendments thereto and the filing thereof with the SEC. Such
cooperation shall include, without limitation, (i) preparation of historical
and pro forma financial statements relating to such Party required to be
included in such filings, (ii) provision of financial and other information
relating to such Party required to be included in such filings, (iii)
engagement of accountants to report on and provide comfort letters in
customary form in respect of financial information provided by such Party for
inclusion in such filings (which comfort letters will be received by TSAT in
accordance with customary practice) and (iv) responding to comments relating
to such Party received from the staff of the SEC in respect of such filings
promptly after receipt thereof.
(b) Each Party shall be entitled to review any materials related to the
Proxy Statement/Prospectus at any time and from time to time prior to their
mailing to the TSAT stockholders, and to comment thereon, and TSAT and the
Company shall incorporate into such materials each Party's reasonable comments
thereon so that such materials are reasonably acceptable to each Party. TSAT
shall cause the Company to prepare and file with the SEC the Form S-4 in which
the Proxy Statement/Prospectus will be included as a prospectus, as promptly
as
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<PAGE>
practicable after the date of this Agreement. Each of TSAT and the Company
shall use its best efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing. TSAT will use its
best efforts to cause the Proxy Statement/Prospectus to be mailed to TSAT's
stockholders as promptly as practicable after the date the Form S-4 is
declared effective under the Securities Act. TSAT and the Company shall also
take any commercially reasonable action (other than qualifying to do business
in any jurisdiction in which TSAT is not now so qualified) required to be
taken under any applicable state securities laws in connection with the
issuance of capital stock of the Company in the Restructuring Transaction.
(c) TSAT will, as soon as practicable following the date of this Agreement,
duly call, give notice of, convene and hold the TSAT Stockholders Meeting, and
will use its best efforts to cause the TSAT Stockholders Meeting to be held as
promptly as practicable after the date the Proxy Statement/Prospectus is
mailed to the TSAT Stockholders, and to cause the TSAT Stockholder Approval to
be obtained at such meeting. TSAT will, through its Board of Directors,
recommend to its stockholders approval of the Roll-up Plan, including, for
avoidance of doubt, this Agreement, the TSAT Merger Agreement and the
Restructuring Transaction. Without limiting the generality of the foregoing,
TSAT agrees that its obligations pursuant to the first sentence of this
Section 7.01(c) shall not be affected by the commencement, public proposal,
public disclosure or communication to TSAT of any alternative transaction of
the type referred to in Section 6.01.
(d) The Parties acknowledge and agree that, subject to Section 7.04(b), they
shall each use their commercially reasonable efforts to cause the Closing to
occur by March 31, 1998 (or as soon as reasonably practicable thereafter), and
to cause the TSAT Stockholders Meeting to occur sufficiently prior to such
date to permit the Closing to occur by such date.
Section 7.02. Listing Application. The Company and TSAT shall prepare and
submit to NASDAQ listing applications covering the shares of Class A Stock and
Class B Stock issuable by the Company pursuant to the TSAT Merger, and shall
use their respective best efforts to obtain, prior to the Effective Time,
approval for the listing of such stock, subject to official notice of
issuance.
Section 7.03. Access to Information; Confidentiality. The Company and TSAT
shall afford to each Class C Holder and GE, and each Class C Holder and GE
shall afford to TSAT, and, in each case, to the officers, employees,
accountants, counsel, financial advisors and other representatives of such
Parties, reasonable access during normal business hours during the period
prior to the Effective Time to (i) in the case of TSAT and each TSAT Sub, all
their respective properties, books, contracts, commitments, personnel and
records and (ii) in the case of each Class C Holder and GE, all their
respective properties, books, contracts, commitments, personnel and records in
respect of their Primestar Assets and Subsidiaries, if any. Each of the
foregoing parties agrees to use its best efforts in good faith to obtain all
waivers and consents necessary under any confidentiality or non-disclosure
agreement (other than any such agreement with a Party seeking disclosure
hereunder, as to which the Party seeking disclosure shall be deemed to have
waived such confidentiality or non-disclosure with respect to itself) to
afford reasonable access to the applicable Party. During such period, each of
the Company and TSAT shall, and shall cause each of its respective
subsidiaries to, furnish promptly to each other Party (a) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of Federal or state securities laws
and (b) all other information concerning its business, properties and
personnel as such other Party may reasonably request. Except as required by
law, each Party will hold, and will cause its respective officers, employees,
accountants, counsel, financial advisors and other representatives and
affiliates to hold, any nonpublic information in confidence until such time as
such information becomes publicly available (otherwise than through the
wrongful act of any such Person) and shall use its best efforts to ensure that
such Persons do not disclose such information to others without the prior
written consent of the applicable Party from whom such information was
received. In the event of the termination of this Agreement for any reason,
each Party shall promptly return or destroy all documents containing nonpublic
information so obtained from any other Party or any of its subsidiaries and
any copies made of such documents.
Section 7.04. Commercially Reasonable Efforts; Notification. (a) Upon the
terms and subject to the conditions set forth in this Agreement, each Party
agrees to use its commercially reasonable efforts to take, or
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<PAGE>
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Restructuring Transaction, the TSAT Merger and (if the TSAT
Merger shall not first have been consummated) the Tempo Sale, including using
its commercially reasonable efforts to (i) obtain all necessary actions or
nonactions, waivers, consents and approvals from Governmental Entities and the
making of all necessary registrations and filings (including filings with
Governmental Entities, if any) and the taking of all commercially reasonable
steps as may be necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) obtain all necessary
consents, approvals or waivers from third parties, (iii) respond to requests
for information from the Department of Justice, the Federal Trade Commission,
the FCC and any other Governmental Entity relating to the Restructuring
Transaction, the TSAT Merger or the Tempo Sale, (iv) defend any lawsuits or
other legal proceedings, whether judicial or administrative, challenging this
Agreement or all or any part of the Restructuring Transaction, the TSAT Merger
or the Tempo Sale, including seeking to have any stay or temporary restraining
order entered by any court or other Governmental Entity vacated or reversed
and (v) execute and deliver any additional instruments necessary to consummate
the transactions contemplated by, and to fully carry out the purposes of, this
Agreement. In connection with and without limiting the foregoing, TSAT and its
Board of Directors shall (i) take all action necessary to ensure that no state
takeover statute or similar statute or regulation is or becomes applicable to
the Roll-up Plan, including, for avoidance of doubt, the Restructuring
Transaction, the TSAT Merger, the Tempo Sale, the Voting Agreements, this
Agreement, the TSAT Merger Agreement, the TSAT Tempo Agreement or the TSAT
Stockholders Agreement and (ii) if any state takeover statute or similar
statute or regulation becomes applicable to the Restructuring Transaction, the
TSAT Merger, the Tempo Sale, the Voting Agreements, this Agreement, the TSAT
Merger Agreement, the TSAT Tempo Agreement or the TSAT Stockholders Agreement,
take all action necessary to ensure that the Restructuring Transaction may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation
on the Restructuring Transaction, the TSAT Merger and the Tempo Sale.
(b) Notwithstanding anything to the contrary in this Agreement, no Party
shall be required to agree to any prohibition, limitation or other
requirements that would (i) prohibit or limit the ownership or operation by
such Party or any of its subsidiaries or affiliates of any portion of the
business or assets of such Party or any of its subsidiaries or affiliates, or
compel such Party or any of its subsidiaries or affiliates to dispose of or
hold separate any portion of the business or assets of such Party or any of
its subsidiaries or affiliates, (ii) impose limitations on the ability of such
Party to acquire or hold, or exercise full rights of ownership of, any shares
of capital stock of the Company, including the right to vote the capital stock
of the Company acquired by it on all matters properly presented to the
stockholders of the Company, (iii) prohibit such Party or any of its
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of such Party or any of its subsidiaries or
affiliates or (iv) change in any respect the governance of the Company from
that set forth in the Charter and By-laws, or change such Party's rights under
the Stockholders Agreement or the Newhouse Voting Agreement, or impose
limitations on the ability of such Party to exercise any such rights.
(c) Each Party shall give prompt written notice to the other Parties of (i)
any representation or warranty contained in this Agreement that is qualified
as to materiality becoming untrue or inaccurate in any respect or any such
representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations, warranties, covenants
or agreements of the parties or the conditions to the obligations of the
parties under this Agreement.
Section 7.05. Primestar Customers. None of TSAT, TWE, Newhouse, Cox, Comcast
or MediaOne shall engage in any unusual selling or subscriber retention
practices (including rebates, give-backs, discounts and debt forgiveness
outside the ordinary course of business consistent with past practice) prior
to the Closing that are designed to inflate their Primestar Customer additions
or retentions beyond normal levels, and thereby increase the percentage of
high risk customers. The Company shall be entitled to review individual
PRIMESTAR
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subscriber records of each such Party to ensure that the foregoing has been
complied with, and instances of noncompliance shall be deemed to be
overstatements for purposes of the adjustment pursuant to Section 4.03(a) (and
shall be subject to the dispute resolution procedure set forth in Section
4.03(a)).
Section 7.06. GE Agreements. The Company shall succeed to and assume the
rights and obligations of the Partnership to GE under the existing agreements
between the Partnership and GE or its affiliates, including, without
limitation, the Ku-1 User Agreement between Primestar and GE, dated as of
February 8, 1990 and the Amended and Restated Memorandum of Agreement, dated
as of October 18, 1996, with GE.
Section 7.07. Equipment. Each party to this Agreement hereto acknowledges
that the ground equipment and "System" technology to be used by the Company in
its high power business will be General Instrument's DigiCipher II technology.
Section 7.08. Financing; Letters of Credit. (a) TSAT shall use its
commercially reasonable efforts to arrange for financing sufficient to enable
the Company to pay the cash and assume the indebtedness contemplated to be
paid and assumed pursuant to Section 3.05, and shall consult with each of
Comcast, Cox, MediaOne, TWE, Newhouse and GE in respect of the terms of such
financing.
(b) TSAT shall negotiate in good faith with the banks in respect of the TSAT
Credit Agreement Amendment and the Supplemental Indentures and shall use its
best efforts to ensure that the TSAT Credit Agreement Amendment and the
Supplemental Indentures are entered into as soon as is reasonably practicable
after the date hereof.
(c) Each of Comcast, Cox, MediaOne and TWE, severally and not jointly,
agrees to maintain each of its Letters of Credit as in existence on the date
of this Agreement on the respective terms of such Letters of Credit, and in
consideration thereof, the Company shall pay to each such Party by wire
transfer of immediately available funds (i) on the Closing Date, a fee (the
"Up-Front Fee") equal to 0.125% of the aggregate face amount of such Party's
Letters of Credit and (ii) on the first business day of each month during
which such Party's Letters of Credit are in effect, a fee (the "Monthly Fee")
equal to 0.10% of the aggregate face amount of such Party's Letters of Credit
(retroactive to January 1, 1998). Each of Comcast, Cox, MediaOne and TWE,
severally and not jointly, agrees that prior to the expiration of its
respective Letters of Credit referred to above, such Party shall extend the
maturity of such Letters of Credit to June 30, 1999, and the Monthly Fee shall
be payable in respect of each such extended Letter of Credit in the same
manner set forth above. In addition, the Company shall reimburse each of
Comcast, Cox, MediaOne and TWE for all commitment fees and other costs
incurred by such Parties in respect of their Letters of Credit, as incurred,
but only to the extent the Company (directly or through TSAT) shall have
agreed to reimburse such amounts to TCI in respect of its Letters of Credit.
Section 7.09. Agreements. On the Closing Date, each Party and the Company
shall enter into the agreements referenced in Section 4.01.
Section 7.10. Compliance. (a) During the period from the date hereof through
the Closing Date, each Representor shall cause each of its Subsidiaries, if
any, to comply with and perform its obligations under each Relevant Agreement
of any such Subsidiary.
(b) During the period from the date hereof through the Closing Date, TSAT
shall cause the TSAT Sub to comply with and perform its obligations under each
Relevant Agreement of the TSAT Sub.
Section 7.11. ASkyB Transaction. (a) The Parties acknowledge and agree that
the intent and desire of the Parties is to close both the Restructuring
Transaction and the transactions contemplated by the ASkyB Agreement as
promptly as possible and simultaneously if feasible. The Parties hereto agree
that the closing of the Restructuring Transaction is not contingent on the
closing of the transactions contemplated by the ASkyB Agreement. The Parties
hereto agree that if all conditions to the closing of the Restructuring
Transaction set forth in Article VIII are satisfied (or otherwise waived)
prior to the satisfaction (or waiver) of all conditions to the
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closing of the transactions contemplated by the ASkyB Agreement, the Parties
hereto agree promptly to close the Restructuring Transaction.
(b) Subject to Section 7.04(b), the Parties shall cooperate with each other
in good faith to consummate the transactions contemplated by the ASkyB
Agreement. Subject to the preceding paragraph, the Parties shall also use
commercially reasonable efforts to respond to requests for information from
the Department of Justice, the Federal Trade Commission, the FCC and any other
Governmental Entity relating to the transactions contemplated by the ASkyB
Agreement, and to prepare and make such other filings as may be reasonably
required to apply for any approvals, authorizations and consents of any
Governmental Entity regarding the transactions contemplated by the ASkyB
Agreement as may be required by applicable law or regulation, and to prepare
and provide each other Party with the financial information regarding such
Party and its Primestar Business (subject to appropriate confidentiality
safeguards) as may be reasonably required to comply with the requirements of
such laws and regulations, including the requirements of the Securities Act or
the Exchange Act relating to any filings to be made by TSAT or the Company in
connection with the transactions contemplated by the ASkyB Agreement, in each
case on as prompt a basis as is reasonably practicable.
Section 7.12. Indemnification. (a) Indemnification by the Company. If the
Closing shall occur, the Company and its subsidiaries, jointly and severally,
shall indemnify each of TSAT, Comcast, Cox, MediaOne, TWE, Newhouse, GE, each
affiliate of TSAT, Comcast, Cox, MediaOne, TWE, Newhouse or GE, 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 (including attorneys' fees and disbursements and other reasonable
professional fees and disbursements, whether or not litigation is instituted)
(collectively, "Losses") suffered or incurred by any such indemnified party
arising out of or resulting from any Primestar Liabilities of any of TSAT,
Comcast, Cox, MediaOne, TWE, Newhouse or GE (or any of their respective
affiliates), (ii) any and all Losses arising out of or resulting from the
operation by the Company, its subsidiaries, or any of their respective
predecessors of the Primestar Business or the Digital Satellite Business or
the ownership by the Company, its subsidiaries, or any of their respective
predecessors of the Primestar Assets or any assets used primarily in the
Digital Satellite Business (the "Digital Satellite Assets"), whether before,
on or after the Closing Date and (iii) any and all Losses 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.
(b) Indemnification by Comcast, Cox, MediaOne, TWE, Newhouse and GE. If the
Closing shall occur, each of Comcast, Cox, MediaOne, TWE, Newhouse and GE,
severally and not jointly, shall 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 arising out of or resulting from
(A) such indemnitor's Excluded Liabilities, (B)(i) the operation by such
indemnitor, its subsidiaries or any of their respective predecessors of any
business other than the Primestar 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 Digital
Satellite Assets, in any such case whether before, on or after the Closing
Date or (C) any and all Losses arising out of or resulting from the business,
affairs, assets or liabilities, other than Primestar Liabilities, of such
indemnitor after the Closing Date.
(c) Indemnification by Comcast, Cox, MediaOne and GE. If the Closing shall
occur, each of Comcast, Cox, MediaOne and GE, severally and not jointly, shall
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 arising out of or resulting from the breach of any of such
indemnitor's representations and warranties set forth in Section 5.02(b)(B).
(d) Procedures. Any party seeking indemnification hereunder shall give
prompt notice to the other party of any claim as to which indemnification is
sought, and the indemnifying party shall have the right to control, at its own
expense, the conduct of any such claim, and any litigation arising out of such
claim. An indemnifying party shall not be liable for any settlement of any
action or claim effected without its consent, which consent shall not
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be unreasonably withheld. Notwithstanding the foregoing, the party seeking
indemnification hereunder shall have the right, at its own expense, to
participate in (but not control) the defense of any third-party claim giving
rise to a claim of indemnification hereunder, and shall have the right to
control (with counsel of its own choice and at the expense of the indemnifying
party) the defense of any such third party claim if such third party claim
shall seek any material non-monetary damages or criminal penalties, or if the
indemnifying party shall also be a party or potential party to such claim (or
another claim based on substantially similar facts) and the party seeking
indemnification shall have received an opinion of counsel stating that the
party seeking indemnification has substantive defenses to such claim that are
different from and potentially inconsistent with those available to the
indemnifying party.
Section 7.13. Tax Indemnification. (a) Each of Comcast, Cox, and GE (each,
in such capacity, a "MergerIndemnitor") shall 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 Covered Taxes of the MergerIndemnitor's Subsidiary for
the Pre-Closing Tax Period, (ii) all liability (as a result of Treasury
Regulation (S) 1.1502-6(a) or otherwise) for Covered Taxes of any corporation
which, prior to the Closing, was affiliated with the MergerIndemnitor's
Subsidiary or with which the MergerIndemnitor's Subsidiary, prior to the
Closing, otherwise filed a consolidated, combined, unitary or aggregate Tax
return, (iii) all liability for Covered Taxes resulting from the merger of the
MergerIndemnitor's Subsidiary with and into the Company failing to qualify
under either (I) Section 351(a) of the Code coupled with a deemed liquidation
of the MergerIndemnitor's Subsidiary under Section 332 of the Code or (II)
Section 368(a) of the Code, (except, in either such case, if and to the extent
any failure to so qualify 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 this Agreement), and (iv) all liability
for any reasonable legal, accounting, appraisal, consulting or similar fees
and expenses relating to the foregoing.
(b) Each of MediaOne, Newhouse, and TWE (each, in such capacity, a
"ContributionIndemnitor") shall 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 the Company by such
ContributionIndemnitor, 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 ContributionIndemnitor, 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 (as a result of
Treasury Regulation (S)1.1502-6(a) or otherwise) for Covered Taxes of any
corporation which, prior to the Closing, was affiliated with the Contributed
Corporation or with which the Contributed Corporation, prior to the Closing,
otherwise 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.
(c) Notwithstanding the foregoing, each MergerIndemnitor and
ContributionIndemnitor (together, each an "Indemnitor") shall not be 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 shall indemnify each 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 the Company for the Post-Closing Tax
Period, (ii) all liability for Covered Taxes resulting from the merger of the
MergerIndemnitor's Subsidiary with and into the Company failing to qualify
under Section 368(a) of the Code if and to the extent 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 this Agreement), and (iii) all liability for any reasonable
legal, accounting, appraisal, consulting or similar fees and expenses relating
to the foregoing.
(d) If a MergerIndemnitor is required to make an indemnity payment pursuant
to clause (iii) of Section 7.13(a) by virtue of a merger failing to qualify
under Section 368(a) of the Code and, as a result of such failure,
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the Company or any of its subsidiaries actually realizes a tax benefit in a
Post-Closing Tax Period (including by virtue of an increase in the tax basis
of the assets acquired in the merger to fair market value), then the Company
shall pay to such MergerIndemnitor the amount of such tax benefit within ten
days of having actually realized such benefit (including at the time estimated
Tax payments are due). For this purpose, the Company or any of its
subsidiaries shall be deemed to actually realize a tax benefit to the extent,
and at such time as, the amount of the Tax payable by the Company or such
subsidiary for the relevant taxable period is reduced below the amount of Tax
that the Company or such subsidiary would otherwise have been required to pay
for such taxable period at such time if the merger had qualified under Section
368(a) of the Code.
Section 7.14. Post-Closing Cooperation; Confidentiality. (a) For a period of
180 days after the Closing, each Party shall cooperate with the Company to
ensure the orderly transition of such Person's Primestar Business to the
Company. Each Party and the Company shall cooperate with one another in
connection with the furnishing of information that is reasonably necessary for
financial reporting and accounting matters and in respect of compliance with
disclosure and reporting requirements under the Securities Act and the
Exchange Act.
(b) After the Closing, upon reasonable written notice, the Company and each
other Party shall furnish or cause to be furnished to one another, as promptly
as practicable, such information and assistance (to the extent within the
control of such Party) relating to such Party's Primestar Assets or
Partnership Interests (including access to books and records) as is reasonably
necessary for the filing of all Tax returns, and making of any election
related to Taxes, the preparation for any audit by any taxing authority, and
the prosecution or defense of any claim, suit or proceeding related to any Tax
return. The Company and each other Party shall cooperate with each other in
the conduct of any audit or other proceeding relating to Taxes involving such
Party's Primestar Assets or Partnership Interest. The Company and each other
Party shall retain the books and records relating to such Party's Primestar
Assets and Partnership Interest for a period of seven years after the Closing.
With respect to ad valorem Taxes attributable to the conduct of a Party's
Primestar Business prior to the Closing Date, the Company shall prepare the
first draft of each such Tax return and shall provide such draft to the
applicable Party for review and comment, and such Party shall file such Tax
return and shall be liable for, and shall pay, the amount of such Taxes as due
and shall reimburse the Company for its reasonable out-of-pocket costs and
expenses incurred in the preparation of such Tax returns.
(c) Each of Comcast and Cox, severally and not jointly, agrees that from and
after the Closing, the Company shall have the right and authority (x) to
collect for its own account all Post-Closing Accounts Receivable, (y) to
collect for the account of Comcast or Cox, as applicable, all Excluded
Accounts Receivable and (z) to collect for the respective accounts of the
Company and Comcast or Cox, as applicable, (as provided herein) all accounts
receivable that comprise both Post-Closing Accounts Receivable and Excluded
Accounts Receivable. Each of Comcast and Cox, severally and not jointly,
agrees to promptly deliver (or cause its subsidiaries to deliver) to the
Company any cash or other property received directly or indirectly by it with
respect to the Post-Closing Accounts Receivable, including any amounts payable
as interest. The Company agrees to promptly deliver to Comcast or Cox, as
applicable, any cash or other property received directly or indirectly by it
with respect to Excluded Accounts Receivable of Comcast or Cox, as applicable.
In the event that any amounts received by the Company, Comcast or Cox, as
applicable, relate to both Post-Closing Accounts Receivable and Excluded
Accounts Receivable, such amounts shall be duly allocated by the recipient to
the appropriate categories and the amounts so allocated shall be delivered to
the appropriate party as provided above.
(d) For a period of three years after the Closing, except as required by
law, each Party will hold, and will cause its respective officers and
employees to hold, any nonpublic information included in such Party's
Primestar Records in confidence until such time as such information becomes
publicly available (otherwise than through the wrongful act of any such
Person).
Section 7.15. TCI Agreements. TSAT shall cause the Transition Services
Agreement to terminate effective on or prior to the Closing Date.
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Section 7.16. Employee Matters. If the Closing shall occur, the Company
shall make an offer of employment to each Selected Employee of TWE, Newhouse,
MediaOne, Comcast and Cox, or any of their respective subsidiaries, and shall
take such other steps as shall be reasonably required to effectuate the
provisions of this Agreement in respect of such Selected Employees.
Section 7.17. Other Stockholder Approvals. (a) As soon as practicable after
the date of this Agreement and in any event prior to the TSAT Stockholders
Meeting, TSAT, as the sole stockholder of the Company, shall execute and
deliver a written consent of sole stockholder, approving and adopting this
Agreement, the Merger Agreements, the Asset Transfer Agreements, the TSAT
Merger Agreement and the TSAT Tempo Agreement.
(b) As soon as practicable after the date of this Agreement and in any event
prior to the TSAT Stockholders Meeting, Cox, as the sole stockholder of Cox
Sub, Comcast, as the sole stockholder of Comcast Sub I and Comcast Sub II, and
GE, as the sole stockholder of GE Sub, shall execute and deliver a written
consent of sole stockholder, approving and adopting the respective Merger
Agreements to which such respective Subsidiaries are parties.
Article VIII
Conditions Precedent
Section 8.01. Conditions Precedent. The rights and obligations of each Party
shall be subject to the satisfaction or waiver on or prior to the Closing Date
of each of the following conditions precedent:
(a) Strategic Plan. The five year strategic plan of the Company shall
have been approved by a Super-majority Vote (in the form approved, the
"Five Year Plan").
(b) Stockholder Approval. The TSAT Stockholder Approval shall have been
obtained.
(c) HSR Act. The waiting period (and any extension thereof) applicable to
the Restructuring Transaction under the HSR Act shall have been terminated
or shall have expired.
(d) Communications Act. All orders and approvals of the FCC required in
connection with the consummation of the Restructuring Transaction, if any,
shall have been obtained or made.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Restructuring Transaction shall be in effect.
(f) NASDAQ Listing. The shares of Class A Stock and Class B Stock
issuable to the stockholders of TSAT pursuant to the TSAT Merger Agreement
and under the TSAT Stock Plans shall have been approved for listing on
NASDAQ, subject to official notice of issuance.
(g) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(h) Secretary's Certificates. Each Party shall have received certificates
from a Secretary or Assistant Secretary of each other Party (and any
Subsidiary of any such Party that is a party to the Drop Down Agreement or
an Asset Transfer Agreement or Merger Agreement) (i) certifying
organizational documents of such Party and relevant board (or partnership)
resolutions authorizing the transactions contemplated by this Agreement,
the Drop Down Agreement (if applicable) and any applicable Asset Transfer
Agreement or Merger Agreement and (ii) as to the incumbency of each person
signing any Relevant Agreement on behalf of such Party or Subsidiary.
Section 8.02. Conditions to Obligations of each of Comcast, Cox, MediaOne,
TWE, Newhouse and GE. The obligations of each of Comcast, Cox, MediaOne, TWE,
Newhouse and GE are further subject to the following conditions:
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(a) Representations and Warranties. The representation and warranties of
each other Party set forth in this Agreement (and of Malone set forth in
the Malone Letter) that are qualified as to materiality shall be true and
correct, and the representations and warranties of each other Party set
forth in this Agreement (and of Malone set forth in the Malone Letter) that
are not so qualified shall be true and correct in all material respects, in
each case as of the date of this Agreement and as of the Closing Date,
except as otherwise contemplated by this Agreement, and such Party shall
have received certificates signed on behalf of each such other Party by the
chief executive officer and the chief financial officer of such other Party
(and from Malone) to such effect.
(b) Performance of Obligations. Each other Party (including any
Subsidiary of such other Party) and each TSAT Sub (and Malone) shall have
performed in all material respects all obligations required to be performed
by it under each of its Relevant Agreements (and under the Malone Letter)
at or prior to the Closing Date, and such Party shall have received a
certificate signed on behalf of each such other Party (and Subsidiary) and
the TSAT Sub, by the chief executive officer and the chief financial
officer of such other Party (or Subsidiary) and the TSAT Sub (and from
Malone) to such effect.
(c) Financing. All financing arrangements of the Company (including those
of TSAT to be assumed by the Company or to remain in effect after the
Effective Time) shall be in accordance with the Five Year Plan.
(d) Capacity. The Company shall have sufficient credit lines and
borrowing capacity to pay the cash and assume the indebtedness contemplated
to be paid and assumed pursuant to Section 3.05.
(e) Letters of Credit. The Letters of Credit of TCI and each other Party
(or their respective affiliates, as applicable) shall be in effect, and TCI
shall have agreed in writing with TSAT to extend the maturity of its
Letters of Credit to June 30, 1999, and the consideration payable to TCI in
respect of its Letters of Credit shall be the same as that for the other
Parties as set forth in Section 7.08(c).
(f) No Litigation. There shall not be pending or threatened any suit,
action or proceeding by any Governmental Entity that has a reasonable
likelihood of success, (i) challenging the acquisition by such Party of any
shares of capital stock of the Company, seeking to restrain or prohibit the
consummation of the Restructuring Transaction or seeking to obtain from
such Party or the Company any damages that are material in relation to the
Company and its subsidiaries taken as a whole, (ii) seeking to prohibit or
limit the ownership or operation by the Company or such Party or any of
their respective subsidiaries or affiliates of any portion of the business
or assets of the Company, such Party or any of their respective
subsidiaries or affiliates, or to compel the Company, such Party or any of
their respective subsidiaries or affiliates to dispose of or hold separate
any portion of the business or assets of the Company, such Party or any of
their respective subsidiaries or affiliates, as a result of the
Restructuring Transaction, (iii) seeking to impose limitations on the
ability of such Party to acquire or hold, or exercise full rights of
ownership of, any shares of capital stock of the Company, including the
right to vote the capital stock of the Company acquired by it on all
matters properly presented to the stockholders of the Company, (iv) seeking
to prohibit the Company, such Party or any of their respective subsidiaries
or affiliates from effectively controlling in any material respect the
business or operations of the Company, such Party or any of their
respective subsidiaries or affiliates, (v) seeking to change in any respect
the governance of the Company from that set forth in the Charter and By-
laws, or to change such Party's rights under the Stockholders Agreement or
the Newhouse Voting Agreement, or seeking to impose limitations on the
ability of such Party to exercise any such rights or (vi) which otherwise
is reasonably likely to have a Material Adverse Effect on the Company.
(g) State Takeover Statutes. TSAT and the Board of Directors of TSAT
shall have taken all actions required to render inapplicable to the Roll-up
Plan, including, for avoidance of doubt, the Restructuring Transaction, the
TSAT Merger, the Tempo Sale, the Voting Agreements, this Agreement, the
TSAT Merger Agreement, the TSAT Tempo Agreement and the TSAT Stockholders
Agreement, any state takeover statute or similar statute or regulation that
would otherwise apply or purport to apply to such transactions and
agreements.
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(h) Tax Representation Letter. Each other Party shall have delivered a
tax representation letter, dated the Closing Date, in the same form as the
letter delivered by each such Party on the date of this Agreement.
Section 8.03. Conditions to Obligations of TSAT. The obligations of TSAT are
further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
each other Party set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of each other Party set forth in this Agreement that are not so
qualified shall be true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing Date, except as
otherwise contemplated by this Agreement, and TSAT shall have received
certificates signed on behalf of each such other Party by the chief
executive officer and the chief financial officer of such other Party to
such effect.
(b) Performance of Obligations. Each other Party (including any
Subsidiary of such other Party) shall have performed in all material
respects all obligations required to be performed by it under each of its
Relevant Agreements at or prior to the Closing Date, and TSAT shall have
received a certificate signed on behalf of each such other Party (and
Subsidiary) by the chief executive officer and the chief financial officer
of such other Party (or Subsidiary) to such effect.
(c) Letters of Credit. The Letters of Credit of each other Party (or
their respective affiliates, as applicable) shall be in effect.
(d) No Litigation. There shall not be pending or threatened any suit,
action or proceeding by any Governmental Entity that has a reasonable
likelihood of success, (i) seeking to restrain or prohibit the consummation
of the Restructuring Transaction or seeking to obtain from TSAT or the
Company any damages that are material in relation to the Company and its
subsidiaries taken as a whole, (ii) seeking to prohibit or limit the
ownership or operation by the Company or TSAT or any of their respective
subsidiaries or affiliates of any portion of the business or assets of the
Company, TSAT or any of their respective affiliates, or to compel the
Company, TSAT or any of their respective affiliates to dispose of or hold
separate any portion of the business or assets of the Company, TSAT or any
of their respective affiliates, as a result of the Restructuring
Transaction, (iii) seeking to prohibit the Company or any of its
subsidiaries from effectively controlling in any material respect the
business or operations of the Company or its subsidiaries, (iv) seeking to
impose limitations on the ability of TSAT or any Person that (as of the
date of this Agreement) holds 5% or more of the TSAT A Stock or TSAT B
Stock to acquire or hold, or exercise full rights of ownership of, any
shares of capital stock of the Company, including the right to vote all
capital stock of the Company acquired by such Person pursuant to the
Restructuring Transaction on all matters properly presented to the
stockholders of the Company, (v) seeking to change in any respect the
governance of the Company from that set forth in the Charter and By-laws,
or to change TSAT's rights under the Stockholders Agreement, or seeking to
impose limitations on the ability of TSAT to exercise any such rights or
(vi) which otherwise is reasonably likely to have a Material Adverse Effect
on the Company.
(e) Tax Representation Letter. Each other Party shall have delivered a
tax representation letter, dated the Closing Date, in the same form as the
letter delivered by each such Party on the date of this Agreement.
Article IX
Termination, Amendment and Waiver
Section 9.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after the vote of the
stockholders of TSAT at the TSAT Stockholders Meeting:
(a) by mutual written consent of the parties hereto; or
(b) by any Party:
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(i) if, upon a vote at a duly held TSAT Stockholders Meeting or any
adjournment thereof, the TSAT Stockholder Approval shall not have been
obtained; or
(ii) if any judgment, decree, injunction, rule or order of any
Governmental Entity which prohibits, restricts or delays consummation
of the Restructuring Transaction shall have become final and
nonappealable;
provided, however, that the Party seeking termination is not in breach in any
material respect of any of its representations, warranties, covenants or
agreements contained in this Agreement.
Section 9.02. Effect of Termination. In the event of termination of this
Agreement by any Party as provided in Section 9.01, this Agreement shall
forthwith become void and have no effect, without any liability or obligation
hereunder on the part of any Party, other than this Section 9.02 and Article X
and except to the extent that such termination results from the wilful and
material breach by a Party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
Section 9.03. Amendment. This Agreement may be amended by the Parties at any
time before or after the TSAT Stockholder Approval; provided, however, that
after any such approval, there shall be made no amendment that by law requires
further approval by such stockholders without the further approval of such
stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the Parties.
Section 9.04. Extension; Waiver. At any time prior to the Effective Time,
the Parties may (a) extend the time for the performance of any of the
obligations or other acts of the other Parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) subject to the proviso of
Section 9.03, waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights.
Article X
General Provisions
Section 10.01. Nonsurvival of Representations and Warranties. Except as set
forth in either of the next two sentences, none of the representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Closing. The representations and warranties of
TSAT in this Agreement shall survive the Closing solely for purposes of
Section 5.02(a) of the TSAT Merger Agreement, and shall terminate on the
earlier of (i) the TSAT Closing Date and (ii) termination of the TSAT Merger
Agreement. The representation and warranty of MediaOne, Comcast, Cox and GE
set forth in Section 5.02(b)(B) shall survive the Closing solely for purposes
of Section 7.12(c) and shall terminate at the close of business 18 months
following the Closing Date. This Section 10.01 shall not limit any covenant or
agreement of the parties which by its terms contemplates performance after the
Effective Time.
Section 10.02. Notices. Any notice or other communication that is required
or that may be given in connection with this Agreement shall be in writing and
shall be delivered personally, telecopied or sent by certified, registered or
express mail or by Federal Express or similar courier service, postage
prepaid, and shall be deemed given when so received if delivered personally or
by telecopy or, if mailed, seven (7) calendar days after the date of mailing
(three (3) calendar days in the case of express mail, Federal Express or
similar courier service), as follows:
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If to the Company:
8085 South Chester Street, Suite 300
Englewood, CO 80112
Attention of President
Facsimile: (303) 712-4977
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (212) 705-5125
If to TWE:
290 Harbor Drive
Stamford, CT 06902
Attention of General Counsel,
Time Warner Cable
Facsimile: (203) 328-4840
With a separate copy delivered to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
Attention of John T. Gaffney, Esq.
Facsimile: (212) 474-3700
If to Newhouse:
5015 Campuswood Drive
East Syracuse, NY 13057
Attention of Robert J. Miron
Facsimile: (315) 463-4127
With a separate copy delivered to:
Sabin, Bermant & Gould LLP
350 Madison Avenue
New York, NY 10017
Attention of Arthur J. Steinhauer, Esq.
Facsimile: (212) 692-4406
If to Comcast:
1500 Market Street
Philadelphia, PA 19102
Attention of General Counsel
Facsimile: (215) 981-7794
With a separate copy delivered to:
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102
Attention of Kathleen M. Hyneman, Esq.
Facsimile: (215) 981-7794
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If to Cox:
1400 Lake Hearn Drive
Atlanta, GA 30319
Attention of Ajit Dalvi
Facsimile: (404) 847-6542
With a separate copy delivered to:
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, DC 20036
Attention of Stuart Sheldon, Esq.
Facsimile: (202) 776-222
If to MediaOne:
US WEST Media Group, Inc.
9785 Maroon Circle, Suite 420
Englewood, CO 80111
Attention of President
Facsimile: (303) 754-5452
With a separate copy delivered to:
US WEST Media Group, Inc.
188 Inverness Drive
Englewood, CO 80112
Attention of General Counsel
Facsimile: (303) 793-6707
If to GE:
Four Research Way
Princeton, NJ 08540
Attention of General Counsel
Facsimile: (609) 987-4233
With a separate copy delivered to:
Hogan & Hartson
555 13th Street NW
Washington, DC 20004
Attention of Timothy A. Lloyd, Esq.
Facsimile: (202) 637-5910
If to TSAT:
8085 South Chester, Suite 300
Englewood, CO 80112
Attention of Kenneth G. Carroll
Facsimile: (303) 712-4973
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (212) 705-5125
A-1-40
<PAGE>
Section 10.03. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Notwithstanding the foregoing, this Agreement
may be assigned, in whole but not in part, to any Person who acquires all or
substantially all the assets of a party (whether by asset transfer, stock
transfer, merger, spin-off or other business combination or transaction or
series of transactions) so long as such assignee assumes in writing all of the
assignor's obligations under this Agreement; provided, that the assignor shall
remain liable for such obligations unless such assignee (or any guarantor of
such assignee's obligations under such assumption) is, at the time of such
assignment and after giving effect to the transactions to be consummated in
connection with such assignment, at least as creditworthy as the assignor was
immediately prior to the assignment (and, in the case of MediaOne, as
creditworthy as US West was immediately prior to the assignment), and such
assignee agrees in writing that the other parties hereto shall be third party
beneficiaries of such assumption, in which case the assignor shall be released
in writing by the other parties hereto from such assumed obligations. Subject
to the preceding sentence, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective
successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
Section 10.04. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule or
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
Section 10.05. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Merger Agreements, the Asset Transfer Agreements, the TSAT
Merger Agreement, the Stockholders Agreement, the US West Guarantee, the
Malone Letter, the Registration Rights Agreement, the Newhouse Voting
Agreement, the Voting Agreements, the Reimbursement Agreements, the Tax
Sharing Agreement, the TSAT Stockholders Agreement, the TSAT Tempo Agreement
and the Drop Down Agreement (a) constitute the entire agreement, and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the Restructuring Transaction and (b) except for the
provisions of Sections 7.12, 7.13 and 10.03, are not intended to confer upon
any person other than the parties any rights or remedies.
Section 10.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of laws thereof, except to the extent the laws of the State of
Delaware are mandatorily applicable to the TSAT Merger or any other merger
under any of the Merger Agreements.
Section 10.07. Enforcement; Exclusive Jurisdiction. (a) The Parties agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the Parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement in any
court of the State of New York or the State of Delaware and any court of the
United States located in the Borough of Manhattan in New York City or the
State of Delaware.
(b) With respect to any suit, action or proceeding relating to this
Agreement (collectively, a "Proceeding"), each party to this Agreement
irrevocably:
(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
A-1-41
<PAGE>
(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 10.02 herein; provided that such manner of service of
process shall not preclude the service of process in any other manner
permitted under applicable law.
Section 10.08. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
Section 10.09. Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
IN WITNESS WHEREOF, each Party has caused this Agreement to be duly executed
as of the day first written above.
TCI Satellite Entertainment, Inc.,
/s/ Kenneth G. Carroll
by __________________________________
Name:Kenneth G. Carroll
Title:Senior Vice President/CFO
Primestar, Inc.,
/s/ Kenneth G. Carroll
by __________________________________
Name:Kenneth G. Carroll
Title:President
Time Warner Entertainment Company,
L.P.,
by American Television and
Communications Corporation, a
general partner,
/s/ David E. O'Hayre
by __________________________________
Name:David E. O'Hayre
Title:Vice President
Advance/Newhouse Partnership,
by Advance Communication Corp., as
general partner
/s/ Robert Miron
by __________________________________
Name:Robert Miron
Title:President
A-1-42
<PAGE>
Comcast Corporation,
/s/ Jack A. Markell
by __________________________________
Name: Jack A. Markell
Title:Vice President
Cox Communications, Inc.,
/s/ Ajit M. Dalvi
by __________________________________
Name: Ajit M. Dalvi
Title:Senior Vice President
MediaOne of Delaware, Inc.,
/s/ Douglas D. Holmes
by __________________________________
Name: Douglas D. Holmes
Title:E.V.P. Finance and Strategy
GE American Communications, Inc.,
/s/ John F. Connelly
by __________________________________
Name: John F. Connelly
Title:Chairman and CEO
A-1-43
<PAGE>
EXHIBIT A
VALUATION METHODOLOGY
- -------------------------------------------------------------------------------
ASSUMPTIONS
Value Per Sub.......... $1,100 Series A Shares........ 68,060,000
Cash Per Sub........... 458 Series B Shares........ 8,466,000
-----------
TSAT Fully Diluted
Equity/Increm. TSAT Shares
Sub.................... 350 Outstanding... 76,526,000
ASSUMPTIONS
<TABLE>
<C> <C> <S> <C>
Value Per Series A
Sub.......... $1,100 Shares........ 68,060,000
Series B
Cash Per Sub.. 458 Shares........ 8,466,000
----------
TSAT Fully Diluted
Equity/Increm. TSAT Shares
Sub........... 350 Outstanding... 76,526,000
</TABLE>
3/31/97 VALUATION
<TABLE>
<CAPTION>
VALUE VALUE OF GROSSED-UP VALUE
SUBS OF SUBS PARTNERSHIP PARTNERSHIP AGGREGATE OF CASH EQUITY
3/31/97(2) $1,100(3) 2/14/97(4) VALUE(5) VALUE(6) $458(7) VALUE(8)
---------- ---------- ----------- ----------- ---------- -------- ----------
($000s) ($000s) ($000s) ($000s) ($000s) ($000s)
<S> <C> <C> <C> <C> <C> <C> <C>
TSAT.................... 716,158 $ 787,774 $ 70,750 $ 70,750 $ 858,523 $327,821 $ 530,702
TWE(1).................. 515,719 567,291 106,124 106,124 673,415 236,070 437,345
Cox..................... 143,707 158,078 35,375 35,375 193,453 65,782 127,671
Comcast................. 134,408 147,849 35,375 35,375 183,224 61,525 121,698
MediaOne................ 152,087 167,296 35,375 35,375 202,671 69,618 133,053
GE...................... 0 0 56,183 84,232 84,232 14,025 70,207
--------- ---------- -------- -------- ---------- -------- ----------
1,662,079 $1,828,287 $339,181 $367,231 $2,195,518 $774,841 $1,420,676
</TABLE>
12/31/97 VALUATION ADJUSTMENTS--INCREMENTAL ADJUSTMENT AMOUNTS(9)
<TABLE>
<CAPTION>
ESTIMATED ADJUSTED ADJUSTED ADJUSTED
SUBS INCREMENTAL CASH EQUITY CASH EQUITY AGGREGATE TOTAL TOTAL
12/31/97 SUBS $458(10) $642 $750 $350 VALUE CASH(10) EQUITY
--------- ----------- -------- -------- -------- ------- ---------- -------- ----------
($000s) ($000s) ($000s) ($000s) ($000s) ($000s) ($000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TSAT.................... 879,042 162,884 -- -- $122,163 $57,009 $1,037,695 $449,984 $ 587,711
TWE..................... 570,793 55,074 25,210 35,371 -- -- 733,997 261,280 472,716
Cox..................... 177,351 33,644 15,400 21,608 -- -- 230,460 81,182 149,278
Comcast................. 197,171 62,763 28,730 40,310 -- -- 252,263 90,255 162,008
MediaOne................ 186,089 34,002 15,564 21,838 -- -- 240,073 85,182 154,891
GE...................... 0 0 0 0 -- -- 84,232 14,025 70,207
--------- ------- ------- -------- -------- ------- ---------- -------- ----------
2,010,445 348,366 $84,905 $119,126 $122,163 $57,009 $2,578,720 $961,909 $1,596,812
</TABLE>
OWNERSHIP CALCULATIONS--SHARES(11)
<TABLE>
<CAPTION>
ADJUSTED
TOTAL ECONOMIC VOTING
EQUITY(12) OWNERSHIP(13) TOTAL(14) CLASS A CLASS B CLASS C VOTES POWER
---------- ------------- ----------- ----------- --------- ---------- ----------- ------
($000s)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TSAT.................... $ 587,711 36.81% 76,526,000 68,060,000 8,466,000 -- 152,720,000 37.63%
TWE..................... 472,716 29.60% 61,552,473 54,742,981 -- 6,809,493 122,837,908 30.27%
Cox..................... 149,278 9.35% 19,437,542 17,287,185 -- 2,150,357 38,790,756 9.56%
Comcast................. 162,008 10.15% 21,095,080 18,761,351 -- 2,333,729 42,098,642 10.37%
MediaOne................ 154,891 9.70% 20,168,320 17,937,118 -- 2,231,202 40,249,143 9.92%
GE...................... 70,207 4.40% 9,141,707 9,141,707 -- -- 9,141,707 2.25%
---------- ------ ----------- ----------- --------- ---------- ----------- ------
$1,596,812 100.00% 207,921,123 185,930,341 8,466,000 13,524,781 405,838,155 100.00%
</TABLE>
A-1-44
<PAGE>
EXPLANATORY NOTES ON VALUATION METHODOLOGY
(1) References herein to TWE include Newhouse.
(2) Number of Primestar Customers of TSAT and each Class C Holder as of March
31, 1997.
(3) Number of Primestar Customers as of March 31, 1997 multiplied by
$1,100/sub.
(4) Value of Partnership Interest based on cost as of February 14, 1997. This
will be the valuation as of the Closing Date as well.
(5) GE will receive a notional value of $84.2 million for its Partnership
Interest of which $14.025 million will be paid in cash/debt in the rolled-
up PRIMESTAR.
(6) The Aggregate Value is the Value of Subs plus the Grossed-up Partnership
Value.
(7) The Value of Cash is the number of Primestar Customers as of March 31, 1997
multiplied by the debt per sub of TSAT as of March 31, 1997 (assumed to be
$458 for this example, however, debt per sub of TSAT will be recalculated
in accordance with Note 10 below on the Closing Date and such number will
be used for the actual calculation of the Value of Cash for purposes of the
Closing).
(8) The Equity Value is the Aggregate Value minus the Value of Cash.
(9) The row of columns which assumes a closing on 12/31/97 reflects the
adjustment of the Equity Value to 12/31/97, based upon the estimated subs
at 12/31/97 and an assumed debt per sub of TSAT at 12/31/97 of $458.
(10) The cash payment to each Class C Holder at Closing is equal to the
Adjusted Total Cash. The Adjusted Total Cash for each Class C Holder is
the number of Primestar Customers as of the Closing Date (i.e. the number
as of March 31, 1997 plus incremental subs) multiplied by debt per sub of
TSAT on the Closing Date.
Debt per sub of TSAT on the Closing Date shall be equal to (A) (x) TSAT
Debt on the Closing Date minus (y) the product of (i) $750 and (ii) TSAT's
incremental subs minus (z) the aggregate net proceeds payable to TSAT upon
the exercise of the Included Options divided by (B) the number of Primestar
Customers of TSAT as of March 31, 1997.
Stated by formula: if x = TSAT Debt on the Closing Date
y = TSAT's incremental subs as of the Closing Date
z = the aggregate net proceeds payable to TSAT upon
exercise of the Included Options
T = TSAT's Primestar Customers as of March 31, 1997 (see
table)
then Debt per sub of TSAT on the Closing Date = x -$750y -z
-----------
T
(11) Assuming a Closing Date of December 31, 1997 and debt per sub of TSAT (as
calculated in accordance with Note 10 above) of $458.
(12) Based on the Adjusted Total Equity calculated using the assumptions
above.
(13) Based upon percentages of Adjusted Total Equity.
(14) The total amount of equity in the Company to be issued at Closing will be
equal to (I) the number of TSAT shares outstanding as of the Closing Date
plus the number of shares of TSAT A Stock issuable pursuant to the
Included Options divided by (II) TSAT's percentage (expressed as a
decimal). The Class C Holders and GE receive in the Restructuring
Transaction that number of Class A and (except for GE) Class C shares
required to give the calculated equity ownership. The proportion of Class
C to Class A shares received by the non-TSAT partners (except for GE) is
based on the same proportion as TSAT's Class B to Class A shares at
Closing.
A-1-45
<PAGE>
SUMMARY
Stated by formula, if N = a party's total number of Primestar Customers on
the Closing Date
D = debt per sub of TSAT on the Closing Date (as
calculated in accordance with Note 10 above)
T = TSAT's Primestar Customers as of March 31, 1997 (see
table)
y = TSAT's incremental subscribers as of the Closing
Date
then the party's ADJUSTED AGGREGATE VALUE = THE GROSSED-UP PARTNERSHIP
VALUE + $1,100N;
IF A CLASS C HOLDER, THE PARTY'S ADJUSTED TOTAL CASH = ND;
IF GE, THE PARTY'S ADJUSTED TOTAL CASH = $14,025,000;
IF TSAT, THE PARTY'S ADJUSTED TOTAL CASH = TD + $750Y
the party's ADJUSTED TOTAL EQUITY = ADJUSTED AGGREGATE VALUE-ADJUSTED
TOTAL CASH
[if a Class C Holder]= the Grossed-up Partnership Value + N($1,100-D)
[if GE] = $84,232,000-$14,025,000
[if TSAT] = the Grossed-up Partnership Value + $1,100N-TD-$750y
In performing the valuation methodology, the following items are constant
and will not depend on the timing of the Closing Date:
(i) TSAT receives $750 in cash per incremental subscriber of TSAT
(ii) each party receives $1,100 per subscriber
(iii) the Grossed-up Partnership Value is as set forth in the table
A-1-46
<PAGE>
APPENDIX A-2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TSAT ASSET TRANSFER AGREEMENT
DATED AS OF FEBRUARY 6, 1998
BETWEEN
TCI SATELLITE ENTERTAINMENT, INC.
AND
PRIMESTAR, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ASSET TRANSFER AGREEMENT dated as of February 6, 1998, between TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("TSAT"), and PRIMESTAR, INC., a
Delaware corporation ("New PRIMESTAR").
TSAT and New PRIMESTAR are parties to the Merger and Contribution Agreement
dated as of February 6, 1998 (the "Restructuring Agreement"), among Time
Warner Entertainment Company, L.P., Advance/Newhouse Partnership, Comcast
Corporation, Cox Communications, Inc., MediaOne of Delaware, Inc., GE American
Communications, Inc., and the other parties thereto. The Restructuring
Agreement provides for the consummation of the Restructuring Transaction (as
defined therein), whereby, among other things, each of the parties to the
Restructuring Agreement other than New PRIMESTAR will contribute to New
PRIMESTAR (by asset transfer or merger) certain assets of such parties, in
exchange for cash (or assumption of indebtedness) and securities of New
PRIMESTAR. This is the TSAT Asset Transfer Agreement described in the
Restructuring Agreement. Capitalized terms used but otherwise not defined
herein shall have the meanings provided in the Restructuring Agreement.
In that connection, TSAT desires to transfer and assign to New PRIMESTAR, as
a contribution to capital as set forth herein, all of TSAT's assets and
liabilities, other than the Excluded Assets and the Retained Liabilities, and
New PRIMESTAR desires to accept and assume such assets and liabilities, upon
the terms and subject to the conditions of this Agreement and the
Restructuring Agreement.
Accordingly, the parties hereby agree as follows:
ARTICLE I
Purchase and Sale of Acquired Assets
Section 1.01. Purchase and Sale. On the terms and subject to the conditions
of this Agreement and the Restructuring Agreement, at the Closing, TSAT shall
sell, assign, transfer, convey and deliver to New PRIMESTAR, and New PRIMESTAR
shall purchase from TSAT all the respective right, title and interest of TSAT
in, to and under the Acquired Assets (as defined in Section 1.02), for (i) an
aggregate purchase price determined as set forth in Section 3.05 of the
Restructuring Agreement (the "Purchase Price"), payable as set forth in the
Restructuring Agreement, and (ii) the assumption of the Assumed Liabilities
(as defined in Section 1.03). The purchase and sale of the Acquired Assets and
the assumption of the Assumed Liabilities is referred to in this Agreement as
the "Contribution."
Section 1.02. Acquired Assets; Excluded Assets. (a) The term "Acquired
Assets" means all the business, rights, properties, assets and goodwill of
TSAT on the Closing Date, of whatever nature, real, personal and mixed,
tangible and intangible, wherever located, other than the Excluded Assets, as
hereinafter defined.
(b) The term "Excluded Assets" means (i) all the issued and outstanding
shares of capital stock of Tempo Satellite, Inc., a Delaware corporation
("Tempo"), and TSAT's rights under any intercompany agreements between TSAT
and Tempo with respect to the provision of any management or other services by
TSAT to Tempo, whether formal or informal, and whether or not in writing; (ii)
the consideration to be received by TSAT under this Agreement and the
Restructuring Agreement; and (iii) any and all other rights of TSAT under this
Agreement, the Restructuring Agreement, the TSAT Merger Agreement, the
Stockholders Agreement, the Registration Rights Agreement, the TSAT Tempo
Agreement, the TSAT Stockholders Agreement and the Voting Agreements.
Section 1.03. Assumption of Liabilities. (a) Upon the terms and subject to
the conditions of this Agreement and the Restructuring Agreement, New
PRIMESTAR shall assume, effective as of the Closing, and from and after the
Closing, New PRIMESTAR shall pay, perform and discharge when due, and shall
indemnify TSAT, its affiliates, and their respective officers, directors,
employees, stockholders, agents and representatives
A-2-1
<PAGE>
against and hold them harmless from and after the Closing from, all debts,
obligations and liabilities of TSAT at the Closing, other than the Retained
Liabilities, as hereinafter defined. The debts, obligations and liabilities of
TSAT required to be assumed by New PRIMESTAR at the Closing as provided herein
are referred to herein collectively as the "Assumed Liabilities."
(b) The term "Retained Liabilities" means any and all obligations of TSAT
under this Agreement, the Restructuring Agreement, the TSAT Merger Agreement,
the Stockholders Agreement, the Registration Rights Agreement, the TSAT Tempo
Agreement, the TSAT Stockholders Agreement and the Voting Agreements.
Section 1.04. Consents of Third Parties. (a) Notwithstanding anything in
this Agreement to the contrary, this Agreement shall not constitute an
agreement to assign any asset or any claim or right or any benefit arising
under or resulting from such asset if an attempted assignment thereof, without
the consent of a third party, would constitute a breach or other contravention
of the rights of such third party, would be ineffective with respect to any
party to an agreement concerning such asset, or would in any way adversely
affect the rights of TSAT or, upon transfer, New PRIMESTAR under such asset.
If any transfer or assignment by TSAT to, or any assumption by New PRIMESTAR
of, any interest in, or liability, obligation or commitment under, any asset
requires the consent of a third party, then such assignment or assumption
shall be made subject to such consent being obtained.
(b) If any such consent is not obtained prior to the Closing, TSAT and New
PRIMESTAR shall cooperate (at their own expense) in any lawful and reasonable
arrangement reasonably proposed by New PRIMESTAR under which New PRIMESTAR
shall obtain the economic claims, rights and benefits under (and assume the
economic costs or expenses of, and any obligations or liabilities under) the
asset, claim or right with respect to which the consent has not been obtained
in accordance with this Agreement. Such reasonable arrangement may include (i)
the subcontracting, sublicensing or subleasing to New PRIMESTAR of any and all
rights of TSAT against the other party to such third-party agreement arising
out of a breach or cancellation thereof by the other party, and (ii) the
enforcement by TSAT of such rights.
ARTICLE II
The Closing
Section 2.01. The Closing shall take place as set forth in Section 4.01 of
the Restructuring Agreement.
Section 2.02. Transactions To Be Effected at the Closing. At the Closing:
(a) TSAT shall deliver to New PRIMESTAR (i) such appropriately executed
deeds, bills of sale, assignments and other instruments of transfer
relating to the Acquired Assets in form and substance reasonably
satisfactory to New PRIMESTAR and its counsel and (ii) such other documents
as New PRIMESTAR or its counsel may reasonably request to demonstrate
satisfaction of the conditions and compliance with the covenants set forth
in this Agreement; and
(b) New PRIMESTAR shall deliver to TSAT the Purchase Price and a duly
executed assumption agreement in the form of Exhibit A-1 hereto.
ARTICLE III
Covenants
Section 3.01. Transfer Taxes. All transfer Taxes applicable to the
conveyance and transfer from TSAT to New PRIMESTAR of the Acquired Assets and
any other transfer or documentary Taxes or any filing or recording fees
applicable to such conveyance and transfer shall be paid by New PRIMESTAR.
Each party shall use reasonable efforts to avail itself of any available
exemptions from any such Taxes or fees, and to cooperate
A-2-2
<PAGE>
with the other parties in providing any information and documentation that may
be necessary to obtain such exemptions.
Section 3.02. Collection of Receivables. TSAT agrees that from and after the
Closing, the New PRIMESTAR shall have the right and authority to collect for
its own account any and all accounts receivable of TSAT relating to the
distribution of the PRIMESTAR programming service, whether before or after the
Closing, including rental and sales fees ("Accounts Receivable"). TSAT agrees
to promptly deliver to New PRIMESTAR any cash or other property received
directly or indirectly by it with respect to the Accounts Receivable,
including any amounts payable as interest.
Section 3.03. Bulk Transfer Laws. New PRIMESTAR hereby waives compliance by
TSAT with the provisions of any so-called "bulk transfer law" of any
jurisdiction in connection with the sale of the Acquired Assets to New
PRIMESTAR.
Section 3.04. Further Assurances. From time to time, as and when requested
by any party, each party shall execute and deliver, or cause to be executed
and delivered, all such documents and instruments and shall take, or cause to
be taken, all such further or other actions, as such other party may
reasonably deem necessary or desirable to consummate the transactions
contemplated by this Agreement, including, in the case of TSAT, executing and
delivering to New PRIMESTAR such assignments, deeds, bills of sale, consents
and other instruments as New PRIMESTAR or its counsel may reasonably request
as necessary or desirable for such purpose.
Section 3.05. Purchase Price Allocation. On or prior to the Closing Date,
TSAT and New PRIMESTAR shall mutually agree on an allocation of the Purchase
Price among the Acquired Assets according to the relative fair market values
of such assets on the Closing Date. If TSAT and New PRIMESTAR are unable to
agree on such fair market values, TSAT and New PRIMESTAR shall elect an
independent appraisal firm to determine such values. The conclusions of such
appraisal firm shall be conclusive and binding. The fees and expenses of such
appraisal firm shall be shared equally by TSAT and New PRIMESTAR.
ARTICLE IV
Conditions Precedent
The sole condition precedent to the respective obligation of each party to
effect the Contribution shall be satisfaction (or waiver by the applicable
beneficiary of the applicable condition) of the conditions set forth in
Article VIII of the Restructuring Agreement.
ARTICLE V
Termination, Amendment and Waiver
Section 5.01. Termination. This Agreement may be terminated, whether before
or after TSAT Stockholder Approval, but only upon termination of the
Restructuring Agreement in accordance with the terms thereof.
Section 5.02. Effect of Termination. In the event of termination of this
Agreement by either New PRIMESTAR or TSAT as provided in Section 5.01, this
Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of New PRIMESTAR or TSAT.
Section 5.03. Amendment. This Agreement may be amended, whether before or
after TSAT Stockholder Approval, but only on the same terms set forth in
Section 9.03 of the Restructuring Agreement.
A-2-3
<PAGE>
ARTICLE VI
General Provisions
Section 6.01. Notices. Any notice or other communication that is required or
that may be given in connection with this Agreement shall be in writing and
shall be delivered in accordance with Section 10.02 of the Restructuring
Agreement.
Section 6.02. Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation."
Section 6.03. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
Section 6.04. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
Section 6.05. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Merger Agreements, the Asset Transfer Agreements, the
Restructuring Agreement, the US West Guarantee, the Malone Letter, the
Reimbursement Agreements, the Stockholders Agreement, the Newhouse Voting
Agreement, the Registration Rights Agreement, the Voting Agreements, the Tax
Sharing Agreement, the TSAT Merger Agreement, the TSAT Stockholders Agreement,
and the TSAT Tempo Agreement (a) constitute the entire agreement, and
supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the Restructuring Transaction and (b) except
for the provisions of Section 1.03, are not intended to confer upon any person
other than the parties any rights or remedies.
Section 6.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of NewYork, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
Section 6.07. Enforcement; Exclusive Jurisdiction. (a) The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this
Agreement in any court of the State of New York or the State of Delaware and
any court of the United States located in the Borough of Manhattan in New York
City or the State of Delaware.
(b) With respect to any suit, action or proceeding relating to this
Agreement (collectively, a "Proceeding"), each party to this Agreement
irrevocably:
(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
A-2-4
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(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 10.02 of the Restructuring Agreement; provided that such
manner of service of process shall not preclude the service of process in
any other manner permitted under applicable law.
Section 6.08. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
IN WITNESS WHEREOF, TSAT and New PRIMESTAR have duly executed this Agreement
as of the date first written above.
TCI Satellite Entertainment, Inc.
/s/ Kenneth G. Carroll
By __________________________________
Name:Kenneth G. Carroll
Title:Senior Vice President/CFO
Primestar, Inc.
/s/ Kenneth G. Carroll
By __________________________________
Name:Kenneth G. Carroll
Title:President
A-2-5
<PAGE>
EXHIBIT A-1
ASSUMPTION AGREEMENT
ASSUMPTION AGREEMENT dated as of [Closing Date], between TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("TSAT"), and PRIMESTAR, INC., a
Delaware corporation ("New PRIMESTAR").
WITNESSETH :
WHEREAS, TSAT and New PRIMESTAR have entered into that certain Asset
Transfer Agreement, dated as of February 6, 1998, (the "Agreement";
capitalized terms used herein and not otherwise defined herein having the
respective meanings given in the Agreement), providing for the transfer and
assignment to New PRIMESTAR of all the assets and liabilities of TSAT, other
than the Excluded Assets and Retained Liabilities;
NOW, THEREFORE, in consideration for the Acquired Assets being transferred
by TSAT pursuant to the Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
and pursuant to the terms and conditions of the Agreement, the parties hereto
agree as follows:
1. Assumption of Liabilities. New PRIMESTAR hereby assumes and agrees to
pay, perform and discharge when due, and indemnify TSAT, their affiliates and
their respective officers, directors, employees, stockholders, agents and
representatives against and hold them harmless from and after the Closing
from, all the Assumed Liabilities.
2. Subject to Agreement. The scope, nature and extent of the Assumed
Liabilities are expressly set forth in the Agreement. Nothing contained herein
shall change, amend, extend or alter (nor shall it be deemed or construed as
changing, amending, extending or altering) the terms or conditions of the
Agreement in any manner whatsoever. In the event of any conflict or other
difference between the Agreement and this instrument, the provisions of the
Agreement shall control.
3. Headings. The headings contained in this Assumption Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Assumption Agreement.
4. Interpretation. Whenever the words "includes," "included" or "including"
are used in this Assumption Agreement, they shall be deemed to be followed by
the words "without limitation."
5. Governing Law. This Assumption Agreement shall be governed by and
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of law thereof.
IN WITNESS THEREOF, each party hereto has caused this Assumption Agreement
to be duly executed by its duly authorized officer as of this [insert Closing
Date].
TCI Satellite Entertainment, Inc.
By: _________________________________
Name:
Title:
Primestar, Inc.
By __________________________________
Name:
Title:
A-2-6
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 6, 1998,
BETWEEN
PRIMESTAR, INC.
AND
TCI SATELLITE ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
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Parties and Recitals...................................................... 1
ARTICLE I
The TSAT Merger
Section 1.01. The TSAT Merger............................................ 1
Section 1.02. TSAT Closing............................................... 1
Section 1.03. TSAT Effective Time........................................ 1
Section 1.04. Effects.................................................... 2
Section 1.05. Certificate of Incorporation and By-Laws................... 2
Section 1.06. Directors.................................................. 2
Section 1.07. Officers................................................... 2
ARTICLE II
Effect on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
Section 2.01. Effect on Capital Stock.................................... 2
Section 2.02. Exchange of Certificates................................... 2
ARTICLE III
Employee Matters
Section 3.01. Employee Stock Options..................................... 4
Section 3.02. TCI Options................................................ 5
Section 3.03. Indemnification............................................ 5
ARTICLE IV
Covenants Relating to Business
Section 4.01. Alternative Transactions................................... 6
Section 4.02. Interim Operations of TSAT................................. 6
Section 4.03. Investment Company Act Exception........................... 7
Section 4.04. Other Actions.............................................. 8
Section 4.05. Access to Information; Confidentiality..................... 8
Section 4.06. Commercially Reasonable Efforts; Notification.............. 8
Section 4.07. Affiliates................................................. 10
Section 4.08. Reimbursement of Expenses.................................. 10
ARTICLE V
Conditions Precedent
Section 5.01. Conditions Precedent....................................... 10
Section 5.02. Conditions to Obligations of the Company................... 11
Section 5.03. Conditions to Obligations of TSAT.......................... 12
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ARTICLE VI
Termination, Amendment and Waiver
Section 6.01. Termination................................................ 12
Section 6.02. Effect of Termination...................................... 12
Section 6.03. Amendment.................................................. 12
Section 6.04. Extension; Waiver.......................................... 12
ARTICLE VII
General Provisions
Section 7.01. Notices.................................................... 13
Section 7.02. Interpretation............................................. 13
Section 7.03. Assignment................................................. 13
Section 7.04. Severability............................................... 13
Section 7.05. Entire Agreement; No Third-Party Beneficiaries............. 13
Section 7.06. Governing Law.............................................. 13
Section 7.07. Enforcement; Exclusive Jurisdiction........................ 13
Section 7.08. Counterparts............................................... 14
Exhibit A Form of Company Affiliate Letter........................... 15
</TABLE>
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AGREEMENT AND PLAN OF MERGER dated as of February 6, 1998, between
PRIMESTAR, INC. a Delaware corporation ("the Company"), and TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("TSAT").
WHEREAS the Company, TSAT and certain other parties are parties to a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), pursuant to which the Restructuring Transaction (as defined
therein) will be consummated by the parties or their respective affiliates
(capitalized terms used herein but not defined herein shall have the meanings
assigned thereto in the Restructuring Agreement);
WHEREAS the respective Boards of Directors of the Company and TSAT have
approved the acquisition of TSAT by the Company on the terms and subject to
the conditions set forth in this Agreement;
WHEREAS the respective Boards of Directors of the Company and TSAT have
approved the merger of TSAT with and into the Company on the terms and subject
to the conditions set forth in this Agreement, whereby (a) each issued share
of Series A Common Stock, par value $1.00 per share, of TSAT ("TSAT A Stock")
not owned by TSAT, shall be converted into the right to receive one share of
Class A Common Stock, par value $.01 per share, of the Company ("Class A
Stock") and (b) each issued share of Series B Common Stock, par value $1.00
per share, of TSAT ("TSAT B Stock") not owned by TSAT, shall be converted into
the right to receive one share of Class B Common Stock, par value $.01 per
share, of the Company ("Class B Stock");
WHEREAS simultaneously with the execution and delivery of this Agreement,
the Company, TSAT and Malone are entering into the TSAT Stockholders
Agreement, pursuant to which Malone and TSAT have agreed to take specified
actions in furtherance of the TSAT Merger; and
WHEREAS for Federal income tax purposes it is intended that the TSAT Merger
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
The TSAT Merger
Section 1.01. The TSAT Merger. On the terms and subject to the conditions
set forth in this Agreement, and in accordance with the DGCL, TSAT shall be
merged with and into the Company at the TSAT Effective Time (as defined
below). At the TSAT Effective Time, the separate corporate existence of TSAT
shall cease and the Company shall continue as the surviving corporation (the
"Surviving Corporation").
Section 1.02. TSAT Closing. Subject to the terms and conditions of this
Agreement, the closing of the TSAT Merger (the "TSAT Closing") shall take
place (i) at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825
Eighth Avenue, New York, New York, 10019, on the first business day following
the date on which the last to be fulfilled or waived of the conditions set
forth in Article V shall be fulfilled or waived in accordance herewith or (ii)
at such other time, date or place as the Company and TSAT may agree (the "TSAT
Closing Date").
Section 1.03. TSAT Effective Time. Prior to the TSAT Closing the Company
shall prepare, and on the TSAT Closing Date or as soon as practicable
thereafter the Company shall file with the Secretary of State of the State of
Delaware, a certificate of merger or other appropriate documents (in any such
case, the "Certificate of Merger") executed in accordance with the relevant
provisions of the DGCL and shall make all other filings or recordings required
under the DGCL. The TSAT Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State or at
such subsequent time as shall be stated in the Certificate of Merger (the
"TSAT Effective Time").
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Section 1.04. Effects. The TSAT Merger shall have the effects set forth in
Section 259 of the DGCL.
Section 1.05. Certificate of Incorporation and By-laws. (a) The Restated
Certificate of Incorporation of the Company as in effect immediately prior to
the TSAT Effective Time shall be the certificate of incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein
or by applicable law.
(b) The By-laws of the Company as in effect immediately prior to the TSAT
Effective Time shall be the By-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
Section 1.06. Directors. The directors of the Company immediately prior to
the TSAT Effective Time shall be the directors of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
Section 1.07. Officers. The officers of the Company immediately prior to the
TSAT Effective Time shall be the officers of the Surviving Corporation, until
the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE II
Effect on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
Section 2.01. Effect on Capital Stock. At the TSAT Effective Time, by virtue
of the TSAT Merger and without any action on the part of the holder of any
shares of TSAT A Stock or TSAT B Stock or any shares of capital stock of the
Company:
(a) Capital Stock of the Company. Except as provided in the next
sentence, each issued and outstanding share of capital stock of the Company
shall remain outstanding and unaffected by the Merger. Each share of Class
A Stock and Class B Stock that is owned by TSAT shall automatically be
canceled and shall cease to exist, and no shares of capital stock of the
Company or other consideration shall be delivered in exchange therefor.
(b) Cancelation of Treasury Stock. Each share of TSAT A Stock and TSAT B
Stock that is owned by TSAT shall automatically be canceled and shall cease
to exist, and no Class A Stock or Class B Stock or other consideration
shall be delivered in exchange therefor.
(c) Conversion of TSAT A Stock and TSAT B Stock. (1) Subject to Section
2.01(b), each issued share of TSAT A Stock shall be converted into the
right to receive one validly issued, fully paid and nonassessable share of
Class A Stock.
(2) Subject to Section 2.01(b), each issued share of TSAT B Stock shall
be converted into the right to receive one validly issued, fully paid and
nonassessable share of Class B Stock.
(3) The shares of Class A Stock and Class B Stock payable upon the
conversion of shares of TSAT A Stock and TSAT B Stock pursuant to this
Section 2.01(c) are referred to collectively as the "Merger Consideration".
As of the TSAT Effective Time, all such shares of TSAT A Stock and TSAT B
Stock shall no longer be outstanding and shall automatically be canceled
and shall cease to exist, and each holder of a Certificate (as defined in
Section 2.02(b) below) shall cease to have any rights with respect thereto,
except the right to receive Merger Consideration upon surrender of such
Certificate in accordance with Section 2.02, without interest.
Section 2.02. Exchange of Certificates. (a) Exchange Agent. Promptly
following the TSAT Effective Time, the Company shall deposit with the Bank of
New York, or such other bank or trust company as may be designated by the
Company (the "Exchange Agent"), for the benefit of the holders of
Certificates, for exchange in accordance with this Article II, through the
Exchange Agent, certificates representing the shares of Class A
B-2
<PAGE>
Stock and Class B Stock issuable pursuant to Section 2.01 in exchange for
Certificates (such shares of Class A Stock and Class B Stock, together with
any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund"). For the purposes of such deposit, the
Company shall assume that there will not be any fractional shares of Class A
Stock and Class B Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the TSAT
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates (the "Certificates") that immediately prior to the
TSAT Effective Time represented outstanding shares of TSAT A Stock or TSAT B
Stock whose shares were converted into the right to receive Merger
Consideration pursuant to Section 2.01, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as the
Company may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for Merger Consideration. Upon
surrender of a Certificate for cancelation to the Exchange Agent, together
with such letter of transmittal, duly executed, and such other documents as
may reasonably be required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of shares of Class A Stock or Class B Stock, as
applicable, that such holder has the right to receive pursuant to the
provisions of this Article II, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of TSAT A Stock
or TSAT B Stock that is not registered in the transfer records of the Company,
a certificate representing the appropriate number of shares of Class A Stock
or Class B Stock, as applicable, may be issued to a person other than the
person in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or
other taxes required by reason of the issuance of shares of Class A Stock or
Class B Stock, as applicable, to a person other than the registered holder of
such Certificate or establish to the satisfaction of the Company that such tax
has been paid or is not applicable. Until surrendered as contemplated by this
Section 2.02, each Certificate shall be deemed at any time after the TSAT
Effective Time to represent only the right to receive the Merger Consideration
upon such surrender as contemplated by this Section 2.02. No interest shall be
paid or accrue on any cash payable upon surrender of any Certificate.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions with respect to Class A Stock or Class B Stock, as applicable,
with a record date after the TSAT Effective Time shall be paid to the holder
of any Certificate with respect to the shares of Class A Stock or Class B
Stock, as applicable, issuable upon surrender thereof, until the surrender of
such Certificate in accordance with this Article II. Subject to applicable
law, following surrender of any such Certificate, there shall be paid to the
holder of the certificate representing shares of Class A Stock or Class B
Stock, as applicable, issued in exchange therefor, without interest, (i) the
amount of dividends or other distributions with a record date after the TSAT
Effective Time theretofore paid with respect to such shares of Class A Stock
or Class B Stock, as applicable, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the TSAT
Effective Time but prior to such surrender and a payment date subsequent to
such surrender payable with respect to such shares of Class A Stock or Class B
Stock, as applicable.
(d) No Further Ownership Rights in TSAT A Stock or TSAT B Stock. The Merger
Consideration issued (and paid) in accordance with the terms of this Article
II upon conversion of any shares of TSAT A Stock or TSAT B Stock shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to such shares, subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the TSAT Effective Time that may have been declared or made by
TSAT on such shares in accordance with the terms of the Restructuring
Agreement or prior to the date of the Restructuring Agreement and which remain
unpaid at the TSAT Effective Time, and there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of
shares of TSAT A Stock or TSAT B Stock that were outstanding immediately prior
to the TSAT Effective Time. If, after the TSAT Effective Time, any
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this
Article II.
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(e) Termination of Exchange Fund. Any portion of the Exchange Fund that
remains undistributed to the holders of Certificates for six months after the
TSAT Effective Time shall be delivered to the Company, upon demand, and any
holder of a Certificate who has not theretofore complied with this Article II
shall thereafter look only to the Company for payment of its claim for Merger
Consideration and any dividends or distributions with respect to Class A Stock
or Class B Stock as contemplated by Section 2.02(c).
(f) No Liability. None of the Company, TSAT or the Exchange Agent shall be
liable to any person in respect of any shares of Class A Stock or Class B
Stock (or dividends or distributions with respect thereto) or cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates have not been
surrendered prior to five years after the TSAT Effective Time (or immediately
prior to such earlier date on which Merger Consideration or any dividends or
distributions with respect to Class A Stock or Class B Stock as contemplated
by Section 2.02(c) in respect of such Certificate would otherwise escheat to
or become the property of any Governmental Entity, any such shares, cash,
dividends or distributions in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
(g) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by the Company, on a daily basis.
Any interest and other income resulting from such investments shall be paid to
the Company.
ARTICLE III
Employee Matters
Section 3.01. Employee Stock Options. (a) As soon as practicable following
the date of this Agreement, the TSAT Board (or, if appropriate, any committee
administering the TSAT Stock Plans) shall adopt such resolutions or take such
other actions as may be required to effect the following:
(i) adjust the terms of all outstanding Employee Stock Options to provide
that, at the TSAT Effective Time, each Employee Stock Option outstanding
immediately prior to the TSAT Effective Time shall be deemed to constitute
an option to acquire, on the same terms and conditions as were applicable
under such Employee Stock Option, the same number of shares of Class A
Stock or Class B Stock, as applicable, as the holder of such Employee Stock
Option would have been entitled to receive pursuant to the TSAT Merger had
such holder exercised such Employee Stock Option in full immediately prior
to the TSAT Effective Time, at a price per share equal to the exercise
price for the shares of TSAT A Stock or TSAT B Stock otherwise purchasable
pursuant to such Employee Stock Option; provided, however, that in the case
of any option to which Section 421 of the Code applies by reason of its
qualification under either Section 422 or 424 of the Code ("qualified stock
options"), the option price, the number of shares purchasable pursuant to
such option and the terms and conditions of exercise of such option shall
be determined in order to comply with Section 424(a) of the Code;
(ii) adjust the terms of all outstanding SARs to provide that, at the
TSAT Effective Time, (A) each holder of a SAR shall be entitled to that
number of stock appreciation rights with respect to Class A Stock or Class
B Stock ("Company SARs") equal to the number of SARs held by such holder
immediately prior to the TSAT Effective Time, and (B) the appreciation base
with respect to each Company SAR shall be equal to the appreciation base in
effect with respect to the corresponding SAR immediately prior to the TSAT
Effective Time;
(iii) adjust the terms of all outstanding Restricted Stock Awards to
provide that, at the TSAT Effective Time, each share of TSAT A Stock or
TSAT B Stock issued pursuant to a Restricted Stock Award and outstanding
immediately prior to the TSAT Effective Time shall be converted into a
share of Class A Stock or Class B Stock, as applicable, as provided in
Section 2.01, and as such shall be subject to the same restrictions as were
applicable to such shares of TSAT A Stock or TSAT B Stock immediately prior
to such conversion;
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<PAGE>
(iv) make such other changes to the TSAT Stock Plans as shall be
necessary to give effect to the TSAT Merger;
(v) ensure that, after the TSAT Effective Time, no Employee Stock
Options, SARs or Restricted Stock Awards may be granted under any TSAT
Stock Plan.
(b) At the TSAT Effective Time, and subject to compliance by the Company
with Section 3.01(a), the Company shall assume all the obligations of TSAT
under the TSAT Stock Plans, each outstanding Employee Stock Option and SAR and
the agreements evidencing the grants thereof. As soon as practicable after the
TSAT Effective Time, the Company shall deliver to the holders of Employee
Stock Options and SARs appropriate notices setting forth such holders' rights
pursuant to the respective TSAT Stock Plans, and the agreements evidencing the
grants of such Employee Stock Options and SARs shall continue in effect on the
same terms and conditions (subject to the adjustments required by this Section
3.01 after giving effect to the TSAT Merger). The Company shall comply with
the terms of TSAT Stock Plans and ensure, to the extent required by, and
subject to the provisions of, such TSAT Stock Plans, that the Employee Stock
Options that qualified as qualified stock options prior to the TSAT Effective
Time continue to qualify as qualified stock options after the TSAT Effective
Time.
(c) The Company shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Class A Stock and Class B Stock for
delivery upon exercise of the Employee Stock Options assumed in accordance
with this Section 3.01. As soon as reasonably practicable after the TSAT
Effective Time, the Company shall file a registration statement on Form S-8
(or any successor or other appropriate form) with respect to the shares of
Class A Stock and Class B Stock subject to such Employee Stock Options and
shall use its best efforts to maintain the effectiveness of such registration
statement or registration statements (and maintain the current status of the
prospectus or prospectuses contained therein) for so long as such Employee
Stock Options remain outstanding. With respect to those individuals who
subsequent to the TSAT Merger will be subject to the reporting requirements
under Section 16(a) of the Exchange Act, where applicable, the Company shall
administer the TSAT Stock Plans assumed pursuant to this Section 3.01 in a
manner that complies with Rule 16b-3 promulgated under the Exchange Act to the
extent the applicable TSAT Stock Plan complied with such rule prior to the
TSAT Merger.
Section 3.02. TCI Options. As soon as practicable following the date of this
Agreement, the TSAT Board shall adopt such resolutions or take such other
actions as may be required to effect the following:
(i) adjust the terms of (x) the Share Purchase Agreement dated as of
December 4, 1996, between TCI and TSAT (the "TCI Share Purchase Agreement")
and (y) the Option Agreement dated as of December 4, 1996, between TCI and
TSAT (the "TCI Option Agreement") to provide that, at the TSAT Effective
Time, each such agreement shall provide for TCI's right to purchase from
the Company, on the same terms and conditions as were applicable under such
agreement, the same number of shares of Class A Stock as TCI would have
been entitled to receive pursuant to the TSAT Merger had TCI exercised in
full its rights to purchase shares of TSAT A Stock thereunder immediately
prior to the TSAT Effective Time, at a price per share equal to the
purchase price for the shares of TSAT A Stock otherwise purchasable
pursuant to such agreement; and
(ii) make such other changes to the foregoing agreements as shall be
necessary to give effect to the TSAT Merger.
Section 3.03. Indemnification. The Company agrees that all rights to
indemnification for acts or omissions occurring prior to the TSAT Effective
Time now existing in favor of the current or former directors or officers of
TSAT and its subsidiaries as provided in their respective certificates of
incorporation or by-laws shall survive the TSAT Merger and shall continue in
full force and effect in accordance with their terms. The Company shall cause
to be maintained for a period of not less than three years from the TSAT
Effective Time TSAT's current directors' and officers' insurance and
indemnification policy to the extent that it provides coverage for events
occurring prior to the TSAT Effective Time (the "D&O Insurance") for all
persons who are directors and officers of TSAT on the date of this Agreement,
so long as the annual premium therefor would
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not be in excess of 150% of the last annual premium paid prior to the date of
this Agreement (such 150% amount, the "Maximum Premium"). If the existing D&O
Insurance expires, is terminated or canceled during such three-year period,
the Company shall use all reasonable efforts to cause to be obtained as much
D&O Insurance as can be obtained for the remainder of such period for an
annualized premium not in excess of the Maximum Premium, on terms and
conditions no less advantageous than the existing D&O Insurance. TSAT
represents to the Company that the Maximum Premium is as set forth in the
letter dated February 6, 1998, from TSAT to the Company.
ARTICLE IV
Covenants Relating to Business
Section 4.01. Alternative Transactions. During the period from the Closing
Date to the TSAT Closing Date, TSAT agrees that neither it nor any of its
subsidiaries shall, nor shall it or any of subsidiaries permit their
respective officers, directors, employees, agents and representatives to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including any proposal or
offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction that would impede, interfere with, delay,
postpone, discourage or adversely affect the transactions contemplated by this
Agreement, or could reasonably be expected to have such effect. During the
period from the Closing Date to the TSAT Closing Date, neither the Board of
Directors of TSAT nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the Company, the
approval or recommendation by such Board of Directors or any such committee of
the TSAT Merger, the Tempo Sale, the Voting Agreements, the Restructuring
Agreement, this Agreement the TSAT Tempo Agreement or the TSAT Stockholders
Agreement or (ii) approve or recommend, or propose to approve or recommend,
any alternative transaction of the type described in the first sentence of
this Section 4.01.
Section 4.02. Interim Operations of TSAT. For the period from the Closing
Date until the TSAT Closing Date, and after giving effect to the Restructuring
Transaction, TSAT:
(a) shall (and shall cause each of its subsidiaries to) conduct its
business and operations according to its ordinary course of business
consistent with past practice, and consistent with their respective
obligations under the Tempo Option and the TSAT Tempo Agreement;
(b) shall not (and shall cause each of its subsidiaries not to) amend its
certificate of incorporation or by-laws;
(c) shall not (and shall cause each of its subsidiaries not to) authorize
for issuance, issue, sell, deliver, pledge or otherwise encumber any shares
of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than (i) shares
issued upon exercise of any rights, warrants or options outstanding as of
June 11, 1997 or, in the case of Benefit Plans existing as of June 11,
1997, any rights, warrants or options authorized under such existing plans
and shares issued upon exercise thereof, (ii) Employee Stock Options issued
to Persons who become independent directors of TSAT after the date of this
Agreement at an exercise price equal to the fair market value of the TSAT A
Stock on the date of issuance (and shares issued upon exercise thereof) in
an amount not to exceed 250,000 shares of TSAT A Stock, and (iii) to the
Company);
(d) shall not (and shall cause each of its subsidiaries not to) (i)
split, combine or reclassify any shares of its capital stock, (ii) declare,
set aside or pay any dividend or make any other distribution or payment
with respect to any shares of its capital stock or any other ownership
interests (whether in stock or property or a combination thereof) or (iii)
directly or indirectly purchase, redeem or otherwise acquire any shares of
or options or warrants or rights relating to its capital stock or that of
any of its subsidiaries, or make any commitment for any such action;
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(e) shall not (and shall cause each of its subsidiaries not to) (i)
create, incur, assume, maintain or permit to exist any long term debt or
short term debt for borrowed money (other than to the Company), (ii) issue
or sell any debt securities, (iii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other Person except the Company, the Partnership
and/or TSAT's wholly owned subsidiaries, or (iv) make any loans, advances
or capital contributions to or investments in any other Person;
(f) shall not make any change to its (or any of its subsidiaries')
accounting (including Tax accounting) methods, principles, practices, or
policies, other than those required by GAAP and except, in the case of Tax
accounting methods, principles or practices, in the ordinary course of
business of TSAT or any of its subsidiaries;
(g) shall not (and shall cause each of its subsidiaries not to) sell,
lease, transfer, mortgage, subject to any Lien or otherwise dispose of, any
of its properties or assets (other than to the Company);
(h) shall not (and shall cause each of its subsidiaries not to) (A)
acquire or agree to acquire (x) by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, joint venture, association or
other business organization or division thereof or (y) any other material
assets, or (B) incur any liabilities except for immaterial liabilities
incurred in the ordinary course of business consistent with past practice
and taking into account the transactions contemplated by the Restructuring
Agreement, the Drop Down Agreement and this Agreement and in each case
except as contemplated by this Agreement, the Tempo Option and the TSAT
Tempo Agreement;
(i) shall not (and shall cause each of its subsidiaries not to) purchase
or acquire any property or assets from or otherwise engage in any
transactions with, any Person that is affiliated with (i) TSAT, (ii) Malone
or (iii) TCI; and
(j) shall not agree to do any of the foregoing.
Section 4.03. Investment Company Act Exception. (a) TSAT agrees to use its
best efforts to take, or cause to be taken, all actions, and to do, or cause
to be done, all things necessary, proper or advisable to cause the Securities
and Exchange Commission to extend (the "Extension") the 12-month period from
the date of this Agreement after which the exception for "transient investment
companies" under Rule 3a-2 promulgated under the Investment Company Act of
1940, as amended, (the "Investment Company Act") will expire so that such
expiration date will be concurrent with any termination of this Agreement (the
date on which such period, after giving effect to any Extension(s) obtained by
TSAT, shall expire being referred to as the "Expiration Date").
(b) In the event that the Expiration Date is not concurrent with any
termination of this Agreement, then notwithstanding Section 4.02, TSAT shall
be entitled to, in consultation with the Company, (i) acquire an operating
business (an "ICA Acquisition"), with such ICA Acquisition to be consummated
no earlier than thirty calendar days prior to the Expiration Date or (ii) take
such other commercially reasonable actions as, in the reasonable judgment of
TSAT, shall be necessary, proper or advisable to cause TSAT not to be subject
to regulation under the Investment Company Act as an investment company;
provided, that all such actions shall be revocable at any time prior to thirty
calendar days prior to the Expiration Date; and provided, further, that any
ICA Acquisition and any such other actions shall require the prior written
consent of the Company if it or they would in any way affect the Tempo Assets,
the Tempo Sale, TSAT's obligations under the TSAT Tempo Agreement or Tempo's
obligations under the Tempo Option. In advance of entering into any agreement
or letter of intent in respect of an ICA Acquisition, TSAT shall provide a
copy thereof to the Company. Any such agreement or letter of intent shall
provide that it may be terminated by TSAT at any time on one day's prior
written notice, without obligation or liability to TSAT, if an FCC Event (as
defined below) shall have occurred. Notwithstanding anything to the contrary
contained herein, TSAT shall not enter into any agreement or letter of intent,
engage in negotiations, or take any other actions of the type specified in
clause (ii) above prior to July 1, 1998.
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(c) Upon consummation of an ICA Acquisition, or taking of any material
actions of the type specified in clause (ii) above, TSAT and the Company shall
negotiate in good faith to amend this Agreement to change the exchange ratio
between TSAT capital stock and Company capital stock to reflect the financial
effects of such acquisition or actions (and if such an agreement is reached
TSAT shall, as soon as practicable, re-submit this Agreement, as amended, to
its stockholders for approval and adoption).
Section 4.04. Other Actions. (a) Subject to Section 4.06(d), TSAT hereby
agrees to take no action that would reasonably be expected to cause:
(i) the failure of TSAT to perform and comply in all material respects
with all agreements, obligations and conditions required by this Agreement
to be performed or complied with by TSAT on or prior to the TSAT Closing
Date;
(ii) the failure of TSAT or the Company to obtain all necessary approvals
or appropriate consents of any United States Federal or state governmental
entity or any other third party in connection with the consummation of the
transactions contemplated herein, including approvals and consents under
the HSR Act and applicable FCC rules and regulations;
(iii) the institution of any suit, action or proceeding challenging,
seeking to restrain, prohibiting or adversely affecting in any material
respect the consummation of the transactions contemplated herein; or
(iv) any Material Adverse Effect on TSAT.
(b) Subject to Section 4.06(c), the Company hereby agrees to take no action
that would reasonably be expected to cause:
(i) the failure of the Company to perform and comply in all material
respects with all agreements, obligations and conditions required by this
Agreement, to be performed or complied with by the Company on or prior to
the Closing Date; or
(ii) the failure of TSAT or the Company to obtain all necessary approvals
or appropriate consents of any United States Federal or state governmental
entity in connection with the consummation of the transactions contemplated
herein, including approvals and consents under the HSR Act and applicable
FCC rules and regulations.
Section 4.05. Access to Information; Confidentiality. TSAT shall afford to
the Company and to the officers, employees, accountants, counsel, financial
advisors and other representatives of the Company, reasonable access during
normal business hours during the period prior to the TSAT Effective Time to
all TSAT's properties, books, contracts, commitments, personnel and records.
TSAT agrees to use its best efforts in good faith to obtain all waivers and
consents necessary under any confidentiality or non-disclosure agreement to
afford reasonable access to the Company. Except as required by law, the
Company will hold, and will cause its respective officers, employees,
accountants, counsel, financial advisors and other representatives and
affiliates to hold, any nonpublic information in confidence until such time as
such information becomes publicly available (otherwise than through the
wrongful act of any such Person) and shall use its best efforts to ensure that
such Persons do not disclose such information to others without the prior
written consent of TSAT. In the event of the termination of this Agreement for
any reason, the Company shall promptly return or destroy all documents
containing nonpublic information so obtained from TSAT and any copies made of
such documents.
Section 4.06. Commercially Reasonable Efforts; Notification. (a) Upon the
terms and subject to the conditions set forth in this Agreement, for the
period from the Closing until the TSAT Closing Date, the Company agrees to use
its commercially reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other party in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the TSAT
Merger, including using its commercially reasonable efforts to (i) obtain all
necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and
filings (including filings with Governmental Entities, if any) and the taking
of all commercially reasonable steps as may be necessary to obtain an approval
or waiver from, or to avoid an action or proceeding by, any Governmental
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Entity, (ii) obtain all necessary consents, approvals or waivers from third
parties, (iii) respond to requests for information from the Department of
Justice, the Federal Trade Commission, the FCC and any other Governmental
Entity relating to the TSAT Merger, (iv) defend any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
all or any part of the TSAT Merger, including seeking to have any stay or
temporary restraining order entered by any court or other Governmental Entity
vacated or reversed and (v) execute and deliver any additional instruments
necessary to consummate the transactions contemplated by, and to fully carry
out the purposes of, this Agreement.
(b) Upon the terms and subject to the conditions set forth in this
Agreement, for the period from the Closing to the TSAT Closing Date, TSAT
agrees to use its best efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, and to assist and cooperate with the other party
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the TSAT Merger,
including using its best efforts to (i) obtain all necessary actions or
nonactions, waivers, consents and approvals from Governmental Entities and the
making of all necessary registrations and filings (including filings with
Governmental Entities, if any) and the taking of all steps as may be necessary
to obtain an approval or waiver from, or to avoid an action or proceeding by,
any Governmental Entity, (ii) obtain all necessary consents, approvals or
waivers from third parties, (iii) respond to requests for information from the
Department of Justice, the Federal Trade Commission, the FCC and any other
Governmental Entity relating to the TSAT Merger, (iv) defend any lawsuits or
other legal proceedings, whether judicial or administrative, challenging this
Agreement or all or any part of the TSAT Merger, including seeking to have any
stay or temporary restraining order entered by any court or other Governmental
Entity vacated or reversed and (v) execute and deliver any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement. In connection with and
without limiting the foregoing, TSAT and its Board of Directors shall (i) take
all action necessary to ensure that no state takeover statute or similar
statute or regulation is or becomes applicable to the TSAT Merger and (ii) if
any state takeover statute or similar statute or regulation becomes applicable
to the TSAT Merger, take all action necessary to ensure that the TSAT Merger
may be consummated as promptly as practicable on the terms contemplated by
this Agreement and otherwise to minimize the effect of such statute or
regulation on the TSAT Merger.
(c) Notwithstanding anything to the contrary in this Agreement, the Company
shall not be required to agree to any prohibition, limitation or other
requirements that would (i) prohibit or limit the ownership or operation by
the Company or any of its subsidiaries or affiliates of any portion of the
business or assets of the Company or any of its subsidiaries or affiliates, or
compel the Company or any of its subsidiaries or affiliates to dispose of or
hold separate any portion of the business or assets of the Company or any of
its subsidiaries or affiliates or (ii) prohibit the Company or any of its
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of the Company or any of its subsidiaries
or affiliates.
(d) Notwithstanding anything to the contrary in this Agreement, TSAT shall
not be required to agree to:
(i) any prohibition, limitation or other requirement that would impose
limitations on the ability of TSAT to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of the Company
(including any requirement to hold such capital stock in trust), including
the right to vote the capital stock of the Company acquired by it on all
matters properly presented to the stockholders of the Company;
(ii) any change in TSAT's or the other Specified Class B Holders' rights
in respect of the governance of the Company from that set forth in the
Charter and By-laws, or any change in TSAT's or the other Specified Class B
Holders' rights under the Stockholders Agreement, or any prohibition,
limitation or other requirement that would impose limitations on the
ability of TSAT or the other Specified Class B Holders to exercise any such
rights;
(iii) any prohibition, limitation or other requirement that would impose
limitations on the ability of any Person that (on and as of the date of
this Agreement) holds 5% or more of the TSAT A Stock or TSAT B Stock to
acquire or hold, or exercise full rights of ownership of, any shares of
capital stock of TSAT or the Company (including any requirement to hold
such capital stock in trust), including the right to vote the
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capital stock of TSAT or the Company acquired by it on all matters properly
presented to the stockholders of TSAT or the Company, as applicable;
(iv) any change in the governance of TSAT from that set forth in TSAT's
certificate of incorporation and by-laws as in effect on the date of this
Agreement; or
(v) take any action that requires the payment of, or the incurrence of an
obligation to pay, any fee, cost or expense in excess of the amount that
would have otherwise been payable by TSAT if it did not have obligations
under this Agreement, unless the Company shall have agreed to advance such
amount to TSAT.
(e) Each party to this Agreement shall give prompt written notice to the
other party of (i) any representation or warranty contained in (or
incorporated by reference into) this Agreement that is qualified as to
materiality becoming untrue or inaccurate in any respect or any such
representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement or the Restructuring
Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement or the
Restructuring Agreement.
Section 4.07. Affiliates. Prior to the TSAT Closing Date, TSAT shall deliver
to the Company a letter identifying all persons who are, at the time this
Agreement is submitted for approval to the stockholders of TSAT, "affiliates"
of TSAT for purposes of Rule 145 under the Securities Act. TSAT shall use its
best efforts to cause each such person to deliver to the Company on or prior
to the TSAT Closing Date a written agreement substantially in the form
attached as Exhibit A hereto.
Section 4.08. Reimbursement of Expenses. During the term of this Agreement,
the Company shall reimburse TSAT for all reasonable costs and expenses
(including reasonable legal fees of outside counsel and reasonable fees of
TSAT's independent public accountants) incurred by TSAT (i) in preparation of
tax returns and other reports to Governmental Entities, (ii) for payment of
required taxes, franchise fees, NASDAQ fees and similar fees, (iii) in
compliance with its reporting obligations under the Securities Act and the
Exchange Act and (iv) to maintain D&O Insurance on terms reasonably acceptable
to the Company.
ARTICLE V
Conditions Precedent
Section 5.01. Conditions Precedent. The rights and obligations of the
Company and TSAT shall be subject to the satisfaction or waiver on or prior to
the TSAT Closing Date of each of the following conditions precedent:
(a) TSAT Stockholder Approval. The TSAT Stockholder Approval shall have
been obtained.
(b) Company Stockholder Approval. Any necessary approval and adoption of
this Agreement by the stockholders of the Company shall have been obtained.
(c) HSR Act. The waiting period (and any extension thereof) applicable to
the TSAT Merger under the HSR Act shall have been terminated or shall have
expired.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the TSAT Merger shall be in effect.
(e) FCC Events. On or prior to the TSAT Closing Date, one of the
following events shall have occurred (each an "FCC Event"):
(i) FCC approval of the parties' pending application for transfer of
control of Tempo; or
(ii) divestiture of the BSS Authorizations in accordance with the
TSAT Tempo Agreement; or
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(iii) the TSAT Merger shall be permitted under applicable FCC rules
and regulations without revocation of the BSS Authorizations (including
pursuant to an agreement to divest the BSS Authorizations within a
specific time period following the date of the TSAT Merger).
(f) NASDAQ Listing. The shares of Class A Stock and Class B Stock
issuable to the stockholders of TSAT pursuant to this Agreement and under
the TSAT Stock Plans shall have been approved for listing on NASDAQ,
subject to official notice of issuance.
(g) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(h) Secretary's Certificates. Each party to this Agreement shall have
received certificates from a Secretary or Assistant Secretary of each other
party, certifying organizational documents of such party and relevant board
(or partnership) resolutions authorizing the transactions contemplated by
this Agreement.
Section 5.02. Conditions to Obligations of the Company. The obligations of
the Company are further subject to the following conditions:
(a) Representations and Warranties. The representation and warranties of
TSAT set forth in Sections 5.01(a), (c), (d), (e), (f), (h), (i), (j), (k),
(l), (m), (n), (o) and (p) of the Restructuring Agreement that are
qualified as to materiality shall be true and correct, and the
representations and warranties of TSAT set forth in the foregoing sections
of the Restructuring Agreement (and of Malone set forth in the Malone
Letter) that are not so qualified shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the TSAT
Closing Date, except as otherwise contemplated by the Restructuring
Agreement, and the Company shall have received certificates signed on
behalf of TSAT by the chief executive officer and the chief financial
officer of TSAT to such effect.
(b) Performance of Obligations. TSAT and any subsidiary of TSAT shall
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the TSAT Closing Date,
and the Company shall have received a certificate signed on behalf of TSAT
and any other subsidiary of TSAT, by the chief executive officer and the
chief financial officer of TSAT to such effect.
(c) Letters from TSAT Affiliates. The Company shall have received from
each person named in the letter referred to in Section 4.07 an executed
copy of an agreement substantially in the form of Exhibit A attached
hereto.
(d) No Litigation. There shall not be pending or threatened any suit,
action or proceeding by any Governmental Entity that has a reasonable
likelihood of success, (i) challenging the TSAT Merger, seeking to restrain
or prohibit the consummation of the TSAT Merger or seeking to obtain from
the Company or TSAT any damages that are material in relation to TSAT and
its subsidiaries taken as a whole, (ii) seeking to prohibit or limit the
ownership or operation by the Company or TSAT or any of their respective
subsidiaries or affiliates of any portion of the business or assets of the
Company, TSAT or any of their respective subsidiaries or affiliates, or to
compel the Company, TSAT or any of their respective subsidiaries or
affiliates to dispose of or hold separate any portion of the business or
assets of the Company, TSAT or any of their respective subsidiaries or
affiliates, as a result of the TSAT Merger, (iii) seeking to prohibit the
Company, TSAT or any of their respective subsidiaries or affiliates from
effectively controlling in any material respect the business or operations
of the Company, TSAT or any of their respective subsidiaries or affiliates,
(iv) seeking to change in any respect the governance of the Company from
that set forth in the Charter and By-laws, or to change any Person's rights
under the Stockholders Agreement, or seeking to impose limitations on the
ability of any Person to exercise any such rights, or (v) which otherwise
is reasonably likely to have a Material Adverse Effect on the Company.
(e) State Takeover Statutes. TSAT and the Board of Directors of TSAT
shall have taken all actions required to render inapplicable to the TSAT
Merger any state takeover statute or similar statute or regulation that
would otherwise apply or purport to apply to such transactions and
agreements.
(f) No Termination Notice. The Company shall not have notified TSAT of
its intention to terminate this Agreement pursuant to Section 6.01(b).
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Section 5.03. Conditions to Obligations of TSAT. The obligations of TSAT are
further subject to the following conditions:
(a) Performance of Obligations. The Company shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the TSAT Closing Date, and TSAT shall have
received a certificate signed on behalf of the Company by the chief
executive officer and the chief financial officer of the Company to such
effect.
(b) No Litigation. There shall not be pending or threatened any suit,
action or proceeding by any Governmental Entity that has a reasonable
likelihood of success, seeking to impose any prohibition, limitation,
requirement or change of the type described in clauses (i) through (v) of
Section 4.06(d).
ARTICLE VI
Termination, Amendment and Waiver
Section 6.01. Termination. This Agreement may be terminated at any time
prior to the TSAT Effective Time, whether before or after adoption of this
Agreement by the stockholders of TSAT and/or the Company:
(a) by mutual written consent of the Company and TSAT;
(b) by the Company at any time after June 30, 1998, on 10 days prior
written notice to TSAT, if the TSAT Merger shall not have been consummated
on or before June 30, 1998 and no FCC Event shall have occurred on or
before the date of such notice, unless the failure to consummate the TSAT
Merger is the result of a willful and material breach of this Agreement by
the Company; or
(c) by either the Company or TSAT, on or after the earlier of (x) the
180th day following the first to occur of the FCC Events, if the TSAT
Merger shall not have been consummated on or before the end of such 180-day
period, and (y) on the 18 month anniversary of the Closing Date (unless the
failure to consummate the TSAT Merger is the result of a wilful and
material breach of this Agreement or the TSAT Stockholders Agreement by the
party seeking to terminate this Agreement); provided, however, that the
passage of either such period shall be tolled for any part thereof during
which any party shall be subject to a nonfinal order, decree, ruling or
action restraining, enjoining or otherwise prohibiting consummation of the
TSAT Merger.
Section 6.02. Effect of Termination. In the event of termination of this
Agreement by any party as provided in Section 6.01, this Agreement shall
forthwith become void and have no effect, without any liability or obligation
hereunder on the part of any party, other than this Section 6.02 and Article
VII and except to the extent that such termination results from the wilful and
material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
Section 6.03. Amendment. This Agreement may be amended by the parties at any
time before or after the adoption of this Agreement by the Stockholders of
TSAT and/or the Company; provided, however, that after any such approval,
there shall be made no amendment that by law requires further approval by such
stockholders without the further approval of such stockholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties to this Agreement.
Section 6.04. Extension; Waiver. At any time prior to the TSAT Effective
Time, the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) subject to the proviso of
Section 6.03, waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights.
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ARTICLE VII
General Provisions
Section 7.01. Notices. Any notice or other communication that is required or
that may be given in connection with this Agreement shall be in writing and
shall be delivered in accordance with Section 10.02 of the Restructuring
Agreement.
Section 7.02. Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation".
Section 7.03. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties. Any purported assignment without
such consent shall be void. Subject to the preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
Section 7.04. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
Section 7.05. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Merger Agreements, the Asset Transfer Agreements, the
Restructuring Agreement, the US West Guarantee, the Malone Letter, the
Reimbursement Agreements, the Stockholders Agreement, the TSAT Stockholders
Agreement, the Newhouse Voting Agreement, the Registration Rights Agreement,
the Voting Agreements, the TSAT Tempo Agreement, the Drop Down Agreement and
the Tax Sharing Agreement (a) constitute the entire agreement, and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the Restructuring Transaction, the TSAT Merger and the
Tempo Sale and (b) except for the provisions of Article II and Section 3.03,
are not intended to confer upon any person other than the parties any rights
or remedies.
Section 7.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof, except to the extent the laws of the State of Delaware are
mandatorily applicable to the TSAT Merger.
Section 7.07. Enforcement; Exclusive Jurisdiction. (a) The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this
Agreement in any court of the State of New York or the State of Delaware and
any court of the United States located in the Borough of Manhattan in New York
City or the State of Delaware.
(b) With respect to any suit, action or proceeding relating to this
Agreement (collectively, a "Proceeding"), each party to this Agreement
irrevocably:
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(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 10.02 of the Restructuring Agreement; provided that such
manner of service of process shall not preclude the service of process in
any other manner permitted under applicable law.
Section 7.08. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
IN WITNESS WHEREOF, the Company and TSAT have duly executed this Agreement,
all as of the date first written above.
Primestar, Inc.,
/s/ Kenneth G. Carroll
by __________________________________
Name: Kenneth G. Carroll
Title: President
TCI Satellite Entertainment, Inc.,
/s/ Kenneth G. Carroll
by __________________________________
Name: Kenneth G. Carroll
Title: Senior Vice President/CFO
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EXHIBIT A
FORM OF COMPANY AFFILIATE LETTER
Dear Sirs:
The undersigned refers to the Agreement and Plan of Merger (the "TSAT Merger
Agreement") dated as of February 6, 1998, between PRIMESTAR, INC., a Delaware
corporation, and TCI SATELLITE ENTERTAINMENT, INC., a Delaware corporation.
Capitalized terms used but not defined in this letter have the meanings given
such terms in the TSAT Merger Agreement. As used herein, references to "TSAT
Common Stock" shall mean shares of TSAT A Stock and/or TSAT B Stock, as
applicable.
The undersigned, a holder of shares of TSAT Common Stock, is entitled to
receive in connection with the TSAT Merger shares of Class A Stock and/or
Class B Stock. The undersigned acknowledges that the undersigned may be deemed
an "affiliate" of TSAT within the meaning of Rule 145 ("Rule 145") promulgated
under the Securities Act although nothing contained herein should be construed
as an admission of such fact.
If in fact the undersigned were an affiliate under the Act, the
undersigned's ability to sell, assign or transfer the Class A Stock or Class B
Stock received by the undersigned in exchange for any shares of TSAT Common
Stock pursuant to the TSAT Merger may be restricted unless such transaction is
registered under the Act or an exemption from such registration is available.
The undersigned understands that such exemptions are limited and the
undersigned has obtained advice of counsel as to the nature and conditions of
such exemptions, including information with respect to the applicability to
the sale of such securities of Rules 144 and 145(d) promulgated under the
Securities Act.
The undersigned hereby represents to and covenants with the Company that the
undersigned will not sell, assign or transfer any of the Class A Stock or
Class B Stock received by the undersigned in exchange for shares of TSAT
Common Stock pursuant to the TSAT Merger except (i) pursuant to an effective
registration statement under the Securities Act or (ii) in a transaction that,
in the opinion of counsel reasonably satisfactory to the Company or as
described in a "no-action" or interpretive letter from the Staff of the SEC,
is not required to be registered under the Securities Act.
In the event of a sale or other disposition by the undersigned pursuant to
Rule 145, of Class A Stock or Class B Stock received by the undersigned in the
TSAT Merger, the undersigned will supply the Company with evidence of
compliance with such Rule, in the form of a letter in the form of Annex I
hereto and the opinion of counsel or no-action letter referred to above. The
undersigned understands that the Company may instruct its transfer agent to
withhold the transfer of any Company Securities disposed of by the
undersigned, but that upon receipt of such evidence of compliance the transfer
agent shall effectuate the transfer of the Class A Stock or Class B Stock, as
applicable, sold as indicated in the letter.
The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing Class A Stock and Class B Stock received
by the undersigned in the TSAT Merger or held by a transferee thereof, which
legends will be removed by delivery of substitute certificates upon receipt of
an opinion in form and substance reasonably satisfactory to the Company from
counsel reasonably satisfactory to the Company to the effect that such legends
are no longer required for purposes of the Securities Act.
The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations
imposed upon the distribution, sale, transfer or other disposition of Class A
Stock and Class B Stock and (ii) the receipt by the Company of this letter is
an inducement and a condition to the Company's obligations to consummate the
TSAT Merger.
Very truly yours,
Dated:
B-15
<PAGE>
ANNEX I
TO EXHIBIT A
PRIMESTAR, INC.
On , the undersigned sold the securities of PRIMESTAR, INC. ("the
Company") described below in the space provided for that purpose (the
"Securities"). The Securities were received by the undersigned in connection
with the merger of TCI SATELLITE ENTERTAINMENT, INC. with and into the
Company.
Based upon the most recent report or statement filed by the Company with the
Securities and Exchange Commission, the Securities sold by the undersigned
were within the prescribed limitations set forth in Rule 144(e) promulgated
under the Securities Act of 1933, as amended (the "Securities Act").
The undersigned hereby represents that the Securities were sold in "brokers'
transactions" within the meaning of Section 4(4) of the Securities Act or in
transactions directly with a "market maker" as that term is defined in Section
3(a)(38) of the Securities Exchange Act of 1934, as amended. The undersigned
further represents that the undersigned has not solicited or arranged for the
solicitation of orders to buy the Securities, and that the undersigned has not
made any payment in connection with the offer or sale of the Securities to any
person other than to the broker who executed the order in respect of such
sale.
Very truly yours,
Dated:
[Space to be provided for description of securities.]
B-16
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TSAT TEMPO AGREEMENT
DATED AS OF FEBRUARY 6, 1998,
BETWEEN
PRIMESTAR, INC.
AND
TCI SATELLITE ENTERTAINMENT, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
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Parties and Recitals...................................................... 1
ARTICLE I
Tempo Sale
Section 1.01. Grant of Tempo Sale Option................................. 1
Section 1.02. Exercise of Tempo Sale Option.............................. 1
Section 1.03. Liquidation of Tempo; Tax Indemnity........................ 2
Section 1.04. Tempo Asset Sale; Consents of Third Parties................ 2
ARTICLE II
The Tempo Closing
Section 2.01. The Tempo Closing.......................................... 3
Section 2.02. Transactions To Be Effected at the Tempo Closing........... 3
ARTICLE III
Covenants Relating to Tempo Sale
Section 3.01. Transfer Taxes............................................. 3
Section 3.02. Collection of Receivables.................................. 4
Section 3.03. Bulk Transfer Laws......................................... 4
Section 3.04. Further Assurances......................................... 4
Section 3.05. Purchase Price Allocation.................................. 4
ARTICLE IV
Covenants Relating to Business
Section 4.01. Alternative Transactions................................... 4
Section 4.02. Interim Operations of Tempo................................ 4
Section 4.03. Other Actions.............................................. 5
Section 4.04. Access to Information; Confidentiality..................... 6
Section 4.05. Best Efforts; Notification................................. 6
ARTICLE V
Conditions Precedent
Section 5.01. Conditions Precedent....................................... 7
Section 5.02. Conditions to Obligations of the Option Holder............. 7
Section 5.03. Conditions to Obligations of TSAT.......................... 8
ARTICLE VI
Termination, Amendment and Waiver
Section 6.01. Termination................................................ 8
Section 6.02. Effect of Termination...................................... 8
Section 6.03. Amendment.................................................. 8
Section 6.04. Extension; Waiver.......................................... 9
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PAGE
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ARTICLE VII
General Provisions
Section 7.01. Notices.................................................... 9
Section 7.02. Interpretation............................................. 9
Section 7.03. Assignment................................................. 9
Section 7.04. Severability............................................... 9
Section 7.05. Entire Agreement; No Third-Party Beneficiaries............. 9
Section 7.06. Governing Law.............................................. 10
Section 7.07. Enforcement; Exclusive Jurisdiction........................ 10
Section 7.08. Counterparts............................................... 10
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TSAT TEMPO AGREEMENT dated as of February 6, 1998, between PRIMESTAR, INC. a
Delaware corporation ("the Company"), and TCI SATELLITE ENTERTAINMENT, INC., a
Delaware corporation ("TSAT").
WHEREAS the Company, TSAT and certain other parties are parties to a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), pursuant to which the Restructuring Transaction (as defined
therein) will be consummated by the parties or their respective affiliates
(capitalized terms used herein but not defined herein shall have the meanings
assigned thereto in the Restructuring Agreement);
WHEREAS the respective Boards of Directors of the Company and TSAT have
approved the Tempo Sale on the terms and subject to the conditions set forth
in this Agreement; and
WHEREAS simultaneously with the execution and delivery of this Agreement,
the Company, TSAT and Malone are entering into the TSAT Stockholder Agreement,
pursuant to which Malone and TSAT have agreed to take specified actions in
furtherance of the Tempo Sale.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Tempo Sale
Section 1.01. Grant of Tempo Sale Option. TSAT hereby grants to the Company,
(together with its successors and assigns, the "Option Holder"), the exclusive
and irrevocable option (the "Tempo Sale Option"), exercisable at any time
during the term of this Agreement, on the terms and subject to the conditions
set forth in this Agreement, to purchase from TSAT (the election between the
transactions described in clauses (a) and (b) below to be in the Option
Holder's sole discretion):
(a) all the issued and outstanding shares of capital stock of Tempo (the
"Tempo Shares"), for an aggregate purchase price of $2.5 Million (the "BSS
Price") (such transaction being the "Tempo Stock Sale"); or
(b) all the right, title and interest of TSAT in, to and under the Tempo
Assets, for (i) an aggregate purchase price equal to the BSS Price and (ii)
the assumption by the Option Holder, from and after the Tempo Closing (as
defined below), of all obligations and liabilities of Tempo of any nature,
whether known or unknown, absolute, accrued, contingent or otherwise, and
whether due or to become due, arising out of, relating to, or otherwise in
respect of, the Tempo Assets, other than the Excluded Tempo Liabilities, as
defined below (the "Tempo Liabilities") (such transaction being the "Tempo
Asset Sale"). For purposes hereof, the "Excluded Tempo Liabilities" shall
be any liabilities of Tempo incurred in violation of Section 4.02.
At least 10 days prior to the Tempo Closing Date, the Option Holder shall
provide written notice to TSAT electing either the Tempo Stock Sale or the
Tempo Asset Sale.
Section 1.02. Exercise of Tempo Sale Option. The Tempo Sale Option shall be
exercisable by the Option Holder by written notice to TSAT, stating the name
of the Option Holder, the proposed Tempo Closing Date and whether the Option
Holder elects to consummate the Tempo Stock Sale or the Tempo Asset Sale. In
the case of an election to consummate the Tempo Stock Sale, such notice shall
be given at least 10 days prior to the Tempo Closing Date, and in the case of
an election to consummate the Tempo Asset Sale, such notice shall be given at
least 30 days prior to the Tempo Closing Date. As used herein, the term "Tempo
Sale" means either the Tempo Stock Sale or the Tempo Asset Sale, as elected by
the Option Holder in its sole discretion pursuant to this Section 1.02.
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Section 1.03. Liquidation of Tempo; Tax Indemnity. (a) If the Option Holder
exercises the Tempo Sale Option and elects to consummate the Tempo Asset Sale,
then TSAT shall liquidate Tempo immediately prior to the Tempo Closing (the
"Pre-Sale Tempo Liquidation").
(b) If the Option Holder exercises the Tempo Sale Option and elects to
consummate the Tempo Asset Sale, then the Option Holder shall indemnify TSAT
and Tempo, and hold TSAT and Tempo harmless, on an after-Tax basis, from and
against any and all Tax liability incurred by TSAT as a result of the Tempo
Asset Sale or incurred by Tempo or TSAT as a result of the Pre-Sale Tempo
Liquidation, as provided herein.
(c) If a claim shall be made by any taxing authority, which, if successful,
might result in an indemnity payment to TSAT pursuant to this Section 1.03 (a
"Tax Claim"), TSAT shall notify the Option Holder in writing, and in
reasonable detail, within ten business days of receipt of such a Tax Claim,
and thereafter, TSAT shall deliver to the Option Holder, within five business
days after TSAT's receipt thereof, copies of all notices and documents
(including any court papers) received by TSAT relating to the Tax Claim. The
Option Holder shall select counsel and control all proceedings and may make
all decisions taken in connection with any Tax Claim, including those
pertaining to the grant or denial of any waiver or extension of the applicable
statute of limitation, and, without limiting the foregoing, may in its sole
discretion pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with any taxing authority with respect thereto, and
may, in its sole discretion, either pay the Tax claimed and sue for a refund
where applicable law permits such refund suits or contest the Tax Claim in any
permissible manner. TSAT agrees to cooperate fully with the Option Holder and
its counsel in the compromise of, or defense against, any such Tax Claim,
which cooperation shall include, without limitation, the authorization by
powers of attorney of such persons as the Option Holder shall designate to
represent TSAT with respect to any Tax Claim, the retention and (upon the
Option Holder's request) the prompt provision to the Option Holder of records
and information which are reasonably relevant to such Tax Claim, and making
employees available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim. TSAT shall not assert any position in
any proceeding or in discussion with any taxing authority representative that
is inconsistent with the position asserted by the Option Holder.
(d) The amount or economic benefit of any refunds, credits or offsets of
Taxes incurred as a result of the Tempo Asset Sale or the Pre-Sale Tempo
Liquidation shall be for the account of the Option Holder. TSAT shall forward
the amount of such refund or the economic benefit of such credit or offset to
Tax to the Option Holder within 10 days after such refund is received or after
such credit is allowed or applied against another tax liability, as the case
may be.
(e) As used herein, "Tax" means any of the Taxes and "Taxes" means, with
respect to any Person, (A) all income taxes (including any tax on or based
upon net income, or gross income, or income as specially defined, or earnings,
profits or gains, or selected items of income, earnings, profits or gains) and
(B) any liability for payment of any amount of the type described in the
immediately preceding clause (A) as a result of being a "transferee" (within
the meaning of Section 6901 of the Code or any other applicable law) of
another Person or a member of an affiliated or combined group.
Section 1.04. Tempo Asset Sale; Consents of Third Parties.
(a) Notwithstanding anything in this Agreement to the contrary, in the case of a
Tempo Asset Sale, this Agreement shall not constitute an agreement to assign any
asset or claim or right or any benefit arising under or resulting from such
asset if an attempted assignment thereof, without the consent of a third party,
would constitute a breach or other contravention of the rights of such third
party, would be ineffective with respect to any party to an agreement concerning
such asset, or would in any way adversely affect the rights of TSAT or Tempo, or
upon transfer, the Option Holder, under such asset. If any transfer or
assignment by TSAT to, or any assumption by the Option Holder of, any interest
in, or liability, obligation or commitment under, any asset requires the consent
of a third party, then such assignment or assumption shall be made subject to
such consent being obtained.
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(b) If any such consent is not obtained prior to the Tempo Closing, TSAT and
the Option Holder shall cooperate (at the Option Holder's sole expense) in any
lawful and commercially reasonable arrangement reasonably proposed by the
Option Holder under which the Option Holder shall obtain the economic claims,
rights and benefits under the asset, claim or right with respect to which the
consent has not been obtained in accordance with this Agreement. Such
reasonable arrangement may include (i) subcontracting, sublicensing or
subleasing to the Option Holder of any and all rights of Tempo against the
other party to such third-party agreement arising out of a breach or
cancelation thereof by the other party, and (ii) the enforcement by TSAT
(directly or through Tempo) of such rights.
ARTICLE II
The Tempo Closing
Section 2.01. The Tempo Closing. Subject to the terms and conditions of this
Agreement, the closing of the Tempo Sale (the "Tempo Closing") shall take
place (i) at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825
Eighth Avenue, New York, New York, 10019, on the first business day following
the date on which the last to be fulfilled or waived of the conditions set
forth in Article V shall be fulfilled or waived in accordance herewith or (ii)
at such other time, date or place as the Option Holder and TSAT may agree (the
"Tempo Closing Date").
Section 2.02. Transactions To Be Effected at the Tempo Closing. (a) At the
Tempo Closing, if the Tempo Stock Sale shall have been elected by the Option
Holder:
(i) TSAT shall deliver to the Option Holder (x) certificates representing
the Tempo Shares, duly endorsed or accompanied by stock powers duly
endorsed in proper form for transfer, with appropriate transfer stamps, if
any, affixed, and (y) such other documents as the Option Holder or its
counsel may reasonably request to demonstrate satisfaction of the
conditions and compliance with the covenants set forth in this Agreement;
and
(ii) the Option Holder shall deliver to TSAT, by wire transfer to a bank
account designated in writing by TSAT at least two business days prior to
the Tempo Closing Date, immediately available funds in an amount equal to
the BSS Price.
(b) At the Tempo Closing, if the Tempo Asset Sale shall have been elected by
the Option Holder:
(i) TSAT shall deliver to the Option Holder (x) such appropriately
executed bills of sale, assignments and other instruments of transfer
relating to the Tempo Assets in form and substance reasonably satisfactory
to the Option Holder and its counsel and (y) such other documents as the
Option Holder or its counsel may reasonably request to demonstrate
satisfaction of the conditions and compliance with the covenants set forth
in this Agreement: and
(ii) the Option Holder shall deliver to TSAT (x) the BSS Price (as set
forth in Section 2.02(a)(ii)) and (y) a duly executed assumption agreement
in the form of Exhibit A-1 hereto.
ARTICLE III
Covenants Relating to Tempo Sale
Section 3.01. Transfer Taxes. If the Tempo Asset Sale shall have been
elected by the Option Holder, all transfer Taxes applicable to the conveyance
and transfer from TSAT to the Option Holder of the Tempo Assets and any other
transfer or documentary Taxes or any filing or recording fees applicable to
such conveyance and transfer shall be paid by the Option Holder. Each party
shall use reasonable efforts to avail itself of any available exemptions from
any such Taxes or fees, and to cooperate with the other parties in providing
any information and documentation that may be necessary to obtain such
exemptions.
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Section 3.02. Collection of Receivables. TSAT agrees that from and after the
Tempo Closing, the Option Holder shall have the right and authority to collect
for its own account all accounts receivable of Tempo constituting or
attributable to the Tempo Assets. TSAT agrees to promptly deliver to the
Option Holder any cash or other property received directly or indirectly by it
with respect to such accounts receivable, including any amounts payable as
interest.
Section 3.03. Bulk Transfer Laws. If the Tempo Asset Sale shall have been
elected by the Option Holder, the Option Holder hereby waives compliance by
TSAT with the provisions of any so-called "bulk transfer law" of any
jurisdiction in connection with the sale of the Tempo Assets to the Option
Holder.
Section 3.04. Further Assurances. From time to time, as and when requested
by any party, each party shall execute and deliver, or cause to be executed
and delivered, all such documents and instruments and shall take, or cause to
be taken, all such further or other actions, as such other party may
reasonably deem necessary or desirable to consummate the transactions
contemplated by this Agreement, including, in the case of TSAT, executing and
delivering to the Option Holder such assignments, deeds, bills of sale,
consents and other instruments as Purchaser or its counsel may reasonably
request as necessary or desirable for such purpose.
Section 3.05. Purchase Price Allocation. If the Tempo Asset Sale shall have
been elected by the Option Holder, on or prior to the Tempo Closing Date, the
Option Holder and TSAT shall mutually agree on an allocation of the BSS Price
among the Tempo Assets according to the relative fair market values of such
assets on the Tempo Closing Date. If the Option Holder and TSAT are unable to
agree on such fair market values, the Option Holder and TSAT shall elect an
independent appraisal firm to determine such values. The conclusions of such
appraisal firm shall be conclusive and binding. The fees and expenses of such
appraisal firm shall be shared equally by the Option Holder and TSAT.
ARTICLE IV
Covenants Relating to Business
Section 4.01. Alternative Transactions. During the period from the date
hereof to the Tempo Closing Date, TSAT agrees that neither it nor any of its
subsidiaries shall, nor shall it or any of subsidiaries permit their
respective officers, directors, employees, agents and representatives to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including any proposal or
offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction in respect of Tempo or the Tempo Assets
that would impede, interfere with, delay, postpone, discourage or adversely
affect the rights of the Option Holder pursuant to this Agreement, or could
reasonably be expected to have such effect. During the period from the date
hereof to the Tempo Closing Date, neither the Board of Directors of TSAT nor
any committee thereof shall (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to the Company or the Option Holder, the approval
or recommendation by such Board of Directors or any such committee of the
Tempo Sale or this Agreement or (ii) approve or recommend, or propose to
approve or recommend, any alternative transaction of the type described in the
first sentence of this Section 4.01.
Section 4.02. Interim Operations of Tempo. For the period from the date
hereof until the Tempo Closing Date, TSAT:
(a) shall not directly or indirectly offer for sale, sell, transfer,
tender, pledge, encumber, assign or otherwise dispose of (including by
merger or otherwise by operation of law), or enter into any contract,
option, or other arrangement or understanding (other than this Agreement)
with respect to or consent to the offer for sale, sale, transfer, tender,
pledge, encumbrance, assignment or other disposition of the Tempo Shares;
(b) shall not directly or indirectly grant any proxies or power of
attorney, deposit into a voting trust or enter into a voting agreement or
otherwise transfer voting power of the Tempo Shares;
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(c) shall cause Tempo to conduct its business and operations according to
its ordinary course of business consistent with past practice, and
consistent with Tempo's obligations under the Tempo Option and TSAT's
obligations under the Tempo Sale Option and this Agreement;
(d) shall cause Tempo not to amend its certificate of incorporation or
by-laws;
(e) shall cause Tempo not to authorize for issuance, issue, sell,
deliver, pledge or otherwise encumber any shares of its capital stock, any
other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible securities;
(f) shall cause Tempo not to (i) split, combine or reclassify any shares
of its capital stock, (ii) declare, set aside or pay any dividend or make
any other distribution or payment with respect to any shares of its capital
stock or any other ownership interests (whether in stock or property or a
combination thereof) or (iii) directly or indirectly purchase, redeem or
otherwise acquire any shares of or options or warrants or rights relating
to its capital stock or that of any of its subsidiaries, or make any
commitment for any such action;
(g) shall cause Tempo not to (i) create, incur, assume, maintain or
permit to exist any long term debt or short term debt for borrowed money
(other than to the Option Holder), (ii) issue or sell any debt securities,
(iii) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other Person except the Partnership, or (iv) make any loans, advances or
capital contributions to or investments in any other Person;
(h) shall not make any change to Tempo's accounting (including Tax
accounting) methods, principles, practices, or policies, other than those
required by GAAP and except, in the case of Tax accounting methods,
principles or practices, in the ordinary course of business of TSAT or
Tempo;
(i) shall cause Tempo not to make any payment in respect of indebtedness
for borrowed money (other than to the Partnership or the Option Holder, or,
with the prior written consent of the Company, to TSAT);
(j) shall not, and shall cause Tempo not to, sell, lease, transfer,
mortgage, subject to any Lien or otherwise dispose of, any of Tempo's
properties or assets (other than to the Option Holder);
(k) shall cause Tempo not to (A) acquire or agree to acquire (x) by
merging or consolidating with, or by purchasing any assets of, or by any
other manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (y) any
other material assets, or (B) incur any liabilities except for immaterial
liabilities incurred in the ordinary course of business consistent with
past practice and taking into account the transactions contemplated by the
Restructuring Agreement and this Agreement and in each case except as
contemplated by the Tempo Option and this Agreement;
(l) shall cause Tempo not to threaten, institute, prosecute, settle or
compromise any claim or litigation without the prior written consent of the
Option Holder;
(m) shall cause Tempo not to purchase or acquire any property or assets
from or otherwise engage in any transactions with, any Person that is
affiliated with (i) TSAT, (ii) Malone or (iii) TCI (other than transactions
with the Company or the Partnership in the ordinary course of business
consistent with past practice or, with the prior written consent of the
Company, with TSAT); and
(n) shall not, and shall cause Tempo not to, agree to do any of the
foregoing.
Section 4.03. Other Actions. Subject to Section 4.06(d), TSAT hereby agrees
to take no action, and to cause Tempo to take no action, that would reasonably
be expected to cause:
(a) the failure of TSAT to perform and comply in all material respects
with all agreements, obligations and conditions required by this Agreement
to be performed or complied with by TSAT on or prior to the Tempo Closing
Date;
(b) the failure of TSAT or the Option Holder to obtain all necessary
approvals or appropriate consents of any United States Federal or state
governmental entity or any other third party in connection with the
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consummation of the transactions contemplated herein, including approvals
and consents under the HSR Act, if any, and applicable FCC rules and
regulations;
(c) the institution of any suit, action or proceeding challenging,
seeking to restrain, prohibiting or adversely affecting in any material
respect the consummation of the transactions contemplated herein; or
(d) any material adverse effect on Tempo or the Tempo Assets.
Section 4.04. Access to Information; Confidentiality. TSAT shall, and shall
cause Tempo to, afford to the Option Holder and to the officers, employees,
accountants, counsel, financial advisors and other representatives of the
Option Holder, reasonable access during normal business hours during the
period prior to the Tempo Closing Date to all Tempo's properties, books,
contracts, commitments, personnel and records. TSAT agrees to use its best
efforts in good faith to obtain all waivers and consents necessary under any
confidentiality or non-disclosure agreement to afford reasonable access to the
Option Holder. Except as required by law, the Option Holder will hold, and
will cause its respective officers, employees, accountants, counsel, financial
advisors and other representatives and affiliates to hold, any nonpublic
information in confidence until such time as such information becomes publicly
available (otherwise than through the wrongful act of any such Person) and
shall use its best efforts to ensure that such Persons do not disclose such
information to others without the prior written consent of TSAT from whom such
information was received. In the event of the termination of this Agreement
for any reason, the Option Holder shall promptly return or destroy all
documents containing nonpublic information so obtained from TSAT and any
copies made of such documents.
Section 4.05. Best Efforts; Notification. (a) Upon the terms and subject to
the conditions set forth in this Agreement, TSAT agrees to use its best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the Option Holder in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Tempo Sale and the transactions
contemplated by the Tempo Option, including using its best efforts to (i)
obtain all necessary actions or nonactions, waivers, consents and approvals
from Governmental Entities and the making of all necessary registrations and
filings (including filings with Governmental Entities, if any) and the taking
of all steps as may be necessary to obtain an approval or waiver from, or to
avoid an action or proceeding by, any Governmental Entity, (ii) obtain all
necessary consents, approvals or waivers from third parties, (iii) respond to
requests for information from the Department of Justice, the Federal Trade
Commission, the FCC and any other Governmental Entity relating to the Tempo
Sale, (iv) defend any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement, the Tempo Option or all or any
part of the Tempo Sale, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed and (v) execute and deliver any additional instruments, make such
other filings and take such other actions as shall be reasonably requested by
the Option Holder to fully carry out the purposes of, this Agreement and the
Tempo Option, including agreeing to any modifications to such terms as shall
be required, as a result of legal requirements or actions of governmental
entities or third parties, to fulfill the intent of the parties in respect
hereof and thereof. In connection with and without limiting the foregoing,
TSAT and its Board of Directors shall (i) take all action necessary to ensure
that no state takeover statute or similar statute or regulation is or becomes
applicable to the Tempo Sale and (ii) if any state takeover statute or similar
statute or regulation becomes applicable to the Tempo Sale, take all action
necessary to ensure that the Tempo Sale may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Tempo Sale.
(b) Notwithstanding anything to the contrary in this Agreement, TSAT shall
not be required to agree to:
(i) any prohibition, limitation or other requirement that would impose
limitations on the ability of TSAT to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of the Company
(including any requirement to hold such capital stock in trust), including
the right to vote the capital stock of the Company acquired by it on all
matters properly presented to the stockholders of the Company;
(ii) any change in TSAT's or the other Specified Class B Holders' rights
in respect of the governance of the Company from that set forth in the
Charter and By-laws, or any change in TSAT's or the other
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Specified Class B Holders' rights under the Stockholders Agreement, or any
prohibition, limitation or other requirement that would impose limitations
on the ability of TSAT or the other Specified Class B Holders to exercise
any such rights;
(iii) any prohibition, limitation or other requirement that would impose
limitations on the ability of any Person that (on and as of the date of
this Agreement) holds 5% or more of the TSAT A Stock or TSAT B Stock to
acquire or hold, or exercise full rights of ownership of, any shares of
capital stock of TSAT or the Company (including any requirement to hold
such capital stock in trust), including the right to vote the capital stock
of TSAT or the Company acquired by it on all matters properly presented to
the stockholders of TSAT or the Company, as applicable;
(iv) any change in the governance of TSAT from that set forth in TSAT's
certificate of incorporation and by-laws as in effect on the date of this
Agreement; or
(v) take any action that requires the payment of, or the incurrence of an
obligation to pay, any fee, cost or expense in excess of the amount that
would have otherwise been payable by TSAT if it did not have obligations
under this Agreement, unless the Company shall have agreed to advance such
amount to TSAT.
(c) TSAT shall give prompt written notice to the Company of any failure by
TSAT to comply with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by TSAT under this Agreement;
provided, however, that no such notification shall affect the representations,
warranties, covenants or agreements of TSAT or the conditions to the
obligations of TSAT under this Agreement.
ARTICLE V
Conditions Precedent
Section 5.01. Conditions Precedent. The consummation of the Tempo Sale shall
be subject to the satisfaction or waiver on or prior to the Tempo Closing Date
of each of the following conditions precedent:
(a) Stockholder Approval. The TSAT Stockholder Approval shall have been
obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable to
the Tempo Sale under the HSR Act shall have been terminated or shall have
expired.
(c) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Tempo Sale shall be in effect.
(d) Tempo FCC Events. On or prior to the Tempo Closing Date, one of the
following events shall have occurred (each a "Tempo FCC Event"):
(i) FCC approval of the application for transfer of control of Tempo
or the Tempo Assets, as applicable, to the Option Holder; or
(ii) the Tempo Sale shall be permitted under applicable FCC rules and
regulations without revocation of the BSS Authorizations (including
pursuant to an agreement to divest the BSS Authorizations within a
specific time period following the date of the Tempo Sale).
(e) Secretary's Certificates. TSAT and the Option Holder shall each have
received certificates from a Secretary or Assistant Secretary of each other
party, certifying the organizational documents of such other party and
relevant board (or partnership) resolutions authorizing the transactions
contemplated by this Agreement.
Section 5.02. Conditions to Obligations of the Option Holder. Upon any
exercise of the Tempo Sale Option, the obligations of the Option Holder to
consummate the Tempo Sale shall be further subject to the following
conditions:
(a) Performance of Obligations. TSAT shall have performed in all material
respects all obligations required to be performed by it under this
Agreement at or prior to the Tempo Closing Date, and the Option
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Holder shall have received a certificate signed on behalf of TSAT by the
chief executive officer and the chief financial officer of TSAT to such
effect.
(b) No Litigation. There shall not be pending or threatened any suit,
action or proceeding by any Governmental Entity that has a reasonable
likelihood of success, (i) challenging the Tempo Sale, seeking to restrain
or prohibit the consummation of the Tempo Sale or seeking to obtain from
the Option Holder any damages that are material in relation to the Option
Holder and its subsidiaries taken as a whole, (ii) seeking to prohibit or
limit the ownership or operation by the Option Holder or any of its
subsidiaries or affiliates of any portion of the business or assets of the
Option Holder, Tempo or any of their respective subsidiaries or affiliates,
or to compel the Option Holder, Tempo or any of their respective
subsidiaries or affiliates to dispose of or hold separate any portion of
the business or assets of the Option Holder, Tempo or any of their
respective subsidiaries or affiliates, as a result of the Tempo Sale, (iii)
seeking to prohibit the Option Holder, Tempo or any of their respective
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of the Option Holder, Tempo or any of
their respective subsidiaries or affiliates, (iv) seeking to change in any
respect the governance of the Company from that set forth in the Charter
and By-laws, or to change any Person's rights under the Stockholders
Agreement, or seeking to impose limitations on the ability of any Person to
exercise any such rights or (v) which otherwise is reasonably likely to
have a Material Adverse Effect on the Option Holder.
(c) State Takeover Statutes. TSAT and the Board of Directors of TSAT
shall have taken all actions required to render inapplicable to the Tempo
Sale any state takeover statute or similar statute or regulation that would
otherwise apply or purport to apply to such transactions and agreements.
Section 5.03. Conditions to Obligations of TSAT. Upon any exercise of the
Tempo Sale Option, the obligations of TSAT to consummate the Tempo Sale shall
be further subject to the condition that there shall not be pending or
threatened any suit, action or proceeding by any Governmental Entity that has
a reasonable likelihood of success seeking to impose any prohibition,
limitation, requirement or change of the type described in clauses (i) through
(v) of Section 4.05(b).
ARTICLE VI
Termination, Amendment and Waiver
Section 6.01. Termination. This Agreement may be terminated at any time
prior to the Tempo Closing Date, whether before or after the vote of the
stockholders of TSAT at the TSAT Stockholders Meeting:
(a) by mutual written consent of the Option Holder and TSAT;
(b) by the Option Holder at any time, on 10 days prior written notice to
TSAT; or
(c) by either the Option Holder or TSAT, on the first anniversary of the
first to occur of the Tempo FCC Events, if the Tempo Sale shall not have
been consummated on or before such date, unless the failure to consummate
the Tempo Sale is the result of a wilful and material breach of this
Agreement by the party seeking to terminate this Agreement; provided,
however, that the passage of such period shall be tolled for any part
thereof during which any party shall be subject to a nonfinal order,
decree, ruling or action restraining, enjoining or otherwise prohibiting
consummation of the Tempo Sale.
Section 6.02. Effect of Termination. In the event of termination of this
Agreement by any party as provided in Section 6.01, this Agreement shall
forthwith become void and have no effect, without any liability or obligation
hereunder on the part of any party, other than this Section 6.02 and Article
VII and except to the extent that such termination results from the wilful and
material breach by a party of any of its representations, warranties,
covenants or agreements set forth in this Agreement.
Section 6.03. Amendment. This Agreement may be amended by the parties at any
time before or after the TSAT Stockholder Approval; provided, however, that
after any such approval, there shall be made no amendment that by law requires
further approval by such stockholders without the further approval of such
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stockholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties to this Agreement.
Section 6.04. Extension; Waiver. At any time prior to the TSAT Effective
Time, the parties may (a) extend the time for the performance of any of the
obligations or other acts of the other parties, (b) waive any inaccuracies in
the representations and warranties contained in this Agreement or in any
document delivered pursuant to this Agreement or (c) subject to the proviso of
Section 6.03, waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights.
ARTICLE VII
General Provisions
Section 7.01. Notices. Any notice or other communication that is required or
that may be given in connection with this Agreement shall be in writing and
shall be delivered in accordance with Section 10.02 of the Restructuring
Agreement.
Section 7.02. Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation".
Section 7.03. Assignment. This Agreement and the Company's rights, interests
and obligations under this Agreement may be assigned at any time by the Option
Holder, in whole or in part, to any other Person, in the Company's sole
discretion, and upon the assumption by such Person of the Company's
obligations hereunder, the Option Holder shall be released from all such
obligations. Upon any such assignment by the Option Holder, references herein
to "the Option Holder" shall be deemed to be references to such assignee, to
the extent applicable and consistent with the terms of such assignment.
Neither this Agreement nor any of TSAT's rights, interests or obligations
under this Agreement shall be assigned, in whole or in part, by operation of
law or otherwise by TSAT without the prior written consent of the Option
Holder, and any purported assignment without such consent shall be void.
Subject to the preceding sentences, this Agreement will be binding upon, inure
to the benefit of, and be enforceable by, the parties and their respective
successors and assigns.
Section 7.04. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule or law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
Section 7.05. Entire Agreement; No Third-Party Beneficiaries. This
Agreement, the Merger Agreements, the Asset Transfer Agreements, the
Restructuring Agreement, the US West Guarantee, the Malone Letter, the
Reimbursement Agreements, the Stockholders Agreement, the TSAT Stockholder
Agreement, the Newhouse Voting Agreement, the Registration Rights Agreement,
the Voting Agreements, the TSAT Merger Agreement and the Tax Sharing Agreement
(a) constitute the entire agreement, and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
Restructuring Transaction, the TSAT
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Merger and the Tempo Sale and (b) except for the provisions of Article II and
Section 3.03, are not intended to confer upon any person other than the
parties any rights or remedies.
Section 7.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof, except to the extent the laws of the State of Delaware are
mandatorily applicable to the Tempo Sale.
Section 7.07. Enforcement; Exclusive Jurisdiction. (a) The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions of this
Agreement in any court of the State of New York or the State of Delaware and
any court of the United States located in the Borough of Manhattan in New York
City or the State of Delaware.
(b) With respect to any suit, action or proceeding relating to this
Agreement (collectively, a "Proceeding"), each party to this Agreement
irrevocably:
(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 10.02 of the Restructuring Agreement; provided that such
manner of service of process shall not preclude the service of process in
any other manner permitted under applicable law.
Section 7.08. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
IN WITNESS WHEREOF, the Company and TSAT have duly executed this Agreement,
all as of the date first written above.
PRIMESTAR, INC.,
by /s/ Kenneth G. Carroll
----------------------------------
Name: Kenneth G. Carroll
Title: President
TCI SATELLITE ENTERTAINMENT, INC.,
by /s/ Kenneth G. Carroll
----------------------------------
Name: Kenneth G. Carroll
Title: Senior Vice President/CFO
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APPENDIX D
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STOCKHOLDERS AGREEMENT
DATED AS OF FEBRUARY 6, 1998,
AMONG
PRIMESTAR, INC.
TCI SATELLITE ENTERTAINMENT, INC.
AND
JOHN C. MALONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
Section 1. Definitions.................................................. 1
Section 2. Terms and Usage Generally.................................... 3
Section 3. Agreement to Vote............................................ 3
Section 4. Grant of Irrevocable Proxy................................... 3
Section 5. Restrictions on Conversion and Transfer...................... 4
Section 6. Stop Transfer................................................ 4
Section 7. Representations and Warranties............................... 5
Section 8. No Other Voting Agreements................................... 5
Section 9. Events of Default............................................ 5
Section 10. Remedies; Specific Performance............................... 5
Section 11. Term; Parties in Interest; Liability......................... 6
Section 12. Governing Law................................................ 6
Section 13. Exclusive Jurisdiction....................................... 6
Section 14. Notices...................................................... 6
Section 15. No Assignment................................................ 7
Section 16. Descriptive Headings......................................... 8
Section 17. Severability................................................. 8
Section 18. Amendments................................................... 8
Section 19. Integration.................................................. 8
Section 20. Counterparts................................................. 8
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STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of February 6, 1998,
among PRIMESTAR, INC., a Delaware corporation (the "Company"), TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("TSAT") and JOHN C. MALONE
("Malone").
WHEREAS, the Company, TSAT and certain other parties are parties to a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), pursuant to which the Restructuring Transaction (as defined
therein) will be consummated by the parties thereto or their respective
affiliates (capitalized terms used herein but not defined herein shall have
the meanings assigned thereto in the Restructuring Agreement);
WHEREAS, Malone is currently a stockholder of TSAT; and
WHEREAS, in connection with the Restructuring Transaction and as a condition
thereof, the parties to this Agreement desire to enter into the arrangements
set forth in this Agreement regarding the voting, conversion and future
dispositions of shares of capital stock of TSAT beneficially owned by the
Stockholders (as defined herein).
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
Section 1. Definitions. The following terms used herein shall have the
following definitions:
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly Controls, is under common Control with, or is
Controlled by such first Person. Anything contained herein to the contrary
notwithstanding, the Estate of Bob Magness shall not be deemed to be an
Affiliate of Malone for purposes of this Agreement.
"Agreement" is defined in the preamble hereto.
"beneficially own" (and beneficial ownership, owned beneficially and other
correlative terms) is defined in Rule 13d-3 promulgated under the Exchange
Act.
"Control" means with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such Person (whether through ownership of securities,
partnership interests or other ownership interest, by contract, or otherwise).
The terms "Controlled," "Controlling" and similar variations shall have
correlative meanings.
"Current Market Price" means, with respect to shares of TSAT A Stock or TSAT
B Stock as of any date, the average of the daily closing prices for shares of
such series for the 30 consecutive trading days ending on the trading day
immediately before the day in question. The closing price for each day shall
mean the reported last sales price regular way or, in the case no such sale is
reported on such day, the average of the reported closing bid and asked prices
regular way, in either case on the principal United States registered
securities exchange on which such shares are listed, or if not listed on any
such exchange, the last reported sales price or bid quotation on the NASDAQ
Stock Market or any other inter-dealer quotation system then in general use
or, if no such prices or quotations are available, the fair market value on
the day in question as determined by the Board of Directors of TSAT in good
faith.
"Defaulting Party" is defined in Section 9.
"Event of Default" is defined in Section 9.
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"Exempt Transfer" means any Transfer that falls within any one of the
following clauses: (i) An exchange or conversion of TSAT Common Stock which
occurs by operation of law in connection with a merger or consolidation of
TSAT with or into another corporation, or a recapitalization, reclassification
or similar event that has been duly authorized and approved by the required
vote of the Board and the stockholders of TSAT pursuant to the Certificate of
Incorporation of TSAT and applicable law; (ii) any surrender by a Stockholder
to TSAT of TSAT Common Stock upon redemption by TSAT of such TSAT Common Stock
pursuant to any right or obligation under the express terms of such TSAT
Common Stock that is made on a proportionate basis from all holders of such
TSAT Common Stock and is not at the option of such Stockholder; or (iii) any
Permitted Pledge.
"Initial Term" means the period from the date of this Agreement until the
termination of the TSAT Merger Agreement.
"Malone Family Foundation" means the Malone Family Foundation, a Colorado
non-profit corporation.
"Permitted Transferee" is defined in Section 5.
"Permitted Pledge" means a bona fide pledge of TSAT Common Stock by a
Stockholder to a financial institution to secure bona fide recourse borrowings
permitted by applicable law, provided, that (i) such Stockholder notifies TSAT
and the Company of such Stockholder's intention to pledge such TSAT Common
Stock at least 10 days prior thereto (such notice to contain a full
description of the terms of such pledge), (ii) such Stockholder retains the
sole right to vote such pledged TSAT Common Stock and (iii) the holder (or
holders) of the pledge (the "pledgee") agrees in writing in advance with such
Stockholder (in an agreement which shall expressly provide that the Company is
a third-party beneficiary thereof, entitled to enforce such agreement directly
against the pledgee, and which shall expressly provide that it shall not be
modified without the prior written consent of the Company) that (A) the
pledgee will notify TSAT and the Company in writing at least 60 days prior to
any Transfer of such pledged TSAT Common Stock pursuant to such pledge (by
foreclosure, by operation of law or otherwise) and (B) the Company shall have
the right, during such 60-day period, to purchase such pledged TSAT Common
Stock at a purchase price equal to the Current Market Price thereof, and that
if such right is exercised by the Company (by written notice to the pledgee),
the pledgee shall release its lien on such pledged TSAT Common Stock
(regardless of whether the purchase price is sufficient to discharge the debt
secured by the pledge) upon payment of the purchase price therefor by the
Company directly to the pledgee for application to the indebtedness secured by
such lien (it being agreed that each Stockholder who pledges any shares of
TSAT Common Stock hereby authorized payment in such manner).
"Proceeding" is defined in Section 13.
"Stockholder" means (i) Malone for so long as he holds of record or
beneficially owns or has voting control of any TSAT Common Stock (or has an
Affiliate holding TSAT Common Stock pursuant to clause (C) of
Section 5) and (ii) each Permitted Transferee that acquires record or
beneficial ownership or voting control of any TSAT Common Stock from a
Stockholder, as long as such Permitted Transferee holds of record,
beneficially owns or has voting control of any TSAT Common Stock; provided
that such Permitted Transferee shall have complied with Section 15.
"Transfer" means, directly or indirectly, (i) to offer for sale, sell,
transfer, tender, pledge, encumber, assign or otherwise dispose of (including
by merger or otherwise by operation of law), or enter into any contract,
option, or other arrangement or understanding (other than the Voting
Agreements, this Agreement and the Stockholders Agreement) with respect to or
consent to the offer for sale, sale, transfer, tender, pledge, encumbrance,
assignment or other disposition of and (ii) except as contemplated by the
Voting Agreements, this Agreement or the Stockholders Agreement, to grant any
proxies or power of attorney, deposit into a voting trust or enter into a
voting agreement or otherwise transfer voting power; provided, however, that
"Transfer" shall not mean or include delivery of a revocable proxy in the
ordinary course of business. The terms "Transferred," "Transferee" and similar
variations shall have correlative meanings.
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"TSAT Common Stock" means TSAT A Stock and/or TSAT B Stock.
Section 2. Terms and Usage Generally. The definitions in Section 1 shall
apply equally to both the singular and plural forms of the terms defined
therein. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. All references herein to
Sections and Exhibits shall be deemed to be references to Sections of and
Exhibits to this Agreement, unless the context shall otherwise require. All
Exhibits attached hereto shall be deemed incorporated herein as if set forth
in full herein. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation". All accounting terms
not defined in this Agreement shall have the meanings determined by United
States generally accepted accounting principles as in effect from time to
time. The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not
to any particular provision of this Agreement. Unless otherwise expressly
provided herein, any agreement, instrument or statute defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments
incorporated therein.
Section 3. Agreement to Vote. (a) During the Initial Term, each Stockholder
hereby agrees to vote or act by written consent with respect to (or cause to
be voted or acted upon by written consent) (x) all shares of TSAT Common Stock
held of record or beneficially owned by such Stockholder at the time of such
vote or action by written consent and (y) all shares of TSAT Common Stock as
to which such Stockholder at the time of such vote or action by written
consent has voting control:
(x) in favor of the TSAT Merger Agreement and the transactions
contemplated thereby; and
(y) against (i) any alternative transaction of the type described in the
first sentence of Section 4.01 of the TSAT Merger Agreement, other than an
ICA Acquisition (as defined in the TSAT Merger Agreement) that is permitted
pursuant to the terms of the TSAT Merger Agreement and (ii) any amendment
of the Certificate of Incorporation or By-laws of TSAT.
In addition, during the Initial Term, each Stockholder hereby agrees not to
convert or Transfer any shares of TSAT Common Stock which are held of record
or owned beneficially by such Stockholder, except in compliance with Section
5.
(b) During the term of this Agreement, each Stockholder hereby agrees to
vote or act by written consent with respect to (or cause to be voted upon or
acted upon by written consent) (x) all shares of TSAT Common Stock held of
record or beneficially owned by such Stockholder at the time of such vote or
action by written consent and (y) all shares of TSAT Common Stock as to which
such Stockholder at the time of such vote or action by written consent has
voting control, in favor of the TSAT Tempo Agreement and the transactions
contemplated thereby.
Section 4. Grant of Irrevocable Proxy. In the event that any Stockholder
shall fail at any time to vote or act by written consent with respect to any
of such Stockholder's TSAT Common Stock as agreed by such Stockholder in this
Agreement, such Stockholder hereby irrevocably grants to and appoints the
Company (and any officer of the Company), such Stockholder's proxy and
attorney-in-fact (with full power of substitution), for and in the name, place
and stead of such Stockholder, to vote, act by written consent or grant a
consent, proxy or approval in respect of such shares exclusively as agreed by
such Stockholder in this Agreement. Each Stockholder hereby affirms that the
irrevocable proxy set forth in this Section 4 is given in connection with the
execution of the asset transfer and merger agreements executed in respect of
the Restructuring Transaction and the TSAT Merger and that such irrevocable
proxy is given to secure the performance of the obligations of such
Stockholder under this Agreement. Each such Stockholder hereby further affirms
that each proxy hereby granted shall, for the term of this Agreement, be
irrevocable and shall be deemed coupled with an interest, in accordance with
Section 212(e) of the DGCL.
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Section 5. Restrictions on Conversion and Transfer. During the Initial Term,
no Stockholder may convert any shares of TSAT B Stock held of record or
beneficially owned by such Stockholder into shares of TSAT A Stock. During the
Initial Term, no Stockholder may Transfer, and TSAT hereby agrees not to
register the Transfer of, any TSAT Common Stock held of record or beneficially
owned by such Stockholder, except to a Permitted Transferee of such
Stockholder; provided that in the case of a Transfer to a Permitted
Transferee, such Permitted Transferee (other than a Permitted Transferee that
is merely the pledgee under a Permitted Pledge) becomes a party to this
Agreement as a Stockholder and to the Stockholders Agreement as a potential
"Specified Class B Holder" (as defined therein), as provided in Section 15.
Any Stockholder that Transfers TSAT Common Stock to a Permitted Transferee
pursuant to clause (B) or (C) of this Section 5 shall be liable (jointly and
severally with such Permitted Transferee) for all obligations of such
Permitted Transferee under this Agreement.
For the purposes hereof, "Permitted Transferee" of a Stockholder shall mean:
(A) with respect to any Stockholder that is a natural Person, (w) the
Person who is the present or former spouse of such Stockholder, and any
lineal descendant (including adoptees) of such Stockholder or any such
spouse, (x) the trustee of a trust, or a custodian under the Uniform Gift
to Minors Act or similar fiduciary, the primary beneficiaries of which (or
primary income beneficiaries of which, in the case of a charitable
remainder or similar trust) include only such Stockholder or Persons
described in clause (w) above (provided, that such trust may grant a
general or special power of appointment to such Stockholder or any such
Person and may permit trust assets to be used to pay taxes, legacies and
other obligations of the trust or the estate of such Stockholder or any
such Person, payable by reason of the death of such Stockholder or such
Person, as applicable), (y) the executor, administrator, guardian or
personal representative of the estate of such Stockholder and (z) the
Malone Family Foundation;
(B) if the establishment of a voting trust is required to prevent the
loss or secure the reinstatement of any license or franchise from any
governmental agency held by TSAT or any subsidiary thereof to conduct any
portion of the business of TSAT or such subsidiary, any voting trust the
trustee of which is reasonably acceptable to the Company; provided, that
the term of such trust shall be no longer than 12 months and at the end of
such 12-month period, the Transferring Stockholder shall cause such TSAT
Common Stock to be Transferred back to such Transferring Stockholder or to
any other Permitted Transferee thereof (excluding another voting trust);
(C) with respect to any Stockholder, any Person that is an Affiliate of
such Stockholder (which for purposes of this Section 5(C) shall include,
with respect to any Stockholder that is a natural Person, any Person in
which such Stockholder both as of the date hereof and at all times
thereafter (x) Controls 5% or more of the voting power and (y) participates
in the direction of the management and control of such Person), for so long
as such Person remains an Affiliate of such Stockholder. In the event that
a Person received TSAT Common Stock by virtue of its status as an Affiliate
of a Stockholder, and such Person subsequently ceases to be an Affiliate of
the Transferring Stockholder for any reason, then, prior to such Person
ceasing to be such an Affiliate, the Transferring Stockholder shall cause
such TSAT Common Stock to be Transferred back to such Transferring
Stockholder or to any other Permitted Transferee thereof; and
(D) any other Person that acquires any TSAT Common Stock from such
Stockholder pursuant to an Exempt Transfer.
Section 6. Stop Transfer. (a) TSAT hereby agrees not to register the
conversion or Transfer of any TSAT Common Stock unless the transferee and the
transferor of such shares have furnished such affidavits or other proof as
TSAT or the Company may reasonably request to establish that such proposed
Transfer is permitted by Section 5.
(b) TSAT and each Stockholder hereby agree that any purported conversion or
Transfer of TSAT Common Stock not permitted by Section 5 shall be deemed null
and void and shall not be given effect or recognition by TSAT.
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Section 7. Representations and Warranties. (a) Each Stockholder, severally
and not jointly, hereby represents and warrants to TSAT and the Company that
such Stockholder owns of record and beneficially and has good and valid title
to the number of shares of TSAT Common Stock set forth opposite his or its
name on Exhibit A attached hereto and has voting control of such shares of
TSAT Common Stock, in each case as of the date hereof. The shares of TSAT
Common Stock so listed constitute all securities of TSAT owned of record or
beneficially by such Stockholder and all such securities as to which such
Stockholder has voting control, in each case as of the date hereof.
(b) Each party to this Agreement hereby represents and warrants to each
other party that (i) such party has the right, power and authority to enter
into this Agreement and perform its obligations hereunder, (ii) this Agreement
has been duly authorized by all necessary action prerequisite to the execution
and delivery thereof by such party and is the valid and binding obligation of
such party enforceable in accordance with its terms and (iii) the execution,
delivery and performance of this Agreement by such party and the transactions
contemplated hereby do not, with or without the giving of notice or the
passage of time or both, (x) violate any law, ordinance, rule or regulation or
any judgment, writ, injunction or order of any court, arbitrator or
governmental, administrative or self-regulatory body or agency, applicable to
such party, (y) require the consent or authorization of or waiver by or filing
with any governmental, administrative, self-regulatory body or agency or any
other Person or entity or (z) conflict with, result in the breach of any
provision of, result in the modification or termination of, require the
consent or authorization of or waiver by or filing with any other parties
(other than such as has been obtained prior to the date hereof) to, or result
in the creation or imposition of any lien or other encumbrance pursuant to or
constitute a default under any material agreement, permit, indenture, note,
lease, license or franchise or any other material instrument to which such
Party is a party.
(c) Each Stockholder, severally and not jointly, represents and warrants to
TSAT and the Company that, except for the Voting Agreements, this Agreement
and the Stockholders Agreement, at the date hereof, such Stockholder has the
sole right to vote and dispose of its TSAT Common Stock in its sole discretion
and none of such TSAT Common Stock is subject to any voting trust or other
agreement, arrangement, or restriction with respect to the voting thereof and
there is no option, warrant, right, call, proxy or other contract or agreement
to which such Stockholder is a party, or by which such Stockholder or any of
its TSAT Stock is bound or affected, that directly or indirectly provides for
the sale, pledge or other Transfer of any of such Stockholder's TSAT Stock or
any interest therein or any rights with respect thereto, relates to the
voting, Transfer or control of any thereof, or obligated such Stockholder or
any Affiliate of such Stockholder to grant, offer or enter into any of the
foregoing.
Section 8. No Other Voting Agreements. Subject to Section 5(B), each
Stockholder hereby agrees, and agrees to cause its Affiliates, not to enter
into any voting agreement (other than the Voting Agreements, this Agreement
and the Stockholders Agreement) with, nor to grant any proxies or powers of
attorney (other than as contemplated by this Agreement) to, nor to deposit
into a voting trust with or otherwise directly or indirectly transfer voting
power (except as contemplated by this Agreement, including Section 5(B)) to,
any other Person.
Section 9. Events of Default. The following events shall constitute Events
of Default with respect to any Stockholder (each, a "Defaulting Party"):
(i) any of the representations or warranties made by such Stockholder
herein shall not be true and correct in all material respects on the date
of this Agreement; or
(ii) any breach or default in the performance by such Stockholder of any
material provision of this Agreement.
Section 10. Remedies; Specific Performance. (a) Upon the occurrence and
continuance of an Event of Default for fifteen (15) calendar days after
delivery by the Company to the Defaulting Party of a written notice of such
Event of Default, the Company shall be entitled to any remedies that may be
available with respect to such Event of Default at law or in equity, including
seeking to enjoin such Event of Default or seeking to obtain specific
performance of a Defaulting Party's obligations.
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(b) The remedies set forth in this Section 10 shall not be mutually
exclusive, and selection of or resort to any such remedy shall not preclude
the selection of or resort to any other such remedy and no selection of or
resort to a remedy shall constitute a waiver of any other remedy available
hereunder.
(c) The parties hereto acknowledge that the benefits to them under this
Agreement are unique, that they are willing to enter into this Agreement only
upon performance by each Stockholder of all its or his or her obligations
hereunder and that monetary damages would not afford an adequate remedy for
failure to perform any such obligations hereunder. Accordingly, the parties
hereby consent to specific performance of their obligations hereunder and
waive any requirement for securing or posting of any bond in connection with
the obtaining of any injunctive or other equitable relief to enforce their
rights hereunder.
Section 11. Term; Parties in Interest; Liability. (a) This Agreement shall
become effective on the date hereof and shall continue in effect until the
earliest to occur of (i) consummation of the TSAT Merger, (ii) consummation of
the transactions contemplated by the TSAT Tempo Agreement and (iii)
termination of the TSAT Tempo Agreement, whereupon it shall terminate;
provided that obligations incurred under this Agreement prior to such
termination shall survive such termination, and the provisions of this Section
11 and Sections 12 through 20 shall survive such termination.
(b) At such time as a Stockholder shall cease to be a Stockholder, such
former Stockholder shall cease to have any rights or obligations under this
Agreement (other than under Section 13 hereof in respect of the matters
addressed in the proviso hereto); provided, that any such former Stockholder
shall be entitled to enforce any rights (and pursue any claims in respect
thereof) accruing to such former Stockholder under this Agreement prior to the
time that it ceased to be a Stockholder, and such former Stockholder shall
continue to be liable for all obligations incurred by such former Stockholder
under this Agreement prior to the time that it ceased to be a Stockholder.
Section 12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
Section 13. Exclusive Jurisdiction. With respect to any suit, action or
proceeding relating to this Agreement (collectively, a "Proceeding"), each
party to this Agreement irrevocably:
(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 30 herein; provided that such manner of service of
process shall not preclude the service of process in any other manner
permitted under applicable law.
Section 14. Notices. Any notice or other communication that is required or
that may be given in connection with this Agreement shall be in writing and
shall be delivered personally, telecopied or sent by certified, registered or
express mail or by Federal Express or similar courier service, postage
prepaid, and shall be deemed given when so received if delivered personally or
by telecopy or, if mailed, seven (7) calendar days after the date of mailing
(three (3) calendar days in the case of express mail, Federal Express or
similar courier service), as follows:
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If to the Company:
8085 South Chester Street, Suite 300
Englewood, CO 80112
Attention of President
Facsimile: (303) 712-4977
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (212) 705-5125
If to TSAT:
8085 South Chester Street, Suite 300
Englewood, CO 80112
Attention of Kenneth G. Carroll
Facsimile: (303) 712-4973
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (212) 705-5125
If to Malone:
Tele-Communications, Inc.
4100 East Drycreek Road
Littleton, CO 80122
Attention of Stephen M. Brett, Esq.
Facsimile: (303) 488-3245
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Elizabeth M. Markowski, Esq.
Facsimile: (212) 705-5125
Section 15. No Assignment. This Agreement shall inure to the benefit of and
be binding upon the Parties hereto and their respective successors and
permitted assigns, and, with respect to Malone, in the event of Malone's
incapacity or death, his legal representative, the executor or administrator
of his estate, and his heirs and beneficiaries. Except as specifically
provided herein, this Agreement and the rights and obligations hereunder may
not be assigned, in whole or in part. In connection with any Transfer by a
Stockholder to a Permitted Transferee of such Stockholder in accordance with
Section 5, such Permitted Transferee shall, as a condition precedent to such
Transfer, become a party to this Agreement (as a Stockholder) and the
Stockholders Agreement (as a Specified Class B Holder), by executing and
delivering to each other party to this Agreement a counterpart hereof and to
each other party to the Stockholders Agreement a counterpart thereof,
whereupon such Permitted Transferee shall become a party to this Agreement as
a Stockholder, and shall be bound by and entitled to the benefits of this
Agreement, for all purposes hereof. Upon such execution and delivery by a
Permitted Transferee, such Permitted Transferee shall become a Stockholder for
all purposes herein. Any purported assignment in violation of this Section 15
shall be void and unenforceable.
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Section 16. Descriptive Headings. The headings in this Agreement are for
reference purposes only and do not form part of this Agreement, nor shall such
headings in any way affect the meaning or interpretation of any provisions
herein.
Section 17. Severability. If any Section, sentence, subsection, term or
provision in this Agreement is determined to be illegal, invalid or
unconstitutional by any court, such determination shall have no effect on the
validity of any other Section, sentence, subsection, term or provision herein,
all of which shall remain in full force and effect for the term of this
Agreement; provided, however, that the parties agree to negotiate in good
faith with respect to an equitable modification of any such Section, sentence,
subsection, term or provision or application thereof held to be illegal,
invalid or unconstitutional so as to put each party in substantially the same
position with respect to such Section, sentence, subsection, term or provision
or application thereof as such party was prior to such determination. To the
extent permissible under applicable law, each party to this Agreement hereby
waives any provision of applicable law that would render any Section,
sentence, subsection, term or provision in this Agreement invalid, illegal or
unenforceable in any respect.
Section 18. Amendments. This Agreement may not be amended except by a
written instrument duly signed by each party.
Section 19. Integration. This Agreement, the Restructuring Agreement, the
Merger Agreements, the Asset Transfer Agreements, the US West Guarantee, the
Reimbursement Agreements, the Stockholders Agreement, the Malone Letter, the
Newhouse Voting Agreement, the Registration Rights Agreement, the Voting
Agreements, the Tax Sharing Agreement, the TSAT Merger Agreement, the Drop
Down Agreement and the TSAT Tempo Agreement (each as defined in the
Restructuring Agreement) constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior agreements
and understandings among the parties with respect thereto.
Section 20. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed as of the day first written above.
PRIMESTAR, INC., a Delaware
corporation,
/s/ Kenneth G. Carroll
by __________________________________
Name:Kenneth G. Carroll
Title:President
TCI SATELLITE ENTERTAINMENT, INC.,
a Delaware corporation,
/s/ Kenneth G. Carroll
by __________________________________
Name:Kenneth G. Carroll
Title:Senior Vice President/CFO
/s/ John C. Malone
___________________________________
JOHN C. MALONE
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APPENDIX E
RESTATED
CERTIFICATE OF INCORPORATION
OF
PRIMESTAR, INC.
PRIMESTAR, Inc. (the "Corporation"), a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "GCL"), does
hereby certify as follows:
(1) The present name of the Corporation is PRIMESTAR, Inc. The
Corporation was originally incorporated under the same name, and its
original certificate of incorporation was filed with the office of the
Secretary of State of the State of Delaware on [ ].
(2) This Restated Certificate of Incorporation was duly adopted in
accordance with Sections 242 and 245 of the GCL and by written consent of
stockholders in accordance with Section 228 of the GCL.
(3) This Restated Certificate of Incorporation restates and integrates
and further amends the certificate of incorporation of the Corporation.
(4) The text of the certificate of incorporation of the Corporation is
amended and restated so as to read in its entirety as follows:
ARTICLE I
Name. The name of the Corporation is PRIMESTAR, Inc.
ARTICLE II
Organization. The Corporation is organized pursuant to the provisions of the
GCL.
ARTICLE III
Registered Office and Agent. The address of the registered office of the
Corporation in the State of Delaware is the office of The Prentice-Hall
Corporation System, Inc., 1013 Centre Road, Wilmington, New Castle, Delaware
19805. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE IV
Duration. The Corporation shall have perpetual existence.
ARTICLE V
Purpose. The purpose of the Corporation is to engage in the Satellite
Television Business and/or any other lawful act or activity for which a
corporation may be organized under the GCL. "Satellite Television Business" is
defined herein to mean (i) any business activity that principally uses
communications satellites to provide video and audio programming, information
services, entertainment or other communications services to the antennas or
other reception equipment of customers or subscribers of such business
activity or to multiple dwelling or commercial units comprising such customers
or subscribers, (ii) investments and activities related to video,
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audio, information and other programming services, (iii) investments and
activities related to the development, design, manufacture and/or sale of
electronics equipment and components related to activities and investments
contemplated in clauses (i) and (ii) above and (iv) any other operations,
services or activities related or ancillary to any of the foregoing.
ARTICLE VI
Capital Stock. (a) General. The total number of shares of capital stock
which the Corporation shall have the authority to issue is one billion four
hundred thirty million (1,430,000,000) shares. Of such shares:
(i) eight hundred fifty million (850,000,000) shares shall be of a class
of common stock designated as Class A Common Stock with a par value of $.01
per share (the "Class A Stock");
(ii) fifty million (50,000,000) shares shall be of a class of common
stock designated as Class B Common Stock with a par value of $.01 per share
(the "Class B Stock");
(iii) thirty million (30,000,000) shares shall be of a class of common
stock designated as Class C Common Stock with par value of $.01 per share
(the "Class C Stock");
(iv) one hundred fifty million (150,000,000) shares shall be of a class
of common stock designated as Class D Common Stock with par value of $.01
per share (the "Class D Stock"); and
(v) three hundred fifty million (350,000,000) shares shall be of a class
designated as Preferred Stock (the "Preferred Stock") issuable in series as
provided in Section (c) below.
(b) Common Stock. The Class A Stock, the Class B Stock, the Class C Stock
and the Class D Stock shall together constitute the "Common Stock" of the
Corporation. Except as otherwise provided in this Section (b), each share of
Class A Stock, each share of Class B Stock, each share of Class C Stock and
each share of Class D Stock shall be identical in all respects and shall have
equal rights and privileges.
1. Voting. Except as otherwise required by applicable law, at each annual or
special meeting of stockholders and in the case of any written consent of
stockholders in lieu of a meeting and for all other matters voted on by the
Corporation's stockholders:
(i) each holder of record of shares of Class A Stock on the relevant
record date shall be entitled to one vote for each share of Class A Stock
standing in such Person's (as defined herein) name on the stock transfer
records of the Corporation;
(ii) each holder of record of shares of Class B Stock on the relevant
record date shall be entitled to ten votes for each share of Class B Stock
standing in such Person's name on the stock transfer records of the
Corporation;
(iii) each holder of record of shares of Class C Stock on the relevant
record date shall be entitled to ten votes for each share of Class C Stock
standing in such Person's name on the stock transfer records of the
Corporation; and
(iv) each holder of record of shares of Class D Stock shall not be
entitled to any votes for shares of Class D Stock standing in such Person's
name on the stock transfer records of the Corporation.
Except as otherwise required by applicable law or this Restated Certificate
of Incorporation, including, without limitation, the provisions of Subsections
(b)8 and (b)9 of this Article VI, and subject to the rights of holders of any
series of Preferred Stock of the Corporation that may be issued from time to
time, the holders of shares of Class A Stock, the holders of shares of Class B
Stock and the holders of shares of Class C Stock shall vote as a single class
on all matters with respect to which a vote of the stockholders of the
Corporation is required under applicable law, this Restated Certificate of
Incorporation or the By-laws of the Corporation or on which a vote of
stockholders is otherwise duly called for by the Corporation.
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The holders of shares of Class A Stock, Class B Stock or Class C Stock shall
not be entitled to cumulative voting rights.
Shares of Class C Stock shall only be issued to and registered in the name
of the beneficial owners (as defined in Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended) thereof and not in "street" or
"nominee" name. The Corporation may, as a condition to counting the votes cast
by any holder of shares of Class C Stock at any annual or special meeting of
stockholders or pursuant to any written consent of stockholders in lieu of a
meeting require the furnishing of such affidavits or other proof as it may
reasonably request to establish that the shares of Class C Stock held by such
holder have not, pursuant to Subsection (b)7 of this Article VI, been
converted.
Shares of Class D Stock shall only be issued to and registered in the name
of the beneficial owners (as defined in Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended) thereof and not in "street" or
"nominee" name.
2. Dividends and Distributions. Except as otherwise provided in this
Subsection (b)2, and subject to the rights of the holders of shares of any
series of Preferred Stock of the Corporation, holders of shares of Class A
Stock, holders of shares of Class B Stock, holders of shares of Class C Stock
and holders of shares of Class D Stock shall be entitled to receive equal
dividends or other distributions per share, and whenever a dividend or other
distribution is paid to the holders of any such class of Common Stock of the
Corporation, the Corporation shall also pay to the holders of each such other
class of Common Stock of the Corporation a dividend or other distribution per
share equal to the dividend or other distribution per share paid to the
holders of such class of Common Stock of the Corporation. Dividends and other
distributions in cash, stock or property shall be payable only as and when
declared by the Board of Directors of the Corporation (the "Board") from time
to time out of assets or funds of the Corporation legally available therefor.
If at any time a dividend or other distribution (collectively, a "share
distribution") payable in Class A Stock, Class B Stock, Class C Stock, Class D
Stock or any other securities of the Corporation or of any other corporation,
partnership, limited liability company, trust or other legal entity
(collectively, a "Person") is to be made with respect to the Class A Stock,
Class B Stock, Class C Stock or Class D Stock, such share distribution may be
declared and paid only as follows, and share distributions declared and paid
as follows shall be deemed to be equal distributions for purposes of the
foregoing paragraph:
(i) a share distribution consisting of (A) shares of Class A Stock (or
Convertible Securities (as defined herein) that are convertible into,
exchangeable for or evidence the right to purchase shares of Class A
Stock), on an equal per share basis to holders of Class A Stock, Class B
Stock and Class C Stock and (B) on an equal per share basis, shares of
Class D Stock (or non-voting Convertible Securities that are convertible
into, exchangeable for or evidence the right to purchase shares of Class D
Stock) to holders of Class D Stock; provided that if Convertible Securities
are so distributed with respect to any such class of Common Stock, then
Convertible Securities shall be so distributed with respect to each such
class of Common Stock, and the Convertible Securities so distributed shall
not differ in any respect other than their relative voting rights and
related differences in designation, conversion and share distribution
provisions;
(ii) a share distribution consisting of (A) shares of Class A Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Class A Stock) to holders of Class
A Stock and (B) on an equal per share basis, shares of Class B Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Class B Stock) to holders of Class
B Stock and (C) on an equal per share basis, shares of Class C Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Class C Stock) to holders of Class
C Stock and (D) on an equal per share basis, shares of Class D Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Class D Stock) to holders of Class
D Stock; provided that if Convertible Securities are so distributed with
respect to any such class of Common Stock, then Convertible Securities
shall be so distributed with respect to each such class of Common Stock,
and the Convertible Securities so distributed shall not differ in any
respect
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other than their relative voting rights and related differences in
designation, conversion and share distribution provisions; or
(iii) a share distribution consisting of shares of any class or series of
securities of the Corporation or any other Person other than Class A Stock,
Class B Stock, Class C Stock or Class D Stock (and other than Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase shares of Class A Stock, Class B Stock, Class C Stock or
Class D Stock), either:
(x) on the basis of a distribution of identical securities, on an
equal per share basis, to holders of Class A Stock, Class B Stock,
Class C Stock and Class D Stock (provided, that holders of Class D
Stock shall receive non-voting securities (or non-voting Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase non-voting securities)); or
(y) on the basis of a distribution of one class or series of
securities to holders of Class A Stock and, on an equal per share
basis, one class or series of securities to holders of Class B Stock
and, on an equal per share basis, one class or series of securities to
holders of Class C Stock and, on an equal per share basis, one class or
series of securities to holders of Class D Stock; provided that the
securities so distributed (and, if applicable, the securities into
which the distributed securities are convertible or for which they are
exchangeable or which they evidence the right to purchase) do not
differ in any respect other than their relative voting rights and
related differences in designation, conversion and share distribution
provisions; and provided, further, that (1) holders of Class A Stock
receive a class or series of securities having no more than one vote
per share (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase securities with no
more than one vote per share), (2) holders of shares of Class D Stock
receive a class or series of securities that are non-voting (or non-
voting Convertible Securities that are convertible into, exchangeable
for or evidence the right to purchase non-voting securities (provided,
that such Convertible Securities may be convertible into, exchangeable
for or evidence the right to purchase voting securities with no more
than one vote per share on the same terms as the Class D Stock is
convertible into Class A Stock as set forth in Subsection (b)7 of this
Article VI)), (3) holders of shares of Class B Stock receive a class or
series of securities having a number of votes per share equal to that
of the class or series of securities distributed pursuant to clause (4)
below (which shall in no event exceed ten votes per share) and having
class voting rights identical to those for the shares of Class B Stock
as set forth in this Restated Certificate of Incorporation (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase securities having a number of votes per
share equal to that of the class or series of securities distributed
pursuant to clause (4) below (which shall in no event exceed ten votes
per share) and having class voting rights identical to those for the
shares of Class B Stock as set forth in this Restated Certificate of
Incorporation), and (4) holders of shares of Class C Stock receive a
class or series of securities having a number of votes per share equal
to that of the class or series of securities distributed pursuant to
clause (3) above (which shall in no event exceed ten votes per share)
and having class voting rights identical to those for the shares of
Class C Stock as set forth in this Restated Certificate of
Incorporation (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase securities having a
number of votes per share equal to that of the class or series of
securities distributed pursuant to clause (3) above (which shall in no
event exceed ten votes per share) and having class voting rights
identical to those for the shares of Class C Stock as set forth in this
Restated Certificate of Incorporation); provided that if Convertible
Securities are so distributed with respect to any such class of Common
Stock, then Convertible Securities shall be so distributed with respect
to each such class of Common Stock, and the Convertible Securities so
distributed shall not differ in any respect other than their relative
voting rights and related differences in designation, conversion and
share distribution provisions.
Any and all right, title, interest and claim to and in any dividends or
other distributions declared by the Corporation, whether in cash, stock or
otherwise, which remain unclaimed for a period of at least four years after
the close of business on the payment date for such dividends or other
distributions shall be deemed abandoned and shall terminate. Any such
unclaimed dividends or other distributions in the possession of the
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Corporation, its transfer agent or other agents or depositaries shall
thereupon become the exclusive property of the Corporation, free and clear of
any and all claims, liens, other encumbrances or any other similar third party
rights.
3. Stock Splits, Subdivisions, Combinations and Reclassifications. In the
case of any split, subdivision, combination or reclassification of shares of
Class A Stock, Class B Stock, Class C Stock or Class D Stock (other than share
distributions described in Subsection (b)2 of this Article VI), the shares of
each other such class of Common Stock of the Corporation shall also be split,
subdivided, combined or reclassified, in each case so that the numbers of
shares of Class A Stock, Class B Stock, Class C Stock and Class D Stock
outstanding immediately following such split, subdivision, combination or
reclassification shall bear the same relationship to one another as do the
numbers of shares of Class A Stock, Class B Stock, Class C Stock and Class D
Stock outstanding immediately prior to such split, subdivision, combination or
reclassification.
4. Liquidation and Dissolution. In the event of a liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, after
payment or provision for payment of the debts and liabilities of the
Corporation and subject to the prior payment in full of or provision for the
preferential or other amounts to which any series of Preferred Stock of the
Corporation outstanding at any time may be entitled, the holders of shares of
Class A Stock, the holders of shares of Class B Stock, the holders of shares
of Class C Stock and the holders of shares of Class D Stock shall be entitled
to receive all assets and funds of the Corporation available for distribution
to the holders of Common Stock of the Corporation, pro rata in accordance with
the numbers of such shares held by such holders, respectively, without regard
to class.
5. Mergers. In the event of any merger, consolidation, purchase or
acquisition of property or stock or other reorganization in which any
consideration is to be received by the holders of shares of Class A Stock, the
holders of shares of Class B Stock, the holders of shares of Class C Stock or
the holders of shares of Class D Stock, the holders of each such class of
Common Stock of the Corporation shall receive the same consideration on a per
share basis.
Notwithstanding the previous paragraph, if any consideration received by the
holders of Class A Stock, the holders of Class B Stock, the holders of Class C
Stock and the holders of Class D Stock in connection with a merger,
consolidation, purchase or acquisition of property or stock or other
reorganization shall consist of securities (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase other
securities), and such securities (or Convertible Securities) do not differ in
any respect other than their relative voting rights and related differences in
designation, conversion and share distribution provisions:
(i) the holders of shares of Class B Stock and the holders of shares of
Class C Stock may receive, on an equal per share basis, voting securities
with up to ten times the number of votes per share as those voting
securities to be received by the holders of shares of Class A Stock and
with respective class voting rights corresponding to those for the shares
of Class B Stock and Class C Stock as set forth in this Restated
Certificate of Incorporation (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase voting
securities with up to ten times the number of votes per share as those
voting securities issuable upon the conversion, exchange or exercise of the
Convertible Securities to be received by the holders of shares of Class A
Stock and with respective class voting rights corresponding to those for
the shares of Class B Stock and Class C Stock as set forth in this Restated
Certificate of Incorporation); provided that the holders of shares of Class
B Stock and the holders of shares of Class C Stock shall receive securities
that do not differ in any respect other than differences corresponding to
the differences between the Class B Stock and Class C Stock as set forth in
this Restated Certificate of Incorporation; and
(ii) the holders of shares of Class D Stock may receive non-voting
securities (or non-voting Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase other non-voting
securities).
6. No Preemptive Rights. Holders of shares of Class A Stock, Class B Stock,
Class C Stock or Class D Stock shall not be entitled to preemptive rights.
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7. Conversion. (i) Optional Conversion. Each share of Class B Stock shall be
convertible, at the option of its holder, into one validly issued, fully paid
and non-assessable share of Class A Stock at any time. At the time of any
optional conversion of any shares of Class B Stock, the record holder of such
shares shall deliver to the principal office of the Corporation or any
transfer agent for shares of Class A Stock (x) the certificate or certificates
representing such record holder's shares of Class B Stock to be converted,
duly endorsed in blank or accompanied by proper instruments of transfer and
(y) written notice to the Corporation specifying the number of shares of Class
B Stock to be converted into shares of Class A Stock and stating the name or
names (with addresses) and denominations in which the certificate or
certificates representing the shares of Class A Stock issuable upon such
conversion are to be issued and including instructions for the delivery
thereof. Conversion shall be deemed to have been effected at the time when
delivery is made to the Corporation of both such written notice and the
certificate or certificates representing the shares of Class B Stock to be
converted (or in the event of the loss or destruction of such certificate or
certificates, such other documentation as the Corporation shall require for
the replacement of lost or destroyed stock certificates, as set forth in the
By-laws of the Corporation) or such later time as may be specified in such
written notice. As of the time of conversion, each Person named in the
applicable written notice to the Corporation in connection with such
conversion as the Person which shall be issued a certificate representing
shares of Class A Stock issued pursuant to such conversion shall be deemed to
be the holder of record of the number of shares of Class A Stock to be
evidenced by such certificate. Delivery of the certificates (or proper
documentation of lost or destroyed certificates) and written notice as
required in this paragraph to effect a conversion of shares of Class B Stock
into shares of Class A Stock shall obligate the Corporation to issue such
shares of Class A Stock, and thereupon the Corporation or its transfer agent
shall promptly issue and deliver to the record holder of such shares stated in
such written notice at the address set forth therein a certificate or
certificates representing the number of shares of Class A Stock to which such
record holder is entitled by reason of such conversion and shall cause such
shares of Class A Stock to be registered in the name of such record holder.
Each share of Class C Stock shall be convertible, at the option of its
holder, into one validly issued, fully paid and non-assessable share of Class
B Stock at any time. At the time of any optional conversion of any shares of
Class C Stock, the record holder of such shares shall deliver to the principal
office of the Corporation or any transfer agent for shares of Class B Stock
(x) the certificate or certificates representing such record holder's shares
of Class C Stock to be converted, duly endorsed in blank or accompanied by
proper instruments of transfer and (y) written notice to the Corporation
specifying the number of shares of Class C Stock to be converted into shares
of Class B Stock and stating the name or names (with addresses) and
denominations in which the certificate or certificates representing the shares
of Class B Stock issuable upon such conversion are to be issued and including
instructions for the delivery thereof. Conversion shall be deemed to have been
effected at the time when delivery is made to the Corporation of both such
written notice and the certificate or certificates representing the shares of
Class C Stock to be converted (or in the event of the loss or destruction of
such certificate or certificates, such other documentation as the Corporation
shall require for the replacement of lost or destroyed stock certificates, as
set forth in the By-laws of the Corporation) or such later time as may be
specified in such written notice. As of the time of conversion, each Person
named in the applicable written notice to the Corporation in connection with
such conversion as the Person which shall be issued a certificate representing
shares of Class B Stock issued pursuant to such conversion shall be deemed to
be the holder of record of the number of shares of Class B Stock to be
evidenced by such certificate. Delivery of the certificates (or proper
documentation of lost or destroyed certificates) and written notice as
required in this paragraph to effect a conversion of shares of Class C Stock
into shares of Class B Stock shall obligate the Corporation to issue such
shares of Class B Stock, and thereupon the Corporation or its transfer agent
shall promptly issue and deliver to the record holder of such shares stated in
such written notice at the address set forth therein a certificate or
certificates representing the number of shares of Class B Stock to which such
record holder is entitled by reason of such conversion and shall cause such
shares of Class B Stock to be registered in the name of such record holder.
Class A Stock and Class D Stock shall not be convertible at any time except,
in the case of Class D Stock, as provided in paragraph (ii) of this Subsection
(b)7.
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(ii) Mandatory and Automatic Conversion. Each share of Class C Stock issued
and outstanding shall, without any further act on the part of the holder
thereof or the Corporation, be mandatorily and automatically converted into
one share of Class B Stock upon the tenth anniversary of the Effective Date.
Each share of Class D Stock issued and outstanding shall, without any
further act on the part of the holder thereof or the Corporation, be
mandatorily and automatically converted into one share of Class A Stock upon
Transfer of such share to any Person other than American Sky Broadcasting LLC,
a Delaware limited liability company ("ASkyB"), The News Corporation Limited,
a South Australia corporation ("News Corp"), or any Affiliate (as defined
herein) of ASkyB or News Corp.
Each mandatory and automatic conversion pursuant to this paragraph (ii)
shall be deemed to have been effected at the time of the event causing such
conversion as set forth in this paragraph (ii). At and as of such time, the
Person entitled to receive the shares of Common Stock of the Corporation
issuable upon such conversion shall be treated for all purposes as the record
holder of such shares, and the rights of such Person as a holder of the shares
of Common Stock which shall have been mandatorily and automatically converted
as provided in this paragraph (ii) shall cease and terminate at and as of such
times and upon surrender to the Corporation of certificates formerly
representing such shares, the Corporation shall execute and deliver, without
charge to such Person, new certificates evidencing the shares of Common Stock
that such surrendered certificates then represent.
(iii) Unconverted Shares. In the event of the conversion of fewer than all
of the shares of Class B Stock, Class C Stock or Class D Stock, as applicable,
evidenced by a certificate surrendered to the Corporation as provided in
paragraph (i) or (ii) of this Subsection (b)7, the Corporation shall execute
and deliver upon the written order of the holder of such unconverted shares,
without charge to such holder, a new certificate evidencing the number of
shares of Common Stock of the Corporation not converted.
(iv) Reservation. The Corporation hereby reserves and shall at all times
reserve and keep available out of its authorized and unissued shares of Class
A Stock and its authorized and unissued shares of Class B Stock, for purposes
of effecting conversions, such number of duly authorized shares of Class A
Stock and such number of duly authorized shares of Class B Stock as shall from
time to time be sufficient to effect the conversion of (x) all outstanding
shares of Class B Stock and Class D Stock into Class A Stock, (y) all
outstanding shares of Class C Stock into Class B Stock and (z) all shares of
Class B Stock issuable upon conversion of Class C Stock into Class A Stock.
The Corporation covenants that all shares of Class A Stock and Class B Stock
issuable upon conversion as provided for herein of any outstanding, validly
issued, fully paid and non-assessable shares of Class B Stock, Class C Stock
or Class D Stock, as applicable, shall, when so issued, be duly and validly
issued, fully paid and non-assessable.
8. Board of Directors. (i) Management of the Corporation. The business and
affairs of the Corporation shall be managed by or under the direction of the
Board. In addition to the powers and authority herein or by statute expressly
conferred upon them, the Board is hereby empowered to exercise all such powers
and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the provisions of the GCL, this
Restated Certificate of Incorporation and the By-laws of the Corporation
adopted by its stockholders; provided, however, that no By-laws hereafter
adopted by the stockholders shall invalidate any prior act of the Board which
would have been valid if such By-laws had not been adopted. The Board shall
have concurrent power with the stockholders to adopt, amend, alter or repeal
the By-laws of the Corporation; provided, however, that until the Class C
Termination Date (as defined herein), the Board shall have no power to adopt,
amend, alter or repeal the By-laws of the Corporation other than to amend or
repeal the following Sections of the By-laws of the Corporation: (i) Section 1
of Article I, (ii) Sections 8, 10, 11, 12 and 13 of Article II, (iii) Sections
14 and 17 of Article III, (iv) Section 2 of Article IV, (v) Sections 11 and 12
of Article V, (vi) all Sections of Article VI, and (vii) Sections 1, 2, 3 and
4 of Article VIII.
(ii) Number of Members; Qualification. Subject to any rights of the holders
of any series of Preferred Stock of the Corporation outstanding at any time to
elect additional directors to the Board, the Board shall consist
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of eleven members until the earlier to occur of (x) the tenth anniversary of
the Effective Date and (y) the date on which the Class C Stock voting as a
class shall not be entitled to elect a specified number of directors to the
Board as provided in paragraph (iv) of this Subsection (b)8 (such earlier
date, the "Class C Termination Date"). On and after the Class C Termination
Date, the number of members constituting the entire Board shall be fixed by,
or in the manner provided in, the By-laws of the Corporation. Any variation in
the number of directors required herein shall take effect as of the annual
stockholders' meeting for the election of the Board immediately following the
event that caused such variation or any special meeting that occurs between
such event and such annual meeting at which directors are to be elected;
provided that the determination of the number of B Directors, C Directors and
Common Directors (each, as defined herein) to be elected at any annual or
special stockholders' meeting shall be made as of the record date for such
meeting. Each director shall be at least 21 years of age. Directors need not
be stockholders of the Corporation.
(iii) B Directors. So long as at least 80% of the shares of Class B Stock
outstanding on the Effective Date shall remain outstanding, the Class B Stock
voting as a class shall be entitled to elect three directors to the Board
(each, a "B Director"). So long as less than 80% but at least 60% of the
shares of Class B Stock outstanding on the Effective Date shall remain
outstanding, the Class B Stock voting as a class shall be entitled to elect
two B Directors. So long as less than 60% but at least 40% of the shares of
Class B Stock outstanding on the Effective Date shall remain outstanding, the
Class B Stock voting as a class shall be entitled to elect one B Director. The
right of the Class B Stock voting as a class to elect a specified number of B
Directors shall terminate upon the earlier to occur of (x) the date on which
less than 40% of the shares of Class B Stock outstanding on the Effective Date
shall remain outstanding and (y) the Class C Termination Date. For purposes of
this Subsection (b)8(iii), the number of shares of Class B Stock outstanding
on the Effective Date shall be subject to adjustment as provided in Subsection
(b)10 of this Article VI.
(iv) C Directors. So long as at least 80% of the shares of Class C Stock
outstanding on the Effective Date shall remain outstanding, the Class C Stock
voting as a class shall be entitled to elect the lesser of (x) six directors
to the Board (each, a "C Director") and (y) the number of C Directors
determined by adding the then applicable Individual C Holder Caps (as defined
herein). So long as less than 80% but at least 66.7% of the shares of Class C
Stock outstanding on the Effective Date shall remain outstanding, the Class C
Stock voting as a class shall be entitled to elect the lesser of (x) five C
Directors and (y) the number of C Directors determined by adding the then
applicable Individual C Holder Caps. So long as less than 66.7% but at least
53.4% of the shares of Class C Stock outstanding on the Effective Date shall
remain outstanding, the Class C Stock voting as a class shall be entitled to
elect the lesser of (x) four C Directors and (y) the number of C Directors
determined by adding the then applicable Individual C Holder Caps. So long as
less than 53.4% but at least 40.1% of the shares of Class C Stock outstanding
on the Effective Date shall remain outstanding, the Class C Stock voting as a
class shall be entitled to elect the lesser of (x) three C Directors and (y)
the number of C Directors determined by adding the then applicable Individual
C Holder Caps. In the event that less than 40.1% of the shares of Class C
Stock outstanding on the Effective Date shall remain outstanding, the Class C
Stock voting as a class shall not be entitled to elect a specified number of C
Directors. The "Individual C Holder Caps" as of any date of determination
shall be as follows (for purposes of this definition, TWE and Newhouse (each,
as defined herein) together with their respective Affiliates, shall
collectively be deemed to be a single Class C Holder, and Class C Holders that
are Affiliates of one another shall collectively be deemed to be a single
Class C Holder): (A) three C Directors in respect of any Class C Holder that
is the record holder on such date of determination of a number of shares of
Class C Stock equal to 80% or more of the aggregate number of shares of Class
C Stock held of record by TWE and Newhouse on the Effective Date; (B) two C
Directors in respect of any Class C Holder that is the record holder on such
date of determination of a number of shares of Class C Stock that is less than
80% of the aggregate number of shares of Class C Stock held of record by TWE
and Newhouse on the Effective Date but greater than or equal to 160% of the
number of shares of Class C Stock held of record by the Smallest C (as defined
herein) on the Effective Date; and (C) one C Director in respect of any Class
C Holder that is the record holder on such date of determination of a number
of shares of Class C Stock that is less than 160% but greater than or equal to
80% of the number of shares of Class C Stock held of record by the Smallest C
on the Effective
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Date. For purposes of this Subsection (b)8(iv), the number of shares of Class
C Stock outstanding on the Effective Date shall be subject to adjustment as
provided in Subsection (b)10 of this Article VI.
(v) Common Directors. The Class A Stock, the Class B Stock and the Class C
Stock voting together as a single class shall be entitled to elect such number
of directors to the Board (each, a "Common Director") as equals the total
number of directors minus the number of B Directors and C Directors that the
Class B Stock and the Class C Stock shall respectively be entitled to elect at
any time as provided in paragraphs (iii) and (iv) of this Subsection (b)8. The
Board shall consist exclusively of Common Directors on and after the Class C
Termination Date. Unless and except to the extent that the By-laws of the
Corporation shall so require, the election of Common Directors need not be by
written ballot.
(vi) Nomination of Common Directors. Prior to the Class C Termination Date,
the Board's nominees for election as Common Directors shall be approved by the
affirmative vote of 83% of the B Directors and the C Directors then in office.
On and after the Class C Termination Date, the Board's nominees for election
as Common Directors shall be approved as provided in the By-laws of the
Corporation.
(vii) Removal of Directors. Subject to the rights of the holders of any
series of Preferred Stock of the Corporation outstanding at any time,
directors may be removed from office with cause (as defined herein) only upon
the affirmative vote of, prior to the Class C Termination Date, the holders of
record of at least 83%, and on and after the Class C Termination Date, the
holders of record of at least 66 2/3%, of the total voting power of the then
outstanding shares of Class A Stock, Class B Stock and Class C Stock voting
together as a single class. Subject to the rights of the holders of any series
of Preferred Stock of the Corporation outstanding at any time, directors may
be removed from office without cause only upon the affirmative vote of (x) in
the case of B Directors, the holders of record of at least 66 2/3% of the
total voting power of the then outstanding Class B Stock voting separately as
a class, (y) in the case of C Directors, the holders of record of at least 66
2/3% of the total voting power of the then outstanding Class C Stock voting
separately as a class and (z) in the case of Common Directors, prior to the
Class C Termination Date, the holders of at least 83%, and on and after the
Class C Termination Date, the holders of record of at least 66 2/3%, of the
total voting power of the then outstanding shares of Class A Stock, Class B
Stock and Class C Stock voting together as a single class. Except as may
otherwise be provided by applicable law, "cause" for removal of a director
shall exist only if (A) such director has been adjudicated mentally
incompetent, (B) such director has wilfully and continuously failed to
substantially perform such director's duties to the Corporation (other than
any such failure resulting from incapacity due to physical or mental illness)
or (C) such director has wilfully engaged in gross misconduct materially and
demonstrably injurious to the Corporation.
(viii) Filling of Newly Created Directorships and Vacancies. Subject to the
rights of holders of any series of Preferred Stock of the Corporation
outstanding at any time, (x) any newly created directorship for a B Director
or vacancy in the office of a B Director shall be filled either by (A) the
affirmative vote of a majority of the remaining B Directors or of the sole
remaining B Director, as the case may be, or, if the vacancy or newly created
directorship has not been so filled then (B) the holders of at least a
majority of the total voting power of the then outstanding Class B Stock
voting separately as a class, (y) any newly created directorship for a C
Director or vacancy in the office of a C Director shall be filled solely by
the affirmative vote of holders of at least 66 2/3% of the total voting power
of the then outstanding Class C Stock voting separately as a class and (z) any
newly created directorship for a Common Director or vacancy in the office of a
Common Director shall be filled solely by the affirmative vote of 83% of the B
Directors and the C Directors then in office if such newly created
directorship is created or such vacancy occurs prior to the Class C
Termination Date or by the affirmative vote of a majority of the remaining
directors then in office (even though less than a quorum) or by the sole
remaining Common Director, as the case may be, if such newly created
directorship is created or such vacancy occurs on or after the Class C
Termination Date. Any director elected pursuant to this paragraph (viii) to
fill a newly created directorship or vacancy shall serve the same remaining
term as that of his or her predecessor, if applicable, and until his or her
successor has been elected and has qualified.
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9. Stockholder Super-Majority Voting Rights. (i) Class B and Class C Class
Votes. Until the Class C Termination Date, none of the following actions may
be effected by the Corporation without, in addition to any other vote required
hereunder or by applicable law, the affirmative vote of the holders of record
of (x) a majority of the total voting power of the then outstanding shares of
Class B Stock and (y) 83% of the total voting power of the then outstanding
shares of Class C Stock, in each case voting separately as a class:
(I) the amendment, alteration or repeal of any provision of this Restated
Certificate of Incorporation, other than an amendment to Article III to
change the registered office or registered agent of the Corporation, and
other than an amendment effected pursuant to Section 151(g) of the GCL (or
any successor provision thereto);
(II) the amendment, alteration or repeal of any provision of the By-laws
of the Corporation; provided, that the Board may without stockholder
approval, and the stockholders by the affirmative vote of the holders of
record of a majority of the total voting power of the then outstanding
Class A Stock, Class B Stock and Class C Stock voting together as a single
class may, amend or repeal the Sections of the By-laws of the Corporation
listed in Subsection (b)8(i) of this Article VI;
(III) except as otherwise provided in Section 253 of the GCL (or any
successor provision thereto), the merger or consolidation of the
Corporation or any of its Subsidiaries (as defined herein) with or into any
Person (except the TSAT Merger (as defined herein) and except a merger
between direct or indirect wholly owned subsidiaries of the Corporation or
a merger between a direct or indirect wholly owned subsidiary of the
Corporation and the Corporation if the Corporation is the surviving entity
of such merger and there is no change in any class or series of outstanding
capital stock of the Corporation nor any amendment to this Restated
Certificate of Incorporation);
(IV) (x) the disposition, directly or indirectly, by the Corporation (or
by one or more direct or indirect subsidiaries thereof) by sale, merger,
new issuances or otherwise, to a Person (other than the Corporation or a
direct or indirect wholly owned subsidiary of the Corporation) of shares of
the capital stock of one or more direct or indirect Subsidiaries of the
Corporation or (y) the disposition, directly or indirectly, by the
Corporation (or by one or more direct or indirect subsidiaries thereof) by
sale, merger or otherwise, (other than to the Corporation or a direct or
indirect wholly owned subsidiary of the Corporation) in any transaction or
series of transactions outside the ordinary course of the business of the
Corporation, of all or substantially all of the assets of the Corporation
and its Subsidiaries on a consolidated basis, except for pledges, grants of
security interests, security deeds, mortgages or similar encumbrances
securing bona fide indebtedness;
(V) the dissolution or liquidation of the Corporation;
(VI) the authorization or issuance by the Corporation of shares of any
series or class of capital stock, securities convertible into or
exchangeable for shares of any series or class of capital stock or options,
warrants or other rights to acquire capital stock or such securities, other
than (A) the authorization or issuance of shares of any new or existing
class of Common Stock with no more than one vote per share, (B) the
authorization or issuance of shares of any series of non-convertible
Preferred Stock with no more than one vote per share, (C) the authorization
or issuance of any convertible Preferred Stock or other convertible or
exchangeable securities that are solely convertible into or exchangeable
for (x) Common Stock with no more than one vote per share and/or (y) other
Preferred Stock or convertible securities of the types described in clauses
(A) through (C) of this Subsection (b)9(i)(VI), (D) the authorization or
issuance of any options, warrants or other rights to acquire securities of
the types described in clauses (A) through (C) of this Subsection
(b)9(i)(VI) and (E) the authorization or issuance of any Common Stock or
Preferred Stock (including stock with more than one vote per share)
pursuant to any stock split or pro rata stock dividend or share
distribution, subject to the provisions of Subsections (b)2 and (b)3 of
this Article VI; and
(VII) the voluntary bankruptcy of the Corporation.
In addition to the foregoing, (1) the amendment, alteration or repeal of any
provision of the terms of the Class B Stock shall require the affirmative vote
of the holders of record of a majority of the total voting power of the then
outstanding shares of Class B Stock, voting separately as a class, and the
affirmative vote of the
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holders of record of, prior to the Class C Termination Date, 83%, and on and
after the Class C Termination Date, a majority, of the total voting power of
the then outstanding shares of Class C Stock, voting separately as a class and
(2) the amendment, alteration or repeal of any provision of the terms of the
Class C Stock shall require the affirmative vote of the holders of record of,
prior to the Class C Termination Date, 83%, and on and after the Class C
Termination Date, a majority, of the total voting power of the then
outstanding shares of Class C Stock, voting separately as a class. However,
without the affirmative vote of the holders of record of a majority of the
total voting power of the then outstanding shares of Class B Stock, voting
separately as a class, the terms of the Class C Stock shall not be amended or
altered to (x) increase the number of votes per share of Class C Stock over
the number of votes per share of Class B Stock, (y) provide for a preference
of the Class C Stock relative to the Class B Stock as to a payment of
dividends or on a liquidation or dissolution of the Corporation or (z) exempt
the Class C Stock but not the Class B Stock from the provisions of Article X
herein.
(ii) Super-Majority Vote. Prior to, on and after the Class C Termination
Date, none of the following actions may be effected by the Corporation
without, in addition to any other vote required hereunder or by applicable
law, the affirmative vote of the holders of record of at least 66 2/3% of the
total voting power of the then outstanding Class A Stock, Class B Stock and
Class C Stock voting together as a single class:
(I) the amendment, alteration or repeal of any provision of this Restated
Certificate of Incorporation, other than an amendment to Article III to
change the registered office or registered agent of the Corporation, and
other than an amendment effected pursuant to Section 151(g) of the GCL (or
any successor provision thereto);
(II) the amendment, alteration or repeal of any provision of the By-laws
of the Corporation; provided, that the Board may without stockholder
approval, and the stockholders by the affirmative vote of the holders of
record of a majority of the total voting power of the then outstanding
Class A Stock, Class B Stock and Class C Stock voting together as a single
class may, amend or repeal the Sections of the By-laws of the Corporation
listed in Subsection (b)8(i) of this Article VI;
(III) except as otherwise provided in Section 253 of the GCL (or any
successor provision thereto), the merger or consolidation of the
Corporation or any of its Subsidiaries with or into any Person (except the
TSAT Merger and except a merger between direct or indirect wholly owned
subsidiaries of the Corporation or a merger between a direct or indirect
wholly owned subsidiary of the Corporation and the Corporation if the
Corporation is the surviving entity of such merger and there is no change
in any class or series of outstanding capital stock of the Corporation nor
any amendment to this Restated Certificate of Incorporation);
(IV) (x) the disposition, directly or indirectly, by the Corporation (or
by one or more direct or indirect subsidiaries thereof) by sale, merger,
new issuances or otherwise, to a Person (other than the Corporation or a
direct or indirect wholly owned subsidiary of the Corporation) of shares of
the capital stock of one or more direct or indirect Subsidiaries of the
Corporation or (y) the disposition, directly or indirectly, by the
Corporation (or by one or more direct or indirect subsidiaries thereof) by
sale, merger or otherwise, (other than to the Corporation or a direct or
indirect wholly owned subsidiary of the Corporation) in any transaction or
series of transactions outside the ordinary course of the business of the
Corporation, of all or substantially all of the assets of the Corporation
and its Subsidiaries on a consolidated basis, except for pledges, grants of
security interests, security deeds, mortgages or similar encumbrances
securing bona fide indebtedness; and
(V) the dissolution or liquidation of the Corporation.
10. Share Number Adjustment. All references in Subsections (b)8(iii) and
b(8)(iv) of this Article VI to a number of shares of Class B Stock or Class C
Stock outstanding on the Effective Date (in each case, a "Share Number") shall
mean the applicable Share Number as adjusted, from time to time, on a
cumulative basis, as provided in the next sentence. If after the Effective
Date the Corporation (A) splits, subdivides, or combines its outstanding
shares of such Class B Stock or Class C Stock into a greater or smaller number
of shares, (B) issues by reclassification or recapitalization of such Class B
Stock or Class C Stock any shares of capital stock of the Corporation, or (C)
pays a dividend or makes a distribution on, such shares of Class B Stock or
Class C Stock in
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shares of Class B Stock or Class C Stock (as applicable), the applicable Share
Number as in effect immediately prior to such action shall be adjusted to
reflect the number of such shares that would have been outstanding on the
Effective Date had such action been taken on the Effective Date prior to
computation of such Share Number.
(c) Preferred Stock. Subject to the provisions herein, the Board is
expressly authorized to provide for the issuance of all or any shares of
Preferred Stock of the Corporation 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.
ARTICLE VII
Limitation on Directors' Liability; Directors' Indemnification.
(a) Limitation on Directors' Liability. To the fullest extent permitted by the
GCL as it presently exists and as amended from time to time, no director of the
Corporation shall be personally liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any repeal or modification of this Section (a) shall be prospective only and
shall not adversely affect any limitation, right or protection of a director of
the Corporation existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.
(b) Directors' Indemnification. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any Person that was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), by reason of the fact that such Person is or
was a director or officer of the Corporation or, while a director or officer
of the Corporation, is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
Person. Such right of indemnification shall inure whether or not the claim
asserted is based on matters which antedate the adoption of this Section (b).
Subject to the second sentence of the next paragraph, the Corporation shall be
required to indemnify or make advances (pursuant to the following paragraph)
to a Person in connection with a Proceeding (or part thereof) initiated by
such Person only if the initiation of such Proceeding (or part thereof) was
authorized by the Board.
The Corporation shall pay the expenses (including attorneys' fees) incurred
by any Person that is or was a director or officer of the Corporation or,
while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust, enterprise or
nonprofit entity, in defending any Proceeding in advance of its final
disposition; provided, however, that the payment of expenses incurred by such
a Person in advance of the final disposition of such Proceeding shall be made
only upon receipt of an undertaking by such Person to repay all amounts
advanced if it should be ultimately determined that such Person is not
entitled to be indemnified under this Section (b) or otherwise. If a claim for
indemnification or advancement of expenses under this Section (b) is not paid
in full within sixty (60) calendar days after a written claim therefor has
been received by the Corporation, the claimant may file suit to recover the
unpaid amount of such claim and, if successful in whole or in part, shall be
entitled to be paid the expense of prosecuting such claim. In any such action,
the Corporation shall have the burden of proving that the claimant was not
entitled to the requested indemnification or payment of expenses under
applicable law.
The rights conferred on any Person by this Section (b) shall not be
exclusive of any other rights which such Person may have or hereafter acquire
under any statute, provision of this Restated Certificate of Incorporation,
the By-laws of the Corporation, agreement, vote of stockholders or resolution
of disinterested directors or
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otherwise. The Corporation's obligation, if any, to indemnify any Person that
was or is serving at its request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, enterprise or
nonprofit entity shall be reduced by any amount such Person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit entity, as applicable.
Any amendment, modification or repeal of the foregoing provisions of this
Section (b) shall not adversely affect any right or protection hereunder of
any Person in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
(c) Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by or granted pursuant to
this Article VII shall, unless otherwise provided when authorized or ratified,
continue as to a Person who has ceased to be a director, officer, employee or
agent of the Corporation or other Person indemnified hereunder and shall inure
to the benefit of the heirs, executors and administrators of such Person.
ARTICLE VIII
Meetings of Stockholders; Books of the Corporation. (a) Meetings of
Stockholders. Meetings of stockholders may be held within or without the State
of Delaware as the By-laws of the Corporation may provide.
(b) Books of the Corporation. The books of the Corporation may be kept
(subject to any applicable provision contained in the GCL) within or without
the State of Delaware at such place or places as may be designated from time
to time by the Board or in the By-laws of the Corporation.
ARTICLE IX
Section 203 of the GCL. The Corporation shall not be governed by Section 203
of the GCL.
ARTICLE X
Restriction on Ownership. Notwithstanding any other provision in this
Restated Certificate of Incorporation to the contrary, but subject to the
provisions of any resolution or resolutions of the Board adopted pursuant to
Article VI creating any series of Preferred Stock of the Corporation,
outstanding shares of Common Stock, Preferred Stock or any other class or
series of stock of the Corporation shall always be subject to redemption by
the Corporation by action of the Board, if in the judgment of the Board such
action should be taken, pursuant to Section 151(b) of the GCL (or by any other
applicable provision of law), to the extent necessary to prevent the loss or
secure the reinstatement of any license or franchise from any governmental
agency held by the Corporation or any Subsidiary thereof to conduct any
portion of the business of the Corporation or such Subsidiary, which license
or franchise is conditioned upon some or all of the holders of the
Corporation's stock of any class or series possessing prescribed
qualifications. The terms and conditions of such redemption shall be as
follows:
(a) the redemption price of the shares to be redeemed pursuant to this
Article X shall be equal to the Fair Market Value (as defined herein) of
such shares;
(b) the redemption price of such shares may be paid in cash, Redemption
Securities (as defined herein) or any combination thereof;
(c) if less than all the shares held by Disqualified Holders (as defined
herein) are to be redeemed, the shares to be redeemed shall be selected in
such manner as shall be determined by the Board, which may include
selection first of the most recently purchased shares thereof, selection by
lot or selection in any other manner determined by the Board;
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(d) at least thirty (30) days' written notice of the Redemption Date (as
defined herein) shall be given to the record holders of the shares selected
to be redeemed (unless waived in writing by such holder), provided that the
Redemption Date may be the date on which written notice shall be given to
record holders if the cash or Redemption Securities necessary to effect the
redemption shall have been deposited in trust for the benefit of such
record holders and subject to immediate withdrawal by them upon surrender
of the stock certificates for their shares to be redeemed;
(e) from and after the Redemption Date, any and all rights of whatever
nature, which may be held by the owners of shares selected for redemption
(including without limitation any rights to vote or participate in
dividends declared on stock of the same class or series as such shares),
shall cease and terminate and they shall thenceforth be entitled only to
receive the cash or Redemption Securities payable upon redemption; and
(f) such other terms and conditions as the Board shall determine.
ARTICLE XI
Reservation of Rights. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Restated
Certificate of Incorporation, the By-laws of the Corporation or the laws of
the State of Delaware, and all rights herein conferred upon stockholders are
granted subject to such reservation.
ARTICLE XII
Definitions. The following terms used herein shall be defined as follows:
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly Controls, is under common Control with, or is
Controlled by such first Person, and shall include, with respect to Newhouse
and Cox, as applicable, (x) in the case of Newhouse, any Person that is a
lineal descendant (including adoptees) of Meyer and Rose Newhouse, and any
Person which is wholly owned, directly or indirectly, by one or more of such
lineal descendants, and in the case of Cox, any Person that is a lineal
descendant (including adoptees) of Governor James M. Cox, and any Person which
is wholly owned, directly or indirectly, by one or more of such lineal
descendants, (y) the trustee of a trust, or a custodian under the Uniform Gift
to Minors Act or similar fiduciary, the primary beneficiaries of which (or
primary income beneficiaries of which, in the case of a charitable remainder
or similar trust) include only the respective natural Persons described in
clause (x) above (provided that such trust may grant a general or special
power of appointment to any such Person and may permit trust assets to be used
to pay taxes, legacies and other obligations of the trust or the estate of any
such Person, payable by reason of the death of such Person, as applicable),
and (z) the executor, administrator, guardian or personal representative of
the estate of any of the respective natural Persons described in clause (x)
above. The term "affiliated" (whether or not capitalized) shall have a
correlative meaning.
"ASkyB" is defined in Subsection (b)7(ii) of Article VI herein.
"B Director" is defined in Subsection (b)8(iii) of Article VI herein.
"beneficial owner" is defined in Section (b)1 of Article VI herein.
"Board" is defined in Subsection (b)2 of Article VI herein.
"C Director" is defined in Subsection (b)8(iv) of Article VI herein.
"cause" is defined in Subsection (b)8(vii) of Article VI herein.
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"Class A Stock" is defined in Section (a) of Article VI herein.
"Class B Stock" is defined in Section (a) of Article VI herein.
"Class C Holder" means any record holder of shares of Class C Stock.
"Class C Stock" is defined in Section (a) of Article VI herein.
"Class C Termination Date" is defined in Subsection (b)8(ii) of Article VI
herein.
"Class D Stock" is defined in Section (a) of Article VI herein.
"Closing Price" on any day shall mean the reported last sales price regular
way or, in the case no such sale is reported on such day, the average of the
reported closing bid and asked prices regular way, in either case on the
principal United States registered securities exchange on which such stock is
listed or, if such stock is not listed on any such exchange, the last reported
sales price or bid quotation for such stock on the NASDAQ Stock Market or any
other inter-dealer quotation system then in general use or, if no such prices
or quotations are available, the fair market value on the day in question as
determined by the Board in good faith.
"Comcast" shall mean Comcast Corporation, a Pennsylvania corporation.
"Common Director" is defined in Subsection (b)8(v) of Article VI herein.
"Common Stock" is defined in Section (b) of Article VI herein.
"Control" shall mean, with respect to any Person, the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person (whether through ownership of securities,
partnership interests or other ownership interests, by contract, or
otherwise). The terms "Controlled", "Controlling" and similar variations shall
have correlative meanings.
"Convertible Securities" shall mean any securities of the Corporation (other
than any class of Common Stock) that are convertible into, exchangeable for or
evidence the right to purchase any shares of any class of Common Stock of the
Corporation, whether upon conversion, exercise, exchange, pursuant to anti-
dilution provisions of such securities or otherwise.
"Corporation" is defined in the preamble hereto.
"Cox" shall mean Cox Communications, Inc., a Delaware corporation.
"Disqualified Holder" shall mean any holder of shares of stock of the
Corporation of any class or series whose holding of such stock may result in
the loss of any license or franchise from any governmental agency held by the
Corporation or any Subsidiary thereof to conduct any portion of the business
of the Corporation or such Subsidiary.
"Effective Date" shall mean the date upon which this Restated Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware.
"Fair Market Value" of a share of the Corporation's stock of any class or
series shall mean the average (unweighted) Closing Price (as defined herein)
for such share for each of the thirty (30) most recent days on which shares of
stock of such class or series shall have been traded preceding the day on
which notice of redemption shall be given pursuant to Article X herein;
provided, however, that if shares of stock of such class or series are not
traded on any securities exchange, on the NASDAQ Stock Market or in the over-
the-counter market, "Fair Market Value" shall be determined by the Board in
good faith; and provided that "Fair Market Value" as to any stockholder that
purchased its stock within one hundred and twenty (120) days from a
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Redemption Date need not (unless otherwise determined by the Board) exceed the
purchase price paid by such stockholder.
"GCL" is defined in the preamble hereto.
"Individual C Holder Caps" is defined in Subsection (b)8(iv) of Article VI
herein.
"MediaOne" shall mean MediaOne of Delaware, Inc., a Delaware corporation.
"Newhouse" shall mean Advance/Newhouse Partnership, a New York general
partnership.
"News Corp" is defined in Subsection (b)7(ii) of Article VI herein.
"Person" is defined in Subsection (b)2 of Article VI herein.
"Proceeding" is defined in Subsection (b) of Article VII herein.
"Redemption Date" shall mean the date fixed by the Board for the redemption
of any shares of stock of the Corporation pursuant to Article X herein.
"Redemption Securities" shall mean any debt or equity securities of the
Corporation, any Subsidiary thereof or any other corporation or any
combination thereof, having such terms and conditions as shall be approved by
the Board and which, together with any cash to be paid as part of the
redemption price, in the opinion of any nationally recognized investment
banking firm selected by the Board (which may be a firm which provides other
investment banking, brokerage or other services to the Corporation), has a
value, at the time notice of redemption is given pursuant to Article X herein,
at least equal to the Fair Market Value of the shares to be redeemed pursuant
to Article X herein (assuming, in the case of Redemption Securities to be
publicly traded, such Redemption Securities were fully distributed and subject
only to normal trading activity).
"Satellite Television Business" is defined in Article V herein.
"share distribution" is defined in Subsection (b)2 of Article VI herein.
"Smallest C" means any one of MediaOne (together with its Affiliates), Cox
and Comcast, being the beneficial owner of the lowest number of outstanding
shares of Class C Stock among such Persons as of the Effective Date.
"Subsidiary" of the Corporation shall mean (i) a corporation in which the
Corporation, directly or indirectly, owns capital stock having a majority of
the voting power of such corporation's capital stock to elect directors under
ordinary circumstances and (ii) any other Person (other than a corporation) in
which the Corporation, directly or indirectly, has (x) a majority ownership
interest or (y) the power to elect or direct the election of a majority of the
members of the governing body of such Person.
"Transfer" shall mean to sell, transfer, assign or otherwise dispose of,
without retention of any rights.
"TSAT Merger" shall mean the merger of TCI Satellite Entertainment, Inc.,
with and into the Corporation, pursuant to the Agreement and Plan of Merger
dated as of February 6, 1998, between TCI Satellite Entertainment, Inc. and
the Corporation.
"TWE" shall mean Time Warner Entertainment Company, L.P., a Delaware limited
partnership.
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IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be duly executed this day of [ ], 1998.
PRIMESTAR, INC., a Delaware
corporation,
by
----------------------------------
Name:
Title:
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APPENDIX F
BY-LAWS
OF
PRIMESTAR, INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
Offices and Agent
Section 1. Registered Office and Agent. The address of the registered office
of the Corporation in the State of Delaware is the office of The Prentice-Hall
Corporation System, Inc., 1013 Centre Road, Wilmington, New Castle, Delaware
19805. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
Section 2. Other Offices. The Corporation may also have offices at other
places, either within or without the State of Delaware, as the Board of
Directors of the Corporation (the "Board") may from time to time determine or
as the business of the Corporation shall require.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meetings. Meetings of the stockholders for the election
of directors or for any other purpose shall be held at any place, either
within or without the State of Delaware, as shall be designated from time to
time by the Board and stated in the notice of meeting or in a duly executed
waiver of notice thereof. Adjournments of meetings may be held at the place at
which the meeting adjourned is being held, or at any other place determined by
the Board and announced at the meeting being adjourned, whether or not a
quorum shall have been present at such meeting.
Section 2. Annual Meetings. To the extent required by applicable law or the
Restated Certificate of Incorporation of the Corporation, an annual meeting of
the stockholders for the election of directors and the transaction of such
other business as may properly come before the meeting shall be held at such
time and on such date as shall be determined by the Board and stated in the
notice of the meeting.
Section 3. Special Meetings. Except as otherwise provided by applicable law
or by the Restated Certificate of Incorporation of the Corporation, special
meetings of the stockholders, for any purpose or purposes, shall be called
only (i) upon written request of the holders of not less than a majority of
the total voting power of the outstanding capital stock of the Corporation
entitled to vote at such meeting or (ii) upon request of not less than 50% of
the entire Board. Special meetings of the stockholders may be held at such
time and place as may be stated in the notice of meeting.
Section 4. Notice of Meetings. Written notice of stockholder meetings,
stating the time, place and date, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given by the
Chairman of the Board, the President, any Vice President, the Secretary or an
Assistant Secretary to each stockholder entitled to vote at such meeting, at
least ten days but not more than sixty days before the date of the meeting,
unless a different period is prescribed by applicable law.
Section 5. Quorum. Except as otherwise provided by applicable law or by the
Restated Certificate of Incorporation of the Corporation, the holders of a
majority in total voting power of the outstanding capital stock
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of the Corporation entitled to vote at a meeting of the stockholders, present
in person or represented by proxy, shall constitute a quorum for the
transaction of business at any annual or special meeting of the stockholders;
provided, that where a separate vote by a class or series of capital stock is
required, the holders of a majority in total voting power of the outstanding
capital stock of such class or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to such
vote on such matter. In the absence of a quorum, the Chairman of the meeting
or the holders of a majority in total voting power of the capital stock
entitled to vote thereat, that are present in person or represented by proxy,
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting of the time and place of the adjourned
meeting, until a quorum shall be present or represented. At such adjourned
meeting, any business may be transacted which may have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a
written notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting not less than ten nor more than sixty days
before the date of the meeting, unless a different period is prescribed by
applicable law.
Section 6. Proxies. Any stockholder entitled to vote at a meeting of the
stockholders may do so in person or by proxy appointed by such stockholder or
by such stockholder's attorney thereto authorized, and bearing a date not more
than three years prior to such meeting, unless such instrument provides for a
longer period. All proxies must be filed with the Secretary of the Corporation
at the beginning of the applicable meeting in order to be counted in any vote
at such meeting.
Section 7. Voting. Except as otherwise provided by applicable law, the
Restated Certificate of Incorporation of the Corporation or these By-laws, and
except for the election of directors, any question brought before any meeting
of the stockholders at which a quorum is present shall be decided by the
affirmative vote of the holders of a majority of the total number of votes of
the capital stock present in person or represented by proxy and entitled to
vote on the applicable subject matter.
Section 8. Organization; Order of Business. (a) At every meeting of
stockholders, the Chairman of the Board, or in such person's absence, the
President, or in the absence of both of them, any Vice President, shall act as
Chairman of the meeting. In the absence of the Chairman of the Board, the
President, and all Vice Presidents, the Board, or if the Board fails to act,
the stockholders may appoint any stockholder, director or officer of the
Corporation to act as Chairman of any meeting. The Secretary of the
Corporation shall act as Secretary of the meeting, but in the absence of the
Secretary, the Chairman of the meeting may appoint any person to act as
Secretary of the meeting.
(b) (1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at any annual meeting of the stockholders, only (i) pursuant to
the Corporation's notice of meeting, (ii) by or at the direction of the Board
of Directors of the Corporation or (iii) by any stockholder who is a holder of
record at the time of the giving of the notice provided for in this Section 8,
who is entitled to vote at the meeting and who complies with the procedures
set forth in this Section 8.
(2) For nominations or business properly to be brought before an annual
meeting by a stockholder, the stockholder must have given timely notice
thereof in proper written form to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 70 days nor
more than 120 days prior to the anniversary date of the immediately preceding
annual meeting; provided, however, that in the event that the date of the
annual meeting is more than 30 days earlier or more than 60 days later than
such anniversary date, notice by the stockholder to be timely must be so
delivered or received not earlier than the 120th day prior to such annual
meeting and not later than the close of business on the later of the 70th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made. To be in proper
written form, a stockholder's notice to the Secretary of the Corporation shall
set forth in writing as to each matter the stockholder proposes to bring
before the annual meeting: (i) as to each person whom the stockholder proposes
to nominate for election or re-election as a director, all information
relating to such person that is required to be disclosed in
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solicitations of proxies for election of directors in an election contest, or
is otherwise required pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the annual meeting
and the reasons for conducting such business at the annual meeting and in the
event that such business includes a proposal to amend the by-laws of the
Corporation, the language of the proposed amendment; (iii) the name and
address, as they appear on the Corporation's books, of the stockholder
proposing such business; (iv) the class or series and number of shares of the
Corporation which are beneficially owned by the stockholder; (v) any material
interest of the stockholder in such business; (vi) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such annual meeting and intends to appear in person or by proxy at such
meeting to propose such business; and (vii) if the stockholder intends to
solicit proxies in support of such stockholder's proposal, a representation to
that effect. The foregoing notice requirements shall be deemed satisfied by a
stockholder if the stockholder has notified the Corporation of his or her
intention to make a nomination or present a proposal at an annual meeting and
such stockholder's nominee or proposal has been included in a proxy statement
that has been prepared by management of the Corporation to solicit proxies for
such annual meeting; provided, however, that if such stockholder does not
appear or send a qualified representative to present such nominee or proposal
at such annual meeting, the Corporation need not present such nominee or
proposal for a vote at such meeting notwithstanding that proxies in respect of
such vote may have been received by the Corporation.
(c) Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors of the Corporation may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder who is a holder
of record at the time of the giving of notice provided for in this Section 8,
who is entitled to vote at the meeting and who complies with the procedures
set forth in this Section 8. In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to
the Board of Directors of the Corporation, any such stockholder may nominate a
person or persons (as the case may be), for election to such position(s) as
specified in the Corporation's notice of meeting, if the stockholder has given
timely notice thereof in proper written form to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
earlier than the 120th day prior to such special meeting and not later than
the close of business on the later of the 70th day prior to such annual
meeting or the 10th day following the day on which public announcement of the
date of such meeting is first made. To be in proper written form, such notice
must meet the requirements of either of the last two sentences of paragraph
(b)(2) above.
(d) Only such persons who are nominated in accordance with this Section 8
(including, for avoidance of doubt, pursuant to the last sentence of paragraph
(b)(2) above) shall be eligible to serve as directors of the Corporation and
only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set
forth in this Section 8 (including, for avoidance of doubt, pursuant to the
last sentence of paragraph (b)(2) above). The Chairman of a meeting shall
refuse to permit any business to be brought before the meeting which fails to
comply with the foregoing or if a stockholder solicits proxies in support of
such stockholder's nominee or proposal without such stockholder having made
the representation required by clause (vii) of paragraph (b)(2) above.
Section 9. Action by Written Consent. Except as otherwise provided by
applicable law or by the Restated Certificate of Incorporation of the
Corporation, any action required or permitted to be taken at any annual or
special meeting of the stockholders may be taken without a meeting, without
prior notice and without a vote if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holders of outstanding stock
of the Corporation having not less than the minimum number of votes that would
be necessary to authorize
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<PAGE>
or take such action at a meeting at which all shares of stock of the
Corporation entitled to vote thereon were present and voted.
Section 10. Voting List. The officer of the Corporation who has charge of
the stock ledger of the Corporation shall prepare and make, at least ten days
before every meeting of the stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the
name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder of the Corporation who is present.
Section 11. Stock Ledger. The stock ledger of the Corporation shall be the
only evidence as to the identity of the stockholders entitled to examine the
stock ledger, the list required by Section 10 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 12. Record Date. In order that the Corporation may determine the
stockholders entitled to (i) notice of or to vote at any meeting of the
stockholders or any adjournment thereof, (ii) unless otherwise provided in the
Restated Certificate of Incorporation of the Corporation, express consent to
corporate action by written consent without a meeting or (iii) receive payment
of any dividend or other distribution or allotment of any rights, or entitled
to exercise any rights in respect of any change, conversion, or exchange of
stock, or (iv) for the purpose of any other lawful action, the Board may fix a
record date, which shall not precede the date upon which the resolution fixing
the record date is adopted by the Board and which record date shall, unless
otherwise required by law, not be: (a) in the case of clause (i) above, more
than sixty nor less than ten days before the date of such meeting, (b) in the
case of clause (ii) above, more than ten days after the date upon which the
resolution fixing the record date was adopted by the Board, and (c) in the
case of any other action, more than sixty days prior to such other action. If
no record date is fixed: (a) the record date for determining stockholders
entitled to notice of or to vote at a meeting of the stockholders shall be at
the close of business on the day next preceding the day on which notice is
given, or if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (b) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting (unless otherwise provided in the Restated
Certificate of Incorporation of the Corporation), when no prior action by the
Board is required under the General Corporation Law of the State of Delaware,
as amended from time to time (the "General Corporation Law"), shall be the
first day on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded; and when prior action by
the Board is required under the General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board adopts the resolution taking such prior action; and (c) the record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at
a meeting of the stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
Section 13. Inspectors of Election. The Corporation may, and at the request
of any stockholder or if required by law shall, before or at each meeting of
stockholders, appoint one or more inspectors of elections to act at the
meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of the
stockholders, the Chairman of the meeting may, and at the request of any
stockholder or if required by law shall, appoint one or more inspectors to act
at the meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality
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and according to the best of his or her ability. The inspector or inspectors
so appointed or designated shall (i) ascertain the number of outstanding
shares of capital stock of the Corporation and the voting power of each such
share, (ii) determine the shares of capital stock of the Corporation
represented at the meeting and the validity of proxies and ballots, (iii)
count all votes and ballots, (iv) determine and retain for a reasonable period
a record of the disposition of any challenges made to any determination by the
inspectors and (v) certify their determination of the number of shares of
capital stock of the Corporation represented at the meeting and such
inspectors' count of all votes and ballots. Such certification and report
shall specify such other information as may be required by law. In determining
the validity and counting of proxies and ballots cast at any meeting of the
stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office
at an election may serve as an inspector at such election.
ARTICLE III
Board of Directors
Section 1. General Powers. The business of the Corporation shall be managed
by or under the direction of the Board. In addition to the powers and
authority herein or by statute expressly conferred upon them, the directors
are hereby empowered to exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation, subject, nevertheless,
to the provisions of applicable law, the Restated Certificate of Incorporation
of the Corporation and these By-laws; provided, however, that no By-laws
hereafter adopted by the stockholders shall invalidate any prior act of the
directors which would have been valid if such By-laws had not been adopted.
Section 2. Number of Directors. Subject to any rights of the holders of any
series of Preferred Stock of the Corporation outstanding at any time to elect
additional directors to the Board, the Board shall consist of eleven members,
and shall be comprised of B Directors, C Directors and Common Directors (each
as defined in the Restated Certificate of Incorporation of the Corporation)
until the Class C Termination Date (as defined in the Restated Certificate of
Incorporation of the Corporation). On and after the Class C Termination Date,
the Board shall consist of not less than three members, the exact number of
which shall from time to time be determined by resolution of the Board.
Section 3. Election of Directors. (a) Capitalized terms used in this Section
3 shall have the meanings assigned in the Restated Certificate of
Incorporation of the Corporation. Except as otherwise required by statute or
by the Restated Certificate of Incorporation of the Corporation, (i) B
Directors, if any, shall be elected by a plurality of the votes cast at a
meeting of stockholders by the holders of shares of Class B Stock entitled to
vote in the election of the B Directors; (ii) C Directors, if any, shall be
elected by a plurality of the votes cast at a meeting of stockholders by the
holders of shares of Class C Stock entitled to vote in the election of C
Directors; and (iii) Common Directors shall be elected by a plurality of the
votes cast at a meeting of stockholders by the holders of shares of Class A
Stock, Class B Stock and Class C Stock entitled to vote in the election of the
Common Directors.
(b) Subject to the provisions of the Restated Certificate of Incorporation
of the Corporation and to this Article III, each director shall serve until
the next succeeding annual meeting of stockholders and until his or her
respective successor has been duly elected and qualified.
Section 4. Nomination of Common Directors. Prior to the Class C Termination
Date, the Board's nominees for election as Common Directors shall be approved
in accordance with Subsection (b)8(vi) of Article VI of the Restated
Certificate of Incorporation of the Corporation. On and after the Class C
Termination Date, the Board's nominees for election as Common Directors shall
be approved by a simple majority of the Board.
Section 5. Resignations. Any director of the Corporation may resign at any
time, by giving written notice to the Board, the Chairman of the Board, the
President or the Secretary of the Corporation. Such resignation shall take
effect after receipt of the applicable written notice of resignation by the
Board, the Chairman of the
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Board, the President or the Secretary of the Corporation at the time specified
in such written notice or, if no time is specified, immediately upon receipt
of such written notice by the Board, the Chairman of the Board, the President
or the Secretary of the Corporation. Unless otherwise specified in such
notice, the acceptance of such resignation shall not be necessary to make it
effective.
Section 6. Removal of Directors. Directors may only be removed as provided
in Subsection (b)8(vii) of Article VI of the Restated Certificate of
Incorporation of the Corporation.
Section 7. Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of directors and any
vacancy on the Board occurring for any other reason shall be filled in
accordance with Subsection (b)8(viii) of Article VI of the Restated
Certificate of Incorporation of the Corporation.
Section 8. Chairman of the Board. The directors shall elect one of their
members to be Chairman of the Board. The Chairman of the Board shall perform
such duties as may from time to time be assigned by the Board. The Chairman of
the Board shall be subject to the control of and may be removed from such
office by the Board.
Section 9. Annual Meetings. The Board shall meet for the election of
officers and the transaction of other business as soon as practicable after
each annual meeting of the stockholders, and no notice of such meeting shall
be necessary in order legally to constitute the meeting, provided a quorum is
present. Such meeting may be held at any other time or place specified in a
notice given as hereinafter provided for regular meetings of the Board.
Section 10. Regular Meetings. The Board may hold meetings, both regular and
special, either within or without the State of Delaware. Regular meetings of
the Board may be held at such time and at such place as may from time to time
be determined by the Board. Notice of each regular meeting shall be furnished
in writing to each member of the Board not less than five days in advance of
such meeting, unless such notice requirement is waived in writing by each such
member.
Section 11. Special Meetings. Special meetings of the Board may be called by
the Chairman of the Board, and shall be called by the President or the
Secretary of the Corporation upon the written request of not less than a
majority of the members of the Board then in office. Special meetings of the
Board shall be held at such time and place as shall be designated in the
notice of the meeting. The Secretary, or in his or her absence any other
officer of the Corporation, shall give each director notice of the time and
place of holding of special meetings of the Board by mail at least ten days
before the meeting, or by facsimile, telegram, cable or personal service at
least three days before the meeting, unless such notice requirement is waived
in writing by each director. Unless otherwise stated in the notice thereof,
any and all business shall be transacted at any meeting without specification
of such business in the notice.
Section 12. Quorum. Except as otherwise required by applicable law, the
Restated Certificate of Incorporation of the Corporation or these By-laws, at
all meetings of the Board, a majority of the entire Board shall constitute a
quorum for the transaction of business. If a quorum shall not be present at
any meeting of the Board, a majority of those present may adjourn the meeting
from time to time, without notice other than announcement at the meeting of
the time and place of the adjourned meeting, until a quorum shall be present.
For purposes of these By-laws, "the entire Board" means the total number of
directors which the Corporation would have if there were no vacancies or
unfilled newly created directorships.
Section 13. Manner of Acting. (a) Except as otherwise provided by applicable
law, the Restated Certificate of Incorporation of the Corporation or these By-
laws, and except for those matters that may be specified in the Restated
Certificate of Incorporation of the Corporation as requiring stockholder
approval, all matters presented to the Board (or a committee thereof) shall be
approved by the affirmative vote of a majority of the directors present at any
meeting of the Board (or such committee) at which there is a quorum (the
foregoing is referred to herein as a "simple majority").
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(b) Except as otherwise provided by applicable law, the Restated Certificate
of Incorporation of the Corporation or these By-laws, the Board may from time
to time, by resolution of a simple majority of the Board, specify, amend,
supplement, substitute, remove or add matters that may not be effected by the
Corporation without the affirmative vote of a simple majority of the Board.
Section 14. Organization. Meetings shall be presided over by the Chairman of
the Board, or in the absence of the Chairman of the Board, by such other
person as the directors may select. The Board shall keep written minutes of
its meetings. The Secretary of the Corporation shall act as Secretary of the
meeting, but in the absence of the Secretary, the Chairman of the meeting may
appoint any person to act as Secretary of the meeting.
Section 15. Action by Written Consent. Unless otherwise required by the
Restated Certificate of Incorporation of the Corporation or these By-laws, any
action required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, if all the members of the
Board or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the Board or
committee thereof.
Section 16. Meetings by Means of Conference Telephone. Unless otherwise
required by the Restated Certificate of Incorporation of the Corporation or
these By-laws, members of the Board, or any committee thereof, may participate
in a meeting of the Board or such committee by means of a conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this Section 16 shall constitute presence in person at such
meeting.
Section 17. Compensation. The directors shall receive such compensation for
attendance at any meetings of the Board and any expenses incidental to
performance of their duties as the Board shall from time to time determine by
resolution. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
Committees
Section 1. Constitution and Powers. Except as provided by applicable law,
the Restated Certificate of Incorporation of the Corporation or these By-laws,
the Board may, by resolution of a simple majority of its members, designate
one or more committees. Except as provided in these By-laws, each committee
shall consist of one or more directors of the Corporation. Except as provided
by applicable law, the Restated Certificate of Incorporation of the
Corporation or these By-laws, the Board, by a simple majority vote of its
members, shall have the right from time to time to delegate to or to remove
from any board committee the authority to approve any matters which would not
otherwise require a higher vote than a simple majority vote of the Board.
Except as required by applicable law, the Restated Certificate of
Incorporation of the Corporation or these By-laws, for those matters that
require a higher vote of the Board than a simple majority vote, the Board, by
such requisite higher vote, shall have the right from time to time to delegate
to or to remove from any board committee the authority to approve any such
matters requiring such requisite higher vote.
Section 2. Organization of Committees. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the Board to
act at the meeting in place of any such absent or disqualified member. Each
committee that may be established by the Board may fix its own rules and
procedures. All committees so appointed shall keep regular minutes of the
transactions of their meetings and shall be responsible to the Board for the
conduct of the enterprises and affairs entrusted to them. Notice of meetings
of committees, other than of regular meetings provided for by such rules,
shall be given to committee members.
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Section 3. Executive Committee. The Board, by the affirmative vote of, prior
to the Class C Termination Date (as defined in the Restated Certificate of
Incorporation of the Corporation), all the members of the entire Board, and on
and after the Class C Termination Date, a simple majority of the Board, may
designate an executive committee of the Board to manage and operate the
affairs of the Corporation. Except as provided by applicable law, the Restated
Certificate of Incorporation of the Corporation or these By-laws, such
executive committee shall exercise all powers and authority of the Board in
the management of the business and affairs of the Corporation; provided,
however, that an executive committee shall not have the authority to approve
any matters which (pursuant to applicable law, the Restated Certificate of
Incorporation of the Corporation or these By-laws) require a higher vote than
a simple majority vote of the Board, unless the resolution establishing such
executive committee (or vesting such executive committee with such authority)
states otherwise and such resolution is approved by such requisite higher
vote. The executive committee shall report to the Board not less often than
quarterly.
ARTICLE V
Officers
Section 1. Officers. The Board shall elect a Chairman of the Board, a Chief
Executive Officer, a President, one or more Vice Presidents, a Chief Financial
Officer, a Treasurer and a Secretary. The Chairman of the Board and the
President shall be chosen from the Board. The Board may elect from time to
time such other officers as, in the opinion of the Board, are desirable for
the conduct of the business of the Corporation. Any two or more offices may be
held by the same person, provided, however, that the President shall not hold
any other office except that of Chairman of the Board and/or Chief Executive
Officer.
Section 2. Chairman of the Board. The Chairman of the Board, if present,
shall preside at all meetings of the stockholders and of the Board. The
Chairman of the Board may enter into and execute in the name of the
Corporation powers of attorney, contracts, bonds and other obligations which
implement policies established by the Board. The Chairman of the Board shall
be a senior officer of the Corporation and in case of the inability or failure
of the President to perform his or her duties, the Chairman of the Board shall
perform the duties of the President. In general, the Chairman of the Board
shall have all authority incident to the office of Chairman of the Board and
shall have such other authority and perform such other duties as may from time
to time be assigned by the Board.
Section 3. Chief Executive Officer. The Chief Executive Officer shall have
supervisory authority over the business, affairs and property of the
Corporation, and over the activities of the President and other executive
officers of the Corporation. In general, the Chief Executive Officer shall
have all authority incident to the office of Chief Executive Officer and shall
have such other authority and perform such other duties as may from time to
time be assigned by the Board. If the Board shall not have elected another
person to such office, the President shall be the Chief Executive Officer. If
so elected by the Board, the Chairman of the Board may be the Chief Executive
Officer.
Section 4. President. The President shall be the chief operating officer of
the Corporation and shall have general supervision of the daily business,
affairs and property of the Corporation. The President shall have the power to
appoint and terminate the appointment or election of officers, agents or
employees other than those appointed or elected by the Board. The President
may enter into and execute in the name of the Corporation powers of attorney,
contracts, bonds and other obligations which implement policies established by
the Board. In general, the President shall have all authority incident to the
office of President and chief operating officer and shall have such other
authority and perform such other duties as may from time to time be assigned
by the Board. The President shall, at the request or in the absence or
disability of the Chairman of the Board or the Chief Executive Officer,
perform the duties and exercise the powers of such officer.
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Section 5. Vice Presidents. The Vice Presidents shall have such powers and
shall perform such duties as may from time to time be assigned to them by the
Chairman of the Board, the President, the executive committee, if any, or the
Board. Without limiting the generality of the foregoing, Vice Presidents may
enter into and execute in the name of the Corporation contracts and other
obligations pertaining to the regular course of their duties which implement
policies established by the Board.
Section 6. Chief Financial Officer. The Chief Financial Officer shall be the
principal financial officer of the Corporation and shall have such powers and
perform such duties as may be assigned by the Chairman of the Board, the
President, the executive committee, if any, or the Board. Without limiting the
generality of the foregoing, the Chief Financial Officer may sign and execute
contracts and other obligations pertaining to the regular course of his or her
duties which implement policies established by the Board.
Section 7. Treasurer. The Treasurer shall, if required by the Chairman of
the Board, the President, the executive committee, if any, the Board or any
other officer to whom the Treasurer reports, give a bond for the faithful
discharge of duties, in such sum and with such sureties as may be so required.
Unless the Board otherwise declares by resolution, the Treasurer shall have
custody of, and be responsible for, all funds and securities of the
Corporation; receive and give receipts for money due and payable to the
Corporation from any source whatsoever; deposit all such money in the name of
the Corporation in such banks, trust companies, or other depositories as the
Board may designate; against proper vouchers, cause such funds to be disbursed
by check or draft on the authorized depositories of the Corporation signed in
such manner as shall be determined by the Board, and be responsible for the
accuracy of the amounts of all funds so disbursed; regularly enter or cause to
be entered in books to be kept by the Treasurer or under the Treasurer's
direction, full and adequate accounts of all money received and paid by the
Treasurer for the account of the Corporation; render to the Board, any duly
authorized committee of directors, the Chairman of the Board, the President or
any officer to whom the Treasurer reports, whenever they or any of them,
respectively, shall require the Treasurer to do so, an account of the
financial condition of the Corporation and of all transactions of the
Treasurer; and, in general, have all authority incident to the office of
Treasurer and such other authority and perform such other duties as from time
to time may be assigned by the Board. Any Assistant Treasurer shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall have such other duties and have such other
powers as the Board may from time to time prescribe.
Section 8. Secretary. The Secretary shall act as Secretary of all meetings
of the stockholders and of the Board; shall keep the minutes thereof in the
proper book or books to be provided for that purpose; shall see that all
notices required to be given by the Corporation in connection with meetings of
stockholders and of the Board are duly given; shall be the custodian of the
seal of the Corporation and shall affix the seal or cause it or a facsimile
thereof to be affixed to all certificates for stock of the Corporation and to
all documents or instruments requiring the same, the execution of which on
behalf of the Corporation is duly authorized in accordance with the provisions
of these By-laws; shall have charge of the stock records and also of the other
books, records and papers of the Corporation relating to its organization and
acts as a corporation, and shall see that the reports, statements and other
documents related thereto required by law are properly kept and filed, all of
which shall, at all reasonable times, be open to the examination of any
director; and shall, in general, have all authority incident to the office of
Secretary and such other authority and perform such other duties as from time
to time may be assigned by the Board.
Section 9. Removal. Any officer may be terminated or removed from office,
either with or without cause, by the Board at any meeting thereof or by
written consent, provided, however, that such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Section 10. Resignation. Any officer may resign at any time by giving
written notice to the Board, the Chairman of the Board, the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
time therein specified or if no time is specified, immediately. Unless
otherwise specified in such notice, the acceptance of such resignation shall
not be necessary to make it effective.
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Section 11. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause may be filled at any
time by the Board, or if such officer was appointed by the Chairman of the
Board or the President, then by the Chairman of the Board or the President, as
applicable.
Section 12. Bank Accounts. In addition to such bank accounts as may be
authorized in the usual manner by resolution of the Board, the Treasurer, with
approval of the Chairman of the Board or the President, may authorize such
bank accounts to be opened or maintained in the name and on behalf of the
Corporation as the Treasurer shall deem necessary or appropriate, provided
that payments from such bank accounts are to be made upon and according to the
check of the Corporation as shall be specified in the written instructions of
the Treasurer or Assistant Treasurer of the Corporation with the approval of
the Chairman of the Board or the President of the Corporation.
Section 13. Voting of Stock Held. Unless otherwise provided in the Restated
Certificate of Incorporation of the Corporation or directed by the Board, the
Chairman of the Board and the President may from time to time personally or by
an attorney or attorneys or agent or agents of the Corporation, in the name
and on behalf of the Corporation, cast the votes which the Corporation may be
entitled to cast as a stockholder or otherwise in any other corporation, any
of the stock or securities of which may be held by the Corporation, at
meetings of the holders of the stock or other securities of such other
corporation, or consent in writing to any action by any such other
corporation, and may instruct any person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause
to be executed on behalf of the Corporation and under its corporate seal, or
otherwise, such written proxies, consents, waivers or other instruments as the
Secretary may deem necessary or proper in the premises; or may attend any
meeting of the holders of stock or other securities of any such other
corporation and thereat vote or exercise any or all other powers of the
Corporation as the holder of such stock or other securities of such other
corporation.
ARTICLE VI
Capital Stock
Section 1. Form of Certificates. (a) Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board, the President, the Chief
Financial Officer, or any of the Vice Presidents and (ii) by the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him or her in the
Corporation.
(b) For each class or series of stock that the Corporation shall be
authorized to issue, the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences or rights shall be set forth in full or summarized on the face or
back of the certificate which the Corporation shall issue to represent each
class or series of stock, provided that, except as otherwise required by
Section 202 of the GCL, in lieu of the foregoing requirements, there may be
set forth on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, a statement that the
Corporation will furnish without charge to each stockholder that so requests
the powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences or rights.
Section 2. Signatures. Any or all signatures on the certificate may be a
facsimile. In case an officer, transfer agent or registrar that has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he or
she were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board may direct a new certificate to be
issued in place of any certificate theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making
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of an affidavit of the fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate
the Board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or
his or her legal representative, to advertise the same in such manner as the
Board shall require and/or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation and its transfer agents and registrars with respect to the
certificate alleged to have been lost, stolen or destroyed or the issuance of
such new certificate.
Section 4. Transfers. Except as otherwise prescribed by applicable law or by
the Restated Certificate of Incorporation of the Corporation, stock of the
Corporation shall be transferable in the manner prescribed in these By-laws.
Transfers of stock shall be made on the books of the Corporation only by the
person named in the certificate or by such person's duly authorized attorney
appointed by a power of attorney duly executed and filed with the Secretary of
the Corporation or a transfer agent of the Corporation, and upon surrender of
the certificate or certificates for such stock properly endorsed. Every
certificate exchanged, returned or surrendered shall be marked "Canceled,"
with the date of cancelation, by the Secretary or an Assistant Secretary of
the Corporation or the transfer agent thereof. No transfer of stock shall be
valid as against the Corporation, its stockholders or creditors for any
purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
Section 5. Transfer Agent and Registrar. The Board may appoint one or more
transfer agents and one or more registrars and may require all certificates
for shares to bear the manual or facsimile signature or signatures of any of
them.
Section 6. Beneficial Owners. The Corporation shall be entitled to recognize
the exclusive right of a person registered on its books as the owner of shares
to receive dividends, and to vote as such owner, and to hold liable for calls
and assessments a person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise required by law.
Section 7. Regulations. Except as otherwise provided by applicable law or in
the Restated Certificate of Incorporation of the Corporation, the Board shall
have the power and authority to make all such rules and regulations as it may
deem expedient concerning the issue, transfer, registration, cancelation and
replacement of certificates representing stock of the Corporation.
Section 8. Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions in the Restated Certificate of Incorporation of the
Corporation, may be declared by the Board at any regular or special meeting,
and may be paid in cash, in property, or in shares of the Corporation's
capital stock. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board from time to time, in its absolute discretion, deems proper as a reserve
or reserves to meet contingencies, or for purchasing any of the shares of
capital stock, warrants, rights, options, bonds, debentures, notes, scrip or
other securities or evidences of indebtedness of the Corporation, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any proper purpose, and the Board may modify or abolish
any such reserve.
ARTICLE VII
Indemnification
Section 1. Directors' Indemnification. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person that was or is made
or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), by reason of the fact that such person is or
was a director or officer of the Corporation or, while a director or officer
of the Corporation, is or
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was serving at the request of the Corporation as a director, officer, employee
or agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such person in connection with such
proceeding or any claim made in connection therewith. Such right of
indemnification shall inure whether or not the claim asserted is based on
matters which antedate the adoption of this Section 1 of Article VII. Subject
to the second sentence of the next paragraph, the Corporation shall be
required to indemnify or make advances to a person in connection with a
Proceeding (or part thereof) initiated by such person only if the initiation
of such Proceeding (or part thereof) was authorized by the Board.
The Corporation shall pay the expenses (including attorneys' fees) incurred
by any person that is or was a director or officer of the Corporation or,
while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust, enterprise or
nonprofit entity, in defending any Proceeding in advance of its final
disposition; provided, however, that the payment of expenses incurred by such
a person in defending any Proceeding in advance of its final disposition shall
be made only upon receipt of an undertaking by such person to repay all
amounts advanced if it should be ultimately determined that such person is not
entitled to be indemnified under this Section 1 of Article VII or otherwise.
If a claim for indemnification or payment of expenses under this Section 1 of
Article VII is not paid in full within sixty (60) calendar days after a
written claim therefor has been received by the Corporation, the claimant may
file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action, the Corporation shall have the burden of proving
that the claimant was not entitled to the requested indemnification or payment
of expenses under applicable law.
The rights conferred on any person by this Section 1 of Article VII shall
not be exclusive of any other rights which such person may have or hereafter
acquire under any statute, the Restated Certificate of Incorporation, these
By-laws, agreement, vote of stockholders or resolution of disinterested
directors or otherwise. The Corporation's obligation, if any, to indemnify any
person that was or is serving at its request as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, enterprise
or nonprofit entity shall be reduced by an amount such person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit entity, as applicable.
Any amendment, modification or repeal of the foregoing provisions of this
Section 1 of Article VII shall not adversely affect any right or protection
hereunder of any person in respect of any act or omission occurring prior to
the time of such amendment, modification or repeal.
Section 2. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by or granted pursuant to
this Article VII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent of the Corporation or other person indemnified hereunder and shall inure
to the benefit of the heirs, executors and administrators of such person.
ARTICLE VIII
General Provisions
Section 1. Books and Records. The books and record of the Corporation may be
kept at such places within or without the State of Delaware as the Board may
from time to time determine.
Section 2. Seal. The Board shall approve a corporate seal which shall be in
the form of a circle and shall bear the name of the Corporation, the year of
its incorporation and the word "Delaware". The seal may be used by causing it
or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
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Section 3. Fiscal Year. The fiscal year of the Corporation shall be
determined and may be changed by resolution of the Board.
Section 4. Notices and Waivers Thereof. (a) Whenever written notice is
required by applicable law, the Restated Certificate of Incorporation of the
Corporation or these By-laws to be given to any director, member of a
committee or stockholder, such notice may be given personally, or by mail, or
in the case of directors or officers, by facsimile transmission, addressed to
such address as appears on the books of the Corporation. Any notice given by
facsimile transmission shall be deemed to have been given upon confirmation of
receipt by the addressee.
(b) Whenever any notice is required by applicable law, the Restated
Certificate of Incorporation of the Corporation, or these By-laws, to be given
to any director, member of a committee or stockholder, a waiver thereof in
writing, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting, present in person or represented by
proxy, shall constitute a waiver of notice of such meeting, except where the
person attends the meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors needs to be
specified in any written waiver of notice unless so required by applicable
law, the Restated Certificate of Incorporation of the Corporation or these By-
laws.
Section 5. Amendments. (a) Subject to paragraph (b) of this Section 5, prior
to the Class C Termination Date, these By-laws or any provision herein may be
amended, altered or repealed only by the stockholders and as provided in the
Restated Certificate of Incorporation of the Corporation.
(b) Notwithstanding paragraph (a) above, the following provisions of these
By-laws may be amended, altered or repealed by the Board by the affirmative
vote of a simple majority of the Board: (i) Section 1 of Article I, (ii)
Sections 8, 10, 11, 12 and 13 of Article II, (iii) Sections 14 and 17 of
Article III, (iv) Section 2 of Article IV, (v) Sections 11 and 12 of Article
V, (vi) all Sections of Article VI, and (vii) Sections 1, 2, 3, and 4 of
Article VIII.
(c) On and after the Class C Termination Date, these By-laws or any
provisions herein may be amended, altered or repealed by (i) the Board by the
affirmative vote of not less than 75% of the members of the Board then in
office (but in no event less than a simple majority of the Board) or (ii)
subject to the rights of the holders of any series of preferred stock, the
stockholders by the affirmative vote of holders of record representing at
least 66 2/3% of the total voting power of the capital stock of the
Corporation then outstanding.
Section 6. Saving Clause. These By-laws are subject to the provisions of the
Restated Certificate of Incorporation of the Corporation and applicable law.
If any provision of these By-laws is inconsistent with the Restated
Certificate of Incorporation of the Corporation or the General Corporation
Law, such provision shall be invalid only to the extent of such conflict, and
such conflict shall not affect the validity of any other provision of these
By-laws.
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APPENDIX G
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STOCKHOLDERS AGREEMENT
DATED AS OF [ ] 1998,
AMONG
PRIMESTAR, INC.
TCI SATELLITE ENTERTAINMENT, INC.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
ADVANCE/NEWHOUSE PARTNERSHIP
COMCAST CORPORATION
COX COMMUNICATIONS, INC.
MEDIAONE OF DELAWARE, INC.
CONTINENTAL SATELLITE COMPANY, INC.
CONTINENTAL SATELLITE COMPANY OF CHICAGO, INC.
CONTINENTAL SATELLITE COMPANY OF MINNESOTA, INC.
CONTINENTAL SATELLITE COMPANY OF NEW ENGLAND, INC.
CONTINENTAL SATELLITE COMPANY OF OHIO, INC.
CONTINENTAL SATELLITE COMPANY OF MICHIGAN, INC.
CONTINENTAL SATELLITE COMPANY OF VIRGINIA, INC.
MEDIAONE SATELLITE II, INC.
GE AMERICAN COMMUNICATIONS, INC.
JOHN C. MALONE
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
Section 1. Definitions ................................................. 1
Section 2. Terms and Usage Generally ................................... 9
Section 3. Agreement to Vote and Not to Transfer or Convert............. 9
Section 4. Super-Majority Voting Agreement.............................. 10
Section 5. Stockholder Meetings and Actions by Written Consent.......... 10
Section 6. Grant of Irrevocable Proxy................................... 10
Section 7. Nomination of C Directors.................................... 11
Section 8. Nomination of B Directors.................................... 11
Section 9. Nomination of Common Directors............................... 11
Section 10. Removal of Directors......................................... 12
Section 11. Filling of Vacancies......................................... 12
Section 12. Restrictions on Conversion................................... 12
Section 13. Restrictions on Transfer..................................... 12
Section 14. Stop Transfer................................................ 14
Section 15. Legend....................................................... 15
Section 16. Mandatory Transfers.......................................... 15
Section 17. Right of First Refusal for Class B Stock..................... 16
Section 18. Right of First Refusal for Class C Stock..................... 19
Section 19. Claw Back Rights............................................. 23
Section 20. Closing Mechanics; Agreement to Cooperate.................... 24
Section 21. Initial Board Resolution..................................... 24
Section 22. Representations and Warranties............................... 24
Section 23. No Other Voting Agreements................................... 25
Section 24. Events of Default............................................ 25
Section 25. Remedies; Specific Performance............................... 25
Section 26. Covenants of the Company..................................... 26
Section 27. Term; Parties in Interest; Liability......................... 27
Section 28. Governing Law................................................ 27
Section 29. Exclusive Jurisdiction....................................... 27
Section 30. Notices...................................................... 27
Section 31. No Assignment................................................ 30
Section 32. Descriptive Headings......................................... 30
Section 33. Severability................................................. 30
Section 34. Amendments................................................... 31
Section 35. Share Number Adjustment...................................... 31
Section 36. Integration.................................................. 31
Section 37. Counterparts................................................. 31
</TABLE>
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STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of [ ], among
PRIMESTAR, INC., a Delaware corporation (the "Company"), TCI SATELLITE
ENTERTAINMENT, INC. ("TSAT"), TIME WARNER ENTERTAINMENT COMPANY, L.P., a
Delaware limited partnership ("TWE"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York
general partnership ("Newhouse"), COMCAST CORPORATION, a Pennsylvania
corporation ("Comcast"), COX COMMUNICATIONS, INC., a Delaware corporation
("Cox"), MEDIAONE OF DELAWARE, INC., a Delaware corporation ("MediaOne"),
CONTINENTAL SATELLITE COMPANY, INC., a Massachusetts corporation, CONTINENTAL
SATELLITE COMPANY OF CHICAGO, INC., an Illinois corporation, CONTINENTAL
SATELLITE COMPANY OF MINNESOTA, INC., a Minnesota corporation, CONTINENTAL
SATELLITE COMPANY OF NEW ENGLAND, INC., a New Hampshire corporation,
CONTINENTAL SATELLITE COMPANY OF MICHIGAN, INC., a Michigan corporation,
CONTINENTAL SATELLITE COMPANY OF OHIO, INC., an Ohio corporation, CONTINENTAL
SATELLITE COMPANY OF VIRGINIA, INC., a Virginia corporation, MEDIAONE
SATELLITE II, INC., a Delaware corporation, GE AMERICAN COMMUNICATIONS, INC.,
a Delaware corporation ("GE"), and JOHN C. MALONE ("Malone").
WHEREAS, each of TSAT, TWE, Newhouse, Comcast, Cox, MediaOne, GE, TSAT and
the Company are parties to a Merger and Contribution Agreement, dated as of
February 6, 1998 (the "Restructuring Agreement"), pursuant to which the
Restructuring Transaction (as defined therein) will be consummated by the
parties or their respective affiliates; and
WHEREAS, Malone is currently a stockholder of TSAT; and
WHEREAS, pursuant to the Restructuring Transaction, the Company has agreed
to issue to each of TSAT, TWE, Newhouse, Comcast, Cox, MediaOne and GE (or
their respective Affiliates) the shares of Common Stock of the Company listed
opposite each such Stockholder's name on Exhibit A hereto (the "Shares"); and
WHEREAS, in connection with the Restructuring Transaction and as a condition
thereof, the parties to this Agreement desire to enter into the arrangements
set forth in this Agreement regarding the voting, conversion and future
dispositions of shares of capital stock of the Company beneficially owned by
the Stockholders from time to time.
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Parties hereby agree as follows:
Section 1. Definitions. The following terms used herein shall have the
following definitions:
"Acquiring Class C Holder" is defined in Section 17(b)(ii).
"Acquiring Specified Class B Holder" is defined in Section 17(b)(i).
"Acquiring Stockholder" means any Stockholder acquiring shares of Common
Stock pursuant to Sections 16, 17, 18 or 19 of this Agreement, as applicable.
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly Controls, is under common Control with, or is
Controlled by such first Person, and shall include, with respect to Newhouse
and Cox, as applicable, (x) in the case of Newhouse, any Person that is a
lineal descendant (including adoptees) of Meyer and Rose Newhouse, and any
Person which is wholly owned, directly or indirectly, by one or more of such
lineal descendants, and in the case of Cox, any Person that is a lineal
descendant (including adoptees) of Governor James M. Cox, and any Person which
is wholly owned, directly or indirectly, by one or more of such lineal
descendants, (y) the trustee of a trust, or a custodian under the Uniform Gift
to Minors Act or similar fiduciary, the primary beneficiaries of which (or
primary income beneficiaries of which, in the case of a charitable
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remainder or similar trust) include only the respective natural Persons
described in clause (x) above (provided that such trust may grant a general or
special power of appointment to any such Person and may permit trust assets to
be used to pay taxes, legacies and other obligations of the trust or the
estate of any such Person, payable by reason of the death of such Person, as
applicable), and (z) the executor, administrator, guardian or personal
representative of the estate of any of the respective natural Persons
described in clause (x) above. The term "affiliated" (whether or not
capitalized) shall have a correlative meaning. Anything contained herein to
the contrary notwithstanding, the Estate of Bob Magness shall not be deemed to
be an Affiliate of Malone for purposes of this Agreement.
"Agreement" is defined in the preamble hereto.
"Ancillary Investment" is defined in Section 26.
"B Director" is defined in the Charter.
"B Offered Terms" is defined in Section 17(a).
"beneficially own" (and beneficial ownership, owned beneficially and other
correlative terms) is defined in Rule 13d-3 promulgated under the Exchange
Act.
"Board" is defined in Section 3(a).
"Business Day" means a day of the year on which banks are not required or
authorized to remain closed in the State of New York.
"By-laws" means the By-laws of the Company, as in effect from time to time.
"Cable Sale" means, with respect to any Class C Holder, the sale,
contribution or assignment to a single Person of all or substantially all of
such Class C Holder's cable systems.
"Cable Sale Call Right" is defined in Section 16(b).
"Cable Sale Interest" is defined in Section 16(b).
"Cable Seller" is defined in Section 16(b).
"Cash Equivalent" means (i) with respect to Cash Instruments, the face
amount thereof, (ii) with respect to Marketable Securities, the Current Market
Price thereof (determined as if the reference in the definition thereof to
"Class A Stock or Class B Stock" were a reference to the applicable Marketable
Security) on the date of the applicable Transfer Notice, and (iii) with
respect to any other assets or property, the price at which a willing seller
would sell and a willing buyer would buy, such assets or property, having full
knowledge of the facts, and assuming each party acts on an arm's length basis
with the expectation of concluding the purchase and sale within a reasonable
time period, as determined by the Board in good faith.
"Cash Instruments" means (i) marketable direct obligations issued or
unconditionally guaranteed by the United States government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof,
(ii) marketable direct obligations issued by any state of the United States or
any political subdivision of any such state or any public instrumentality
thereof, in each case maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having the highest rating obtainable
from any of Standard & Poor's Corporation, Moody's Investors Service, Inc. or
Duff & Phelps Credit Rating Co. or (iii) commercial paper maturing not more
than one year from the date of issuance thereof and, at the time of
acquisition, having the highest rating obtainable from any of Standard &
Poor's Corporation, Moody's Investors Service, Inc. or Duff & Phelps Credit
Rating Co.
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"C Director" is defined in the Charter.
"C Offered Terms" is defined in Section 18(a).
"Charter" means the Restated Certificate of Incorporation of the Company, as
amended or restated from time to time.
"Class A Stock" means Class A Common Stock, par value $.01 per share, of the
Company with one vote per share.
"Class B Options" means any options, warrants or other rights (other than
Convertible Securities and other than shares of Class C Stock), however
denominated, to subscribe for, purchase or otherwise acquire any shares of
Class B Stock or Convertible B Securities, with or without payment of
additional consideration in cash or property, either immediately or upon the
occurrence of a specified date or specified event or the satisfaction or
failure to satisfy any condition or the happening or failure to happen of any
other contingency.
"Class B Stock" means Class B Common Stock, par value $.01 per share, of the
Company with ten votes per share.
"Class C Holder" means (i) each of TWE, Newhouse, Comcast, Cox, MediaOne and
each of the MediaOne Transferors, in each case for so long as it holds of
record or beneficially owns or has voting control of any Covered C Securities
(or has an Affiliate holding Covered C Securities pursuant to clause (D) of
Section 13(b)) and (ii) each Permitted C Transferee that acquires record or
beneficial ownership or voting control of any Covered C Securities from a
Class C Holder, for as long as such Permitted C Transferee holds of record,
beneficially owns or has voting control of any Covered C Securities; provided
that such Permitted C Transferee shall have complied with Section 31; and
provided, further, that if such Permitted C Transferee became such pursuant to
clause (D) of Section 13(b), then upon compliance with the right of first
refusal process as set forth in such clause (D), such Permitted C Transferee
shall cease to be a Class C Holder (and shall cease to be a Stockholder).
"Class C Options" means any options, warrants or other rights (except
Convertible Securities), however denominated, to subscribe for, purchase or
otherwise acquire any shares of Class C Stock or Convertible C Securities,
with or without payment of additional consideration in cash or property,
either immediately or upon the occurrence of a specified date or specified
event or the satisfaction or failure to satisfy any condition or the happening
or failure to happen of any other contingency.
"Class C Stock" means Class C Common Stock, par value $.01 per share, of the
Company with ten votes per share.
"Class C Termination Date" is defined in the Charter.
"Class C Transferor" is defined in Section 18(a).
"Claw Back Offer" is defined in Section 19(a).
"Comcast" is defined in the preamble hereto.
"Common Director" is defined in the Charter.
"Common Director Voting Power" is defined in Section 19(a).
"Common Stock" means the Class A Stock, Class B Stock and Class C Stock of
the Company, and any other class of common stock of the Company that may
hereafter be authorized and issued.
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"Company" is defined in the preamble hereto.
"Control" means with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such Person (whether through ownership of securities,
partnership interests or other ownership interest, by contract, or otherwise).
The terms "Controlled," "Controlling" and similar variations shall have
correlative meanings.
"Convertible B Securities" means evidences of indebtedness, shares of stock
or other securities or obligations (other than shares of Class C Stock) that
are convertible into or exchangeable, with or without payment of additional
consideration in cash or property, for any shares of Class B Stock, either
immediately or upon the occurrence of a specified date or a specified event,
the satisfaction of or failure to satisfy any condition or the happening or
failure to happen of any other contingency.
"Convertible C Securities" means evidences of indebtedness, shares of stock
or other securities or obligations that are convertible into or exchangeable,
with or without payment of additional consideration in cash or property, for
any shares of Class C Stock, either immediately or upon the occurrence of a
specified date or a specified event, the satisfaction of or failure to satisfy
any condition or the happening or failure to happen of any other contingency.
"Convertible Securities" means Convertible B Securities and Convertible C
Securities, as applicable.
"Covered B Securities" means:
(i) any and all shares of Class B Stock, Convertible B Securities and
Class B Options;
(ii) any and all shares of Class A Stock issued to any Specified Class B
Holder upon conversion of shares of Class B Stock which are Covered B
Securities;
(iii) any securities of the Company or any other Person issued in
exchange for (including pursuant to a merger, consolidation or other
business combination), or as a dividend on, or pursuant to the split,
subdivision, combination, reclassification or recapitalization of, any
Covered B Securities; and
(iv) any securities of the Company or any other Person that are
distributed on any Covered B Securities and any securities which shall
result from the conversion or exchange of any such distributed securities;
provided, that the term "Covered B Securities" shall not include securities of
the Company acquired by a Specified Class B Holder after the Effective Date
from any Person other than the Company, a Specified Class B Holder, a Class C
Holder or GE.
"Covered C Securities" means:
(i) any and all shares of Class C Stock, Convertible C Securities and
Class C Options;
(ii) any securities of the Company or any other Person issued in exchange
for (including pursuant to a merger, consolidation or other business
combination), or as a dividend on, or pursuant to the split, subdivision,
combination, reclassification or recapitalization of, any Covered C
Securities; and
(iii) any securities of the Company or any other Person that are
distributed on any Covered C Securities and any securities which shall
result from the conversion or exchange of any such distributed securities;
provided, that the term "Covered C Securities" shall not include (x) shares of
Class B Stock (or other securities of the Company or any other Person)
issuable on conversion of shares of Class C Stock (so long as such conversion
was not effected in violation of Section 12) or (y) securities of the Company
acquired by a Class C Holder after the Effective Date from any Person other
than the Company, a Specified Class B Holder, a Class C Holder or GE; and
provided, further, that if securities are issued in exchange for (including
pursuant to a merger, consolidation or other business combination), or are
issued as a dividend on, or are issued pursuant to the split,
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subdivision, combination, reclassification or recapitalization of, shares of
Class C Stock, and such issued securities (the "underlying securities") are
convertible into or exchangeable for other securities (the "convert
securities"), then if the convert securities bear a relationship to the
underlying securities that is akin to the relationship that the Class B Stock
bears to the Class C Stock, the convert securities shall not be "Covered C
Securities" (so long as the conversion of the underlying securities is not
effected in violation of Section 12, assuming for purposes of this clause that
references to "Class C Stock" therein were references to such underlying
securities and references to "Class B Stock" therein were references to such
convert securities).
"Covered Securities" means Covered B Securities, Covered C Securities and GE
Shares, as applicable.
"Cox" is defined in the preamble hereto.
"Current Market Price" means, with respect to shares of Class A Stock or
Class B Stock as of any date, (a) prior to an initial public offering of the
Company (or the TSAT Merger), the fair market value on the day in question as
determined by the Board in good faith and (b) following an initial public
offering of the Company (or the TSAT Merger), the average of the daily closing
prices for shares of such class for the 30 consecutive trading days ending on
the trading day immediately before the day in question. The closing price for
each day shall mean the reported last sales price regular way or, in the case
no such sale is reported on such day, the average of the reported closing bid
and asked prices regular way, in either case on the principal United States
registered securities exchange on which such shares are listed, or if not
listed on any such exchange, the last reported sales price or bid quotation on
the NASDAQ Stock Market or any other inter-dealer quotation system then in
general use or, if no such prices or quotations are available, the fair market
value on the day in question as determined by the Board in good faith. The
Current Market Price of a share of Class C Stock on any date shall be equal to
the Current Market Price of a share of Class B Stock on such date, for all
purposes of this Agreement.
"Cut-Off Amount" shall mean 80% of the aggregate number of the outstanding
shares of Class C Stock held of record by any two of MediaOne (together with
its Affiliates), Cox and Comcast as of the Effective Date, respectively, being
the record holders of the highest and lowest number of outstanding shares of
Class C Stock among such Persons as of the Effective Date.
"Cut-Off Holder" is defined in Section 4.
"Defaulting Party" is defined in Section 24.
"Effective Date" is defined in the Charter.
"Event of Default" is defined in Section 24.
"Exchange Act" means the Securities and Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exempt Transfer" means any Transfer that falls within any one of the
following clauses: (i) An exchange or conversion of Covered Securities which
occurs by operation of law in connection with a merger or consolidation of the
Company with or into another corporation, or a recapitalization,
reclassification or similar event that has been duly authorized and approved
by the required vote of the Board and the stockholders of the Company pursuant
to the Charter and applicable law; (ii) any surrender by a Stockholder to the
Company of Covered Securities upon redemption by the Company of such Covered
Securities pursuant to any right or obligation under the express terms of such
Covered Securities that is made on a proportionate basis from all holders of
such Covered Securities and is not at the option of such Stockholder; or (iii)
any Permitted Pledge.
"Exercise Notice" is defined in Section 17(b).
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"Fast-Track Sale" means that, as of the date of the applicable Transfer
Notice, a Specified Class B Transferor or Class C Transferor, as the case may
be, has a bona fide intention to sell its Transferred B Interest or
Transferred C Interest, as applicable, pursuant to a Public Sale to be
consummated within ninety (90) calendar days from the date of such Transfer
Notice.
"GCL" means the General Corporation Law of the State of Delaware, as
amended.
"GE" means (i) GE American Communications, Inc. and (ii) each Permitted B
Transferee of GE that acquires record or beneficial ownership or voting
control of any GE Shares for so long as such Permitted B Transferee holds of
record, beneficially owns or has voting control of any GE Shares; provided
that such Permitted B Transferee shall have complied with Section 31.
"GE Shares" means:
(i) all shares of Class A Stock and Class B Stock, record or beneficial
ownership of which shall be acquired by GE after the Effective Date
pursuant to the rights of first refusal set forth in Sections 17 and 18;
(ii) any securities of the Company or any other Person issued in exchange
for (including pursuant to a merger, consolidation or other business
combination), or as a dividend on, or pursuant to the split, subdivision,
combination, reclassification or recapitalization of, any GE Shares; and
(iii) any securities of the Company or any other Person that are
distributed on any GE Shares and any securities which shall result from the
conversion or exchange of any such distributed securities;
provided, that the term "GE Shares" shall not include securities of the
Company acquired by GE after the Effective Date from any Person other than the
Company, a Specified Class B Holder, a Class C Holder or GE.
"High Vote Offered Interest" is defined in Section 19(a).
"High Voting Holder" is defined in Section 19(a).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder.
"Individual C Holder Caps" is defined in the Charter.
"Majority Specified Class B Holders" is defined in Section 8.
"Malone" is defined in the preamble hereto.
"Malone Family Foundation" means the Malone Family Foundation, a Colorado
non-profit corporation.
"Marketable Securities" means securities that are (i)(A) securities of or
other interests in any Person that are traded on a U.S. national securities
exchange or reported on by the National Association of Securities Dealers
Automated Quotation System or (B) debt securities on market terms of any
issuer that has debt or equity securities that are so traded or so reported on
and in which securities a U.S. nationally recognized securities firm has
agreed to make a market and (ii) not subject to restrictions on Transfer as a
result of any applicable contractual provisions or the provisions of the
Securities Act (or, if subject to such restrictions under such Act, are also
subject to registration rights on customary terms).
"MediaOne" is defined in the preamble hereto.
"MediaOne Transferors" means each of (i) Continental Satellite Company,
Inc., (ii) Continental Satellite Company of Chicago, Inc., (iii) Continental
Satellite Company of Minnesota, Inc., (iv) Continental Satellite Company of
New England, Inc., (v) Continental Satellite Company of Michigan, Inc., (vi)
Continental Satellite Company of Ohio, Inc., (vii) Continental Satellite
Company of Virginia, Inc. and (viii) MediaOne Satellite II, Inc.
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"Newhouse" is defined in the preamble hereto.
"Newhouse Voting Agreement" means the Voting Agreement between TWE and
Newhouse in substantially the form of Exhibit E to the Restructuring
Agreement.
"Options" means Class B Options and Class C Options, as applicable.
"Permitted B Transferee" is defined in Section 13(a).
"Permitted C Transferee" is defined in Section 13(b).
"Permitted Pledge" means a bona fide pledge of Covered Securities by a
Stockholder to a financial institution to secure bona fide recourse borrowings
permitted by applicable law, provided, that (i) such Stockholder notifies each
other Stockholder and the Company of such Stockholder's intention to pledge
such Covered Securities at least 10 days prior thereto (such notice to contain
a full description of the terms of such pledge), (ii) such Stockholder retains
the sole right to vote such pledged Covered Securities and (iii) the holder
(or holders) of the pledge (the "pledgee") agrees in writing in advance with
such Stockholder (in an agreement which shall expressly provide that each
other Stockholder is a third-party beneficiary thereof, entitled to enforce
such agreement directly against the pledgee, and which shall expressly provide
that it shall not be modified without the prior written consent of each other
Stockholder) that (A) the pledgee will notify each Stockholder in writing at
least 60 days prior to any Transfer of such pledged Covered Securities
pursuant to such pledge (by foreclosure, by operation of law or otherwise),
(B) that any such Transfer shall first be subject to the rights of first
refusal pursuant to Sections 17 and 18 of this Agreement (as applicable), with
the B Offered Terms or C Offered Terms (as applicable) being a Fast-Track Sale
and (C) that if any such right of first refusal pursuant to Section 17 or 18
of this Agreement is exercised, the pledgee shall release its lien on such
pledged Covered Securities (regardless of whether the purchase price is
sufficient to discharge the debt secured by the pledge) upon payment of the
purchase price therefor by the purchasing Stockholder or Stockholders directly
to the Pledgee for application to the indebtedness secured by such lien (it
being agreed that each Stockholder who pledges any Covered Securities hereby
authorizes payment in such manner).
"Permitted Transferee" means a Permitted B Transferee or a Permitted C
Transferee, as applicable.
"Permitted TWE Transfer" means a Transfer by TWE to Newhouse of a number of
shares of Class C Stock not to exceed the number of shares of Class C Stock
attributable to 30,000 Primestar subscribers (based upon the valuation
methodology set forth in the Restructuring Agreement), in accordance with the
letter dated October 27, 1997 from Newhouse to TWE.
"Person" means any individual, corporation, limited liability company,
general or limited partnership, joint venture, association, joint stock
company, trust or unincorporated business or organization.
"Proceeding" is defined in Section 29.
"Public Sale" means a sale of a Transferred B Interest or Transferred C
Interest, as applicable, pursuant to (i) a registered offering under an
already effective registration statement pursuant to the Securities Act or a
registration statement to be filed pursuant to the exercise of a demand or
piggyback registration right by the applicable Specified Class B Transferor or
Class C Transferor, as applicable, or (ii) Rule 144 promulgated under the
Securities Act, in each case provided that such sale is not being undertaken
as a result of an offer to buy, a bid or a request, invitation or solicitation
to sell made by any Person (other than an investment banker seeking to act as
an underwriter of a publicly distributed offering of such Transferred B
Interest or Transferred C Interest, as applicable).
"Restructuring Agreement" is defined in the preamble hereto.
"Restructuring Transaction" is defined in the Restructuring Agreement.
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"Satellite Television Business" is defined in the Charter.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"Shares" is defined in the preamble hereto.
"Smallest C" means any one of MediaOne (together with its Affiliates), Cox
and Comcast, being the record holder of the lowest number of outstanding
shares of Class C Stock among such Persons as of the Effective Date.
"Specified Class B Holder" means (i) TSAT for so long as it holds of record
or beneficially owns or has voting control of any Covered B Securities (or has
an Affiliate holding Covered B Securities pursuant to clause (C) of Section
13(a)), (ii) Malone, during the term of the TSAT Merger Agreement, and
thereafter if, when and for so long as he holds of record or beneficially owns
or has voting control of any Covered B Securities (or has an Affiliate holding
Covered B Securities pursuant to clause (C) of Section 13(a)) and (iii) each
Permitted B Transferee that acquires record or beneficial ownership or voting
control of any Covered B Securities from a Specified Class B Holder, a Class C
Holder or, with respect to the GE Shares, GE, for as long as such Permitted B
Transferee holds of record, beneficially owns or has voting control of any
Covered B Securities; provided that such Permitted B Transferee shall have
complied with Section 31; and provided, further, that if such Permitted B
Transferee became such pursuant to clause (C) of Section 13(a), then upon
compliance with the right of first refusal process as set forth in such clause
(C), such Permitted B Transferee shall cease to be a Specified Class B Holder
(and shall cease to be a Stockholder).
"Specified Class B Transferor" is defined in Section 17(a).
"Spin-Off " means, with respect to any Class C Holder, any transaction
pursuant to which all or substantially all ownership interests in a wholly
owned subsidiary (the "Spin-Off Entity") of such Class C Holder (i) are
offered or distributed on a pro rata basis to all or substantially all of the
common stockholders (and any other security holders) of such Class C Holder
pursuant to a stock dividend or other distribution, an offering of rights,
warrants or securities or a similar transaction entitling such stockholders to
acquire or subscribe for such ownership interests, a spin-off, a split-up, a
split-off, an exchange offer or similar transaction and/or (ii) are offered
pursuant to an initial public offering made on a widely distributed basis.
"Stockholder" means each Specified Class B Holder, each Class C Holder, and
GE.
"Tender Offer" means a tender offer or exchange offer for shares of any
class of Common Stock of the Company on Schedule 14d-1 promulgated under the
Exchange Act.
"Transfer" means, directly or indirectly, (i) to offer for sale, sell,
transfer, tender, pledge, encumber, assign or otherwise dispose of (including
by merger or otherwise by operation of law), or enter into any contract,
option, or other arrangement or understanding (other than this Agreement and
the Newhouse Voting Agreement) with respect to or consent to the offer for
sale, sell, transfer, tender, pledge, encumbrance, assignment or other
disposition of and (ii) except as contemplated by this Agreement or the
Newhouse Voting Agreement, to grant any proxies or power of attorney, deposit
into a voting trust or enter into a voting agreement or otherwise transfer
voting power; provided, however, that "Transfer" shall not mean or include
delivery of a revocable proxy in the ordinary course of business. Without
limiting the generality of the foregoing:
(1) any redemption, purchase or other acquisition in any manner (whether
or not for consideration) by the Company of any Covered Securities shall be
deemed to be a Transfer of such Covered Securities; and
(2) none of the conversion or exchange of a Convertible Security, the
exercise of any Option or the failure to convert or exchange a Convertible
Security or to exercise any Option prior to the expiration of
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the right of conversion, exchange or exercise shall be deemed to be a
Transfer of such Convertible Security or such Option.
The terms "Transferred," "Transferee" and similar variations shall have
correlative meanings. For purposes of this Agreement any Transfer of any
Option or Convertible Security shall also constitute a Transfer of the
Underlying Securities.
"Transferor" means any Stockholder Transferring shares of Common Stock
pursuant to Sections 16, 17, 18 or 19 of this Agreement, as applicable.
"Transfer Notice" is defined in Section 17(a).
"Transferred B Interest" is defined in Section 17(a).
"Transferred C Interest" is defined in Section 18(a).
"TWE" is defined in the preamble hereto.
"Underlying Securities" means, when used with reference to any Option or
Convertible Security as of any time, the Covered Securities issuable or
deliverable upon exercise, exchange or conversion of such Option or
Convertible Security (whether or not such Option or Convertible Security is
then exercisable, exchangeable or convertible). In the case of an Option to
acquire a Convertible Security, the Underlying Securities of such Options
shall include the Underlying Securities of such Convertible Security.
Section 2. Terms and Usage Generally. The definitions in Section 1 shall
apply equally to both the singular and plural forms of the terms defined
therein. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. All references herein to
Sections and Exhibits shall be deemed to be references to Sections of and
Exhibits to this Agreement, unless the context shall otherwise require. All
Exhibits attached hereto shall be deemed incorporated herein as if set forth
in full herein. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation". All accounting terms
not defined in this Agreement shall have the meanings determined by United
States generally accepted accounting principles as in effect from time to
time. The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not
to any particular provision of this Agreement. Unless otherwise expressly
provided herein, any agreement, instrument or statute defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver
or consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments
incorporated therein.
Section 3. Agreement to Vote and Not To Transfer or Convert. (a) Until the
Class C Termination Date, each Specified Class B Holder and each Class C
Holder hereby agrees to vote or act by written consent with respect to (or
cause to be voted or acted upon by written consent) (x) all shares of Common
Stock held of record or owned beneficially by such Stockholder at the time of
such vote or action by written consent and (y) all shares of Common Stock as
to which such Stockholder at the time of such vote or action by written
consent has voting control, in each case (A) in favor of the election of the
Persons nominated pursuant to Section 9 or Section 11 to serve on the Board of
Directors of the Company (the "Board") as Common Directors and (B) against the
election of any other Person nominated to be a Common Director. In addition,
during the term of this Agreement, each Specified Class B Holder hereby agrees
not to Transfer any shares of Class B Stock which are held of record or owned
beneficially by such Specified Class B Holder, except in compliance with
Section 13(a).
(b) Until the Class C Termination Date, each Class C Holder hereby agrees to
vote or act by written consent with respect to (or cause to be voted or acted
upon by written consent) (x) all shares of Class C Stock held of
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record or owned beneficially by such Class C Holder at the time of such vote
or action by written consent and (y) all shares of Class C Stock as to which
such Class C Holder at the time of such vote or action by written consent has
voting control, in each case (A) in favor of the election of the Persons
nominated pursuant to Section 7 or Section 11 to serve on the Board as C
Directors and (B) against the election of any other Person nominated to be a C
Director. In addition, during the term of this Agreement, each Class C Holder
hereby agrees not to convert or Transfer any shares of Class C Stock which are
held of record or owned beneficially by such Class C Holder, except in
compliance with Sections 12 and 13(b), respectively.
(c) Until the Class C Termination Date, GE hereby agrees to vote or act by
written consent with respect to (or cause to be voted or acted upon by written
consent) all GE Shares, in each case (A) in favor of (i) the election of the
Persons nominated pursuant to Section 9 or Section 11 to serve on the Board as
Common Directors and (ii) the election of the Persons nominated pursuant to
Section 8 or Section 11 to serve on the Board as B Directors, and (B) against
the election of any other Person nominated for election to the Board as a
Common Director or a B Director. In addition, during the term of this
Agreement, GE hereby agrees not to Transfer any GE Shares, except in
compliance with Section 13(a).
Section 4. Super-Majority Voting Agreement. Until the Class C Termination
Date, each of Cox, Comcast and MediaOne hereby agrees that if such Person,
together with its Affiliates, is the record or beneficial holder of a smaller
number of shares of Class C Stock than the Cut-Off Amount (any such Person in
such capacity being a "Cut-Off Holder"), then such Cut-Off Holder shall not
have the right individually to veto any of the actions specified in Subsection
(b)9(i) of Article VI of the Charter, and each of Cox, Comcast and MediaOne
hereby agrees that if it shall be a Cut-Off Holder it shall, and shall cause
its Affiliates to, vote or act by written consent with respect to (or cause to
be voted or acted upon by written consent) (x) all shares of Class C Stock
held of record or owned beneficially by such Cut-Off Holder at the time of
such vote and (y) all shares of Class C Stock as to which such Cut-Off Holder
has voting control, in each case in favor of any action specified in
Subsection (b)9(i) of Article VI of the Charter, unless at least one other
Class C Holder which together with such first Cut-Off Holder, on the record
date of such vote, is the record or beneficial owner of a number of shares of
Class C Stock greater than or equal to the Cut-Off Amount, shall have notified
such Cut-Off Holder in writing of its intention to vote against such action,
and such notice shall not have been revoked as provided in the next sentence.
Each Class C Holder hereby agrees that if it shall have delivered such a
notice to a Cut-Off Holder but determines not to vote against such action, it
shall use commercially reasonable efforts to revoke the foregoing notice as
soon as practicable, by written notice to the Cut-Off Holder.
Section 5. Stockholder Meetings and Actions by Written Consent. (a) Each
Specified Class B Holder, each Class C Holder and GE hereby agrees to use its
commercially reasonable efforts to take all actions necessary or appropriate
for the purpose of calling, or causing the Company to call, a special meeting
of stockholders or acting by written consent, in each case as promptly as
practicable from time to time as necessary to effect the provisions of this
Agreement.
(b) Whenever the Company or any Stockholder shall solicit written consents
to take any action concerning the election or removal of any Person as a
director of the Company, in accordance with Section 228 of the GCL, the
Charter and the By-laws, then each Stockholder shall execute and deliver, or
cause to be executed and delivered, as promptly as practicable, a written
consent with respect to such actions, in accordance with such Section 228 and
the Charter and By-laws, in conformity with the obligations of such
Stockholder under this Agreement.
Section 6. Grant of Irrevocable Proxy. In the event that any Specified Class
B Holder, any Class C Holder or GE shall fail at any time to vote or act by
written consent with respect to any of such Stockholder's shares of the
Company's capital stock as agreed by such Stockholder in this Agreement, such
Stockholder hereby irrevocably grants to and appoints each other Stockholder
(and any officer of such Stockholder or each of them individually), such
Stockholder's proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of such Stockholder, to vote, act by
written consent or grant a consent, proxy or approval in respect of such
shares exclusively as agreed by such Stockholder in this Agreement. Each
Specified Class B
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Holder, each Class C Holder and GE hereby affirm that the irrevocable proxy
set forth in this Section 6 is given in connection with the execution of the
asset transfer and merger agreements executed in respect of the Restructuring
Transaction and that such irrevocable proxy is given to secure the performance
of the obligations of such Stockholder under this Agreement. Each such
Stockholder hereby further affirms that each proxy hereby granted shall, for
the term of this Agreement, be irrevocable and shall be deemed coupled with an
interest, in accordance with Section 212(e) of the GCL.
Section 7. Nomination of C Directors. (a) (i) Each Class C Holder (provided
that, for purposes of this Section 7, TWE and Newhouse, together with their
respective Affiliates, shall collectively be deemed a single Class C Holder,
and Class C Holders that are Affiliates of one another shall collectively be
deemed to be a single Class C Holder) shall be entitled to nominate such
number of C Directors as specified by the then applicable Individual C Holder
Caps.
(ii) In the event that the aggregate number of C Directors permitted to be
nominated pursuant to the Charter is smaller than the aggregate number of C
Directors permitted to be elected pursuant to the then applicable Individual C
Holders Caps as set forth in Section 7(a)(i), then the Class C Holder that is
the record holder of the number of shares of Class C Stock that is closest (in
number of shares) to the next lower Individual Class C Holder Cap shall be
treated as if the number of shares of Class C Stock held of record by such
Class C Holder were less than such next lower Individual C Holder Cap, and
such Class C Holder shall therefore lose the right to nominate one C Director,
so that the aggregate number of C Directors permitted to be nominated
hereunder equals the number of C Directors permitted to be elected pursuant to
the Charter.
(b) At least 45 days before each annual meeting of stockholders of the
Company, and a reasonable period of time before any other stockholder vote or
action by written consent with respect to the election of C Directors, each
Class C Holder shall notify the Company and each other Class C Holder in
writing of such Class C Holder's designee for each position of the Board to be
filled by a C Director that such Class C Holder is entitled to nominate
pursuant to Section 7(a). The Company hereby agrees to include each such C
Director nominee in management's slate of nominees and as such, each such C
Director nominee shall be included in the proxy statement prepared by
management of the Company in respect of such annual meeting, vote or action by
written consent, whether or not the foregoing notice complies with the
penultimate sentence of Section 8(b)(2) of Article II of the By-laws.
Section 8. Nomination of B Directors. At least 45 days before each annual
meeting of stockholders of the Company, and a reasonable period of time before
each other stockholder vote or action by written consent with respect to the
election of B Directors, the Specified Class B Holder or group of Specified
Class B Holders holding in the aggregate a majority of the aggregate number of
shares of Class B Stock then held of record by the Specified Class B Holders
(the "Majority Specified Class B Holders") shall notify the Company, each
other Specified Class B Holder and GE in writing of the Majority Specified
Class B Holder's designee for each position on the Board to be filled by a B
Director in accordance with the Charter and By-laws then in effect. The
Company hereby agrees to include each such B Director nominee in management's
slate of nominees and as such, each such B Director nominee shall be included
in the proxy statement prepared by management of the Company in respect of
such annual meeting, vote or action by written consent, whether or not the
foregoing notice complies with the penultimate sentence of Section 8(b)(2) of
Article II of the By-laws.
Section 9. Nomination of Common Directors. (a) Prior to the Class C
Termination Date, the Board's nominees for election as Common Directors shall
be nominated by the affirmative vote of 83% of the B Directors and the C
Directors then in office. On and after the Class C Termination Date, the
Board's nominees for election as Common Directors shall be nominated by the
affirmative vote of a majority of the members of the Board then in office. The
initial Common Directors will be John Goddard and John Connelley.
(b) At least 45 days before each annual meeting of stockholders of the
Company, and a reasonable period of time before any other stockholder vote or
action by written consent with respect to the election of Common Directors,
the Company shall notify each Class C Holder, each Specified Class B Holder
and GE in writing of the Board's nominee for each position on the Board to be
filled by a Common Director.
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Section 10. Removal of Directors. (a) At the request of any Class C Holder
with respect to a C Director designated by such Class C Holder pursuant to
Section 7, each other Class C Holder hereby agrees to vote or act by written
consent with respect to (or cause to be voted or acted upon by written
consent) all shares of Class C Stock held of record or beneficially owned by
such other Class C Holder at the time of such vote or action by written
consent or as to which such other Class C Holder has voting control at the
time of such vote or action by written consent to remove or cause the removal
from office of such C Director at any meeting or action by written consent of
the Class C Holders called or taken for the purpose of determining whether or
not such C Director shall be removed from office (and otherwise shall not vote
or act by written consent to remove or cause the removal of any C Director
without cause).
(b) At the request of the Majority Specified Class B Holders with respect to
a B Director designated pursuant to Section 8, each other Specified Class B
Holder and GE hereby agrees to vote or act by written consent with respect to
(or cause to be voted or acted upon written consent) all shares of Class B
Stock held of record or beneficially owned by such Stockholder at the time of
such vote or action by written consent or as to which such Stockholder has
voting control at the time of such vote or action by written consent to remove
or cause the removal from office of such B Director at any meeting or action
by written consent of the holders of Class B Stock called or taken for the
purpose of determining whether or not such B Director shall be removed from
office (and otherwise shall not vote or act by written consent to remove or
cause the removal of any B Director without cause).
Section 11. Filling of Vacancies. Any vacancy in the office of a C Director
shall be filled with a nominee selected by the Class C Holder that nominated
the C Director whose vacancy is to be filled. All nominations of individuals
to fill C Director vacancies on the Board shall be voted upon in accordance
with Section 3(b). Any vacancy in the office of a B Director designated by the
Majority Specified Class B Holders pursuant to Section 8 shall be filled
either by (A) a majority of the remaining B Directors or the sole remaining B
Director, as the case may be, or (B) with a nominee selected by the Majority
Specified Class B Holders. All nominations of individuals to fill B Director
vacancies on the Board pursuant to clause (B) of the preceding sentence shall
be voted upon in accordance with Section 3(c).
Section 12. Restrictions on Conversion. During the term of this Agreement,
no Class C Holder shall convert into shares of Class B Stock any shares of
Class C Stock which such Class C Holder holds of record or owns beneficially
except upon Transfer of such Class C Stock to any Person other than a Class C
Holder after compliance with the right of first refusal process set forth in
Section 18.
Section 13. Restrictions on Transfer. (a) During the term of this Agreement,
no Specified Class B Holder (or GE, with respect to the GE Shares) may
Transfer, and the Company hereby agrees not to register the Transfer of, any
Covered B Securities held of record or beneficially owned by such Specified
Class B Holder (or GE), except
(i) to a Permitted B Transferee of such Specified Class B Holder (or GE);
(ii) to any Person in compliance with the right of first refusal process
set forth in Section 17; or
(iii) in accordance with Section 19;
provided that in the case of a Transfer to a Permitted B Transferee, such
Permitted B Transferee (other than a Permitted B Transferee that is merely the
pledgee under a Permitted Pledge) becomes a party to this Agreement as a
Specified Class B Holder (or, in the case of GE, in the same manner as GE) as
provided in Section 31. Any Specified Class B Holder that Transfers Covered B
Securities to a Permitted B Transferee pursuant to clause (B) or (C) of this
Section 13(a) shall be liable (jointly and severally with such Permitted B
Transferee) for all obligations of such Permitted B Transferee under this
Agreement.
For the purposes hereof, "Permitted B Transferee" of a Specified Class B
Holder (or GE, as applicable) shall mean:
(A) with respect to any Specified Class B Holder that is a natural
Person, (w) the Person who is the present or former spouse of such
Specified Class B Holder and any lineal descendant (including adoptees)
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of such Specified Class B Holder or any such spouse, (x) the trustee of a
trust, or a custodian under the Uniform Gift to Minors Act or similar
fiduciary, the primary beneficiaries of which (or primary income
beneficiaries of which, in the case of a charitable remainder or similar
trust) include only such Specified Class B Holder or Persons described in
clause (w) above (provided, that such trust may grant a general or special
power of appointment to such Specified Class B Holder or any such Person
and may permit trust assets to be used to pay taxes, legacies and other
obligations of the trust or the estate of such Specified Class B Holder or
any such Person, payable by reason of the death of such Specified Class B
Holder or such Person, as applicable), (y) the executor, administrator,
guardian or personal representative of the estate of such Specified Class B
Holder and (z) in the case of Malone, the Malone Family Foundation;
(B) if the establishment of a voting trust is required to prevent the
loss or secure the reinstatement of any license or franchise from any
governmental agency held by the Company or any subsidiary thereof to
conduct any portion of the business of the Company or such subsidiary, any
voting trust the trustee of which is acceptable to the holders of at least
66 2/3% of the total voting power of the then outstanding shares of Class C
Stock; provided, that such voting trust shall have no rights under Sections
17, 18 or 19; and provided, further, that the term of such trust shall be
no longer than 12 months and at the end of such 12-month period, the
Transferring Specified Class B Holder (or GE, as applicable) shall cause
such Covered B Securities to be (x) Transferred back to such Transferring
Specified Class B Holder (or GE, as applicable) or to any other Permitted B
Transferee thereof (excluding another voting trust) or (y) offered pursuant
to the rights of first refusal set forth in Section 17, with the B Offered
Terms being a Fast-Track Sale;
(C) with respect to any Specified Class B Holder (or GE, as applicable),
any Person that is an Affiliate of such Specified Class B Holder (which for
purposes of this Section 13(a)(C) shall include, with respect to any
Specified Class B Holder that is a natural Person, any Person in which such
Specified Class B Holder both as of the Effective Date and at all times
thereafter (x) Controls 5% or more of the voting power and (y) participates
in the direction of the management and control of such Person), for so long
as such Person remains an Affiliate of such Specified Class B Holder (or
GE, as applicable). In the event that a Person received Covered B
Securities by virtue of its status as an Affiliate of a Specified Class B
Holder (or GE, as applicable), and such Person subsequently ceases to be an
Affiliate of the Transferring Specified Class B Holder (or GE, as
applicable) for any reason, then, prior to such Person ceasing to be such
an Affiliate, the Transferring Specified Class B Holder (or GE, as
applicable) shall cause such Covered B Securities to be (x) Transferred
back to such Transferring Specified Class B Holder (or GE, as applicable)
or to any other Permitted B Transferee thereof or (y) offered pursuant to
the rights of first refusal set forth in Section 17, with the B Offered
Terms being a Fast-Track Sale; provided, that such former Affiliate shall
cease to have any rights under Sections 17, 18 or 19 immediately upon
ceasing to be an Affiliate of the applicable Transferring Specified Class B
Holder (or GE, as applicable); and
(D) any other Person that acquires any Covered B Securities from such
Specified Class B Holder (or GE, as applicable) pursuant to an Exempt
Transfer.
(b) During the term of this Agreement, no Class C Holder may Transfer, and
the Company hereby agrees not to register the Transfer of, any Covered C
Securities held of record or beneficially owned by such Class C Holder, except
(i) to a Permitted C Transferee of such Class C Holder;
(ii) to any Person in compliance with the right of first refusal process
set forth in Section 18;
(iii) in accordance with Section 16;
(iv) in accordance with Section 19; or
(v) in the case of TWE, pursuant to a Permitted TWE Transfer;
provided that, in the case of a Transfer to a Permitted C Transferee, such
Permitted C Transferee (other than a Permitted C Transferee that is merely the
pledgee under a Permitted Pledge) becomes a party to this Agreement as
provided in Section 31. Any Class C Holder that Transfers Covered C Securities
to a Permitted C Transferee
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pursuant to clause (C) or (D) of this Section 13(b) shall be liable (jointly
and severally with such Permitted C Transferee) for all obligations of such
Permitted C Transferee under this Agreement.
For purposes hereof, "Permitted C Transferee" of a Class C Holder shall
mean:
(A) any Person that acquires beneficial ownership of all or substantially
all of the cable assets of such Class C Holder pursuant to a Cable Sale;
(B) a Spin-Off Entity that acquires beneficial ownership of all or
substantially all of the cable assets of such Class C Holder pursuant to a
Spin-Off;
(C) if the establishment of a voting trust is required to prevent the
loss or secure the reinstatement of any license or franchise from any
governmental agency held by the Company or any subsidiary thereof to
conduct any portion of the business of the Company or such subsidiary, any
voting trust the trustee of which is acceptable to the holders of at least
a majority of the total voting power of the then outstanding shares of
Class B Stock and the holders of at least 66 2/3% of the total voting power
of the then outstanding shares of Class C Stock; provided, that such voting
trust shall have no rights under Section 17, 18 or 19; and provided,
further, that the term of such trust shall be no longer than 12 months and
at the end of such 12-month period, the Transferring Class C Holder shall
cause such Covered C Securities to be (x) Transferred back to such
Transferring C Holder or to any other Permitted C Transferee thereof
(excluding another voting trust) or (y) offered pursuant to the rights of
first refusal set forth in Section 18, with the C Offered Terms being a
Fast-Track Sale;
(D) any Person that is an Affiliate of such Class C Holder, for so long
as such Person remains an Affiliate of such Class C Holder. In the event
that a Person received Covered C Securities by virtue of its status as an
Affiliate of a Class C Holder, and such Person subsequently ceases to be an
Affiliate of the Transferring Class C Holder for any reason, then, prior to
such Person ceasing to be such an Affiliate, the Transferring Class C
Holder shall cause such Covered C Securities to be (x) Transferred back to
such Transferring Class C Holder or to any other Permitted C Transferee
thereof or (y) offered pursuant to the rights of first refusal set forth in
Section 18, with the C Offered Terms being a Fast-Track Sale; provided,
that such former Affiliate shall cease to have any rights under Sections
16, 17, 18 or 19 immediately upon ceasing to be an Affiliate of the
applicable Transferring Class C Holder; and provided, further, that any
shares of Class C Stock that are not Transferred to Acquiring Class C
Holders pursuant to Section 18(c) shall be immediately converted into
shares of Class B Stock, as provided in the Charter; and
(E) any other Person that acquires any Covered C Securities from such
Class C Holder pursuant to an Exempt Transfer.
(c) Notice of any Transfer to a Permitted B Transferee or Permitted C
Transferee pursuant to this Section 13 shall be promptly provided to each
other party to this Agreement by the applicable transferor.
Section 14. Stop Transfer. (a) The Company hereby agrees not to register the
Transfer of any shares of Class B Stock or Class C Stock, unless the
transferee and the transferor of such shares have furnished such affidavits or
other proof as the Company may reasonably request to establish that such
proposed Transfer is permitted by Section 13.
(b) The Company hereby agrees not to register the conversion of any shares
of Class C Stock to Class B Stock or of Class B Stock to Class A Stock, unless
the holder of such shares of Common Stock has furnished such affidavits or
other proof as the Company may reasonably request to establish that such
conversion is permitted by Section 12.
(c) The Company and each Stockholder hereby agree that any purported
conversion or Transfer of shares of Class B Stock or Class C Stock not
permitted by Section 12 or 13, respectively shall be deemed null and void and
shall not be given effect or recognition by the Company.
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Section 15. Legend. (a) During the term of this Agreement, each certificate
evidencing outstanding Covered B Securities held of record or owned
beneficially by a Specified Class B Holder, outstanding GE Shares held of
record or owned beneficially by GE or outstanding Covered C Securities held of
record or owned beneficially by a Class C Holder shall bear the following
legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND
TRANSFERABLE ONLY UPON COMPLIANCE WITH THE PROVISIONS OF A STOCKHOLDERS
AGREEMENT, DATED AS OF [ ], AS AMENDED, AMONG PRIMESTAR, INC. AND
CERTAIN OF ITS STOCKHOLDERS. A COPY OF SUCH STOCKHOLDERS AGREEMENT IS ON
FILE AT THE PRINCIPAL OFFICE OF PRIMESTAR, INC. AT 8085 SOUTH CHESTER
STREET, SUITE 300, ENGLEWOOD, CO 80112."
(b) Upon a Person ceasing to have rights and obligations under this
Agreement as provided in Section 27(b) (or upon termination of this
Agreement), such Person may surrender to the Company any certificates held of
record by such Person and bearing the legend set forth in Section 15(a), and
upon surrender of such certificates, the Company shall reissue such
certificates without such legend.
(c) Immediately prior to a Transfer of Covered Securities pursuant to
Section 17(c)(A) or Section 18(c)(A), the Transferor may surrender to the
Company any certificates evidencing such securities bearing the legend set
forth in Section 15(a), and upon surrender of such certificates, the Company
shall reissue such certificates without such legend.
Section 16. Mandatory Transfers. (a) Spin-Off. (i) In the event of a Spin-
Off with respect to any Class C Holder, pursuant to which the applicable Spin-
Off Entity shall acquire beneficial ownership of all or substantially all of
the cable assets of such Class C Holder, such Class C Holder hereby agrees to
sell, contribute or assign to such Spin-Off Entity (and to cause such Spin-Off
Entity to purchase and accept) the record and beneficial ownership of all
Covered C Securities held of record or beneficially owned by such Class C
Holder concurrently with the consummation of such Spin-Off (and any such
Transfer shall be exempt from the rights of first refusal set forth in Section
18 or any mandatory conversion provisions hereof).
(ii) In the event that a Class C Holder shall fail to make the foregoing
Transfer, each Class C Holder hereby appoints the Company, or any of the
Company's executive officers, each acting individually, as the true and lawful
attorney-in-fact of such Class C Holder, in such Class C Holder's name, place
and stead, such that if such Class C Holder Spins-Off all or substantially all
of its cable assets to a Spin-Off Entity, then such attorneys-in- fact shall
have full power to Transfer all of such Class C Holder's Covered C Securities
to such Spin-Off Entity and to deliver or cause to be delivered the
certificates and other evidences of such Covered C Securities and to execute
on such Class C Holder's behalf such certificates, instruments and other
documents as may be necessary to effectuate such Transfer (and in consummating
the Spin-Off, such Spin-Off Entity shall be deemed to have agreed to purchase
and accept such Covered C Securities); provided, that such Class C Holder
shall be liable to the Company for any costs that the Company incurs in
exercising the power of attorney granted in this Section 16(a).
(b) Cable Sale. (i) In the event of a Cable Sale pursuant to which any Class
C Holder sells, contributes or assigns to a single Person all or substantially
all of such Class C Holder's cable systems, then such Class C Holder (the
"Cable Seller") shall have the right to sell, contribute or assign to such
Person all (but not less than all) of such Cable Seller's Covered C Securities
(the "Cable Sale Interest") concurrently with the consummation of such Cable
Sale (a "Cable Sale Transfer") (and any such Cable Sale Transfer shall be
exempt from the rights of first refusal set forth in Section 18 or any
mandatory conversion provisions hereof). The Cable Seller shall provide
written notice to each other Class C Holder within 15 days of consummating a
Cable Sale, which notice shall state whether or not such Cable Sale Transfer
shall have been consummated (the "Cable Sale Notice").
(ii) In the event that a Cable Seller shall fail to make the foregoing Cable
Sale Transfer, each other Class C Holder (provided that, for purposes of this
Section 16(b), except in the event of a Cable Sale where TWE or
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Newhouse is the Cable Seller, TWE and Newhouse, together with their respective
Affiliates, shall collectively be deemed a single Class C Holder) shall have a
call right (the "Cable Sale Call Right") to purchase from the Cable Seller (and
such Cable Seller shall be required to sell) the Cable Sale Interest (in an
amount determined as specified below). A Cable Sale Call Right shall be
exercised by delivery of written notice (a "Cable Sale Exercise Notice") to the
Cable Seller, within ninety (90) calendar days from the date of the Cable Sale
Notice, which notice shall specify the maximum amount of the Cable Sale
Interest that the exercising Class C Holder is willing to purchase. If a Class
C Holder delivers a Cable Sale Exercise Notice as provided above, such Class C
Holder shall have the right to acquire its pro rata portion (or a smaller
amount) of the Cable Sale Interest (based on the respective holdings of Class C
Stock of each exercising Class C Holder at the time of the Cable Sale Notice)
until all such Cable Sale Interest has been allocated pro rata among the
exercising Class C Holders; provided, that if any Class C Holder elects to
acquire a smaller amount than its pro rata portion of the Cable Sale Interest,
then each other exercising Class C Holder that stated in its Cable Sale
Exercise Notice a willingness to acquire more than its pro rata portion of the
Cable Sale Interest in its Cable Sale Exercise Notice shall be allocated the
excess pro rata based on the respective holdings of Class C Stock of each such
exercising Class C Holder at the time of the Cable Sale Notice, in each case up
to the maximum specified in the applicable Class C Holder's Cable Sale Exercise
Notice. All Covered C Securities being Transferred pursuant to Cable Sale Call
Rights shall be Transferred to the Class C Holders exercising such right, in
accordance with Section 20, at the Current Market Price calculated as of the
trading day immediately preceding the date of the closing of such Transfer;
provided, however, that in the event that the Board is required to determine
the Current Market Price for purposes of this Section 16(b), such Current
Market Price shall be calculated as of the date of the applicable Cable Sale
Notice and notice thereof shall be promptly delivered by the Company to each
Class C Holder, and any time periods provided under this Section 16(b) for
delivery of a Cable Sale Exercise Notice shall be tolled during the period of
such determination. No Class C Holder shall have the right to elect to acquire
any Cable Sale Interest if such Class C Holder fails to provide to each of the
other Class C Holders written notice of the exercise of such Class C Holder's
Cable Sale Call Right within the time period specified in this Section 16(b).
(iii) Notwithstanding anything to the contrary in this Section 16(b), Covered
C Securities shall be Transferred to Class C Holders as provided in this
Section 16(b) pursuant to a Cable Sale Call Right only if the Class C Holders
have agreed to acquire the entire Cable Sale Interest held of record or
beneficially owned by the Cable Seller. In the event that the Class C Holders
do not collectively agree to acquire all the Covered C Securities held of
record or beneficially owned by the Cable Seller, then the Cable Seller shall
be entitled to:
(A) Transfer to the other Class C Holders the portion of the Cable Sale
Interest that they respectively agreed to acquire (at the price set forth
in paragraph (ii) above), allocated pursuant to this Section 16(b), and
retain the remainder; or
(B) retain all such Cable Sale Interest;
provided, however, that any Covered C Securities retained by the Cable Seller
shall remain subject to this Agreement in all respects and may not subsequently
be Transferred to any Person, except as provided in Section 13(b).
Section 17. Right of First Refusal for Class B Stock. (a) Except with respect
to Transfers described in clauses (i) and (iii) of Section 13(a), if at any
time any Specified Class B Holder (or GE, with respect to any GE Shares) (each,
a "Specified Class B Transferor") proposes to Transfer any Covered B Securities
(or, in the case of GE, GE Shares) held of record or owned beneficially by such
Specified Class B Transferor (collectively, the "Transferred B Interest"), such
Specified Class B Transferor shall be free to negotiate with any prospective
transferee to obtain an offer to purchase all or any portion of the Transferred
B Interest. In the event that the Specified Class B Transferor (i) receives
from a prospective transferee (other than a Transferee under clause (i) or
(iii) of Section 13(a)) a bona fide, fully financed offer on terms that such
Specified Class B Transferor is willing to accept or (ii) seeks to Transfer the
Transferred B Interest pursuant to a Public Sale or a Tender Offer, such
Specified Class B Transferor shall provide written notice thereof (each, a
"Transfer Notice") to each other Specified Class B Holder, each Class C Holder
(provided that, for purposes of this Section 13, TWE and
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Newhouse, together with their respective Affiliates, shall collectively be
deemed a single Class C Holder and a single Acquiring Class C Holder), GE and
the Company. Each such Transfer Notice shall include (i) in the case of a
Transfer other than pursuant to a Public Sale or a Tender Offer, the identity
of the prospective buyer, the price per share offered, the terms of the
prospective buyer's financing and the other material terms of the offer, (ii)
in the case of a Transfer pursuant to a Public Sale, the Current Market Price
of the applicable Transferred B Interest as of the date of such Transfer
Notice (or a reference that the Board must determine such Current Market
Price, if applicable) and whether or not such Public Sale is to be a Fast-
Track Sale and (iii) in the case of a Transfer pursuant to a Tender Offer, the
Tender Offer price per share (the foregoing being the "B Offered Terms").
(b) Upon receipt of a Transfer Notice relating to Covered B Securities of a
Specified Class B Transferor, each other Specified Class B Holder, each Class
C Holder and GE shall have the right, in the priority and within the time
periods specified below, to irrevocably elect to acquire the applicable
Transferred B Interest (or portions thereof) by delivering a written notice
(each, an "Exercise Notice") to such Specified Class B Transferor, any other
Specified Class B Holder, each Class C Holder and GE, as applicable. Any such
Exercise Notice shall specify the maximum amount of the Transferred B Interest
that the Person delivering such notice is willing to purchase. In the event
that the Board is required to determine the Current Market Price for purposes
of this Section 17, notice thereof shall be promptly delivered by the Company
to each Specified Class B Holder, each Class C Holder and GE, and any time
periods provided under this Section 17 for delivery of an Exercise Notice
shall be tolled during the period of such determination. Subject to the
foregoing, no Specified Class B Holder, Class C Holder or GE shall have the
right to elect to acquire a Transferred B Interest (or portions thereof) if
such Specified Class B Holder, such Class C Holder or GE, as applicable, fails
to provide to the Specified Class B Transferor and to each other Specified
Class B Holder, each Class C Holder and GE, as applicable, an Exercise Notice
with respect to such Transferred B Interest within the time periods specified
in this Section 17(b).
(i) First, a Specified Class B Holder (other than a Specified Class B
Transferor) shall have the right to acquire a Transferred B Interest (in an
amount determined as specified below) by delivering an Exercise Notice as
provided herein within twenty (20) calendar days (provided that, in the
case of a Fast-Track Sale, such Exercise Notice shall be delivered within
ten (10) calendar days and, in the case of a Tender Offer, such Exercise
Notice shall be delivered within seven (7) calendar days) from the date of
the Transfer Notice associated with such Transferred B Interest. In the
event that a Specified Class B Holder (each, an "Acquiring Specified Class
B Holder") delivers an Exercise Notice with respect to a Transferred B
Interest as provided herein, such Acquiring Specified Class B Holder shall
have the right to acquire its pro rata portion (or a smaller amount) of the
Transferred B Interest (based on the respective holdings of Class B Stock
of each Acquiring Specified Class B Holder at the time of the Transfer
Notice) until all of such Transferred B Interest has been allocated pro
rata among the Acquiring Specified Class B Holders; provided, that if any
Acquiring Specified Class B Holder elects to acquire a smaller amount than
its pro rata portion of a Transferred B Interest, then each other Acquiring
Specified Class B Holder that stated in its Exercise Notice a willingness
to acquire more than its pro rata portion of such Transferred B Interest
shall be allocated the excess (pro rata based on the respective holdings of
Class B Stock of each such Acquiring Specified Class B Holder at the time
of the Transfer Notice), in each case up to the maximum specified in the
applicable Acquiring Specified Class B Holder's Exercise Notice.
Notwithstanding the foregoing, (i) if only one Acquiring Specified Class B
Holder delivers an Exercise Notice with respect to a Transferred B Interest
as provided herein, or (ii) in a case covered by the proviso of the
preceding sentence, if only one Acquiring Specified Class B Holder states
in its Exercise Notice a willingness to acquire more than its pro rata
portion of such Transferred B Interest, then such Acquiring Specified Class
B Holder shall have the right to acquire up to 100% of such Transferred B
Interest, or of such excess, as the case may be, subject to the maximum
specified in such Acquiring Specified Class B Holder's Exercise Notice,
without regard to the number of shares of Class B Stock (if any) held by
such Acquiring Specified Class B Holder at the time of the applicable
Transfer Notice.
(ii) Second, each Class C Holder shall have the right to acquire any
portion of a Transferred B Interest that has not been acquired by any
Specified Class B Holder as provided above in Section 17(b)(i) (in an
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amount determined as specified below) by delivering an Exercise Notice as
provided herein within twenty five (25) calendar days (provided that, in
the case of a Fast-Track Sale, such Exercise Notice shall be delivered
within fifteen (15) calendar days and, in the case of a Tender Offer, such
Exercise Notice shall be delivered within eleven (11) calendar days) from
the date of the Transfer Notice associated with such Transferred B
Interest. In the event that a Class C Holder (each, an "Acquiring Class C
Holder") delivers an Exercise Notice with respect to a Transferred B
Interest as provided herein, such Acquiring Class C Holder shall have the
right to acquire its pro rata portion (or a smaller amount) of the
remaining portion of such Transferred B Interest (based on the respective
holdings of Class C Stock of each Acquiring Class C Holder at the time of
the Transfer Notice) until all of such remaining portion has been allocated
pro rata among the Acquiring Class C Holders; provided, that if any
Acquiring Class C Holder elects to acquire a smaller amount than its pro
rata portion of a Transferred B Interest, then each other Acquiring Class C
Holder that stated in its Exercise Notice a willingness to acquire more
than its pro rata portion of such Transferred B Interest shall be allocated
the excess (pro rata based on the respective holdings of Class C Stock of
each such Acquiring Class C Holder at the time of the Transfer Notice), in
each case up to the maximum specified in the applicable Acquiring Class C
Holder's Exercise Notice.
(iii) Third, GE shall have the right to acquire the remaining portion of
a Transferred B Interest that has not been acquired by any Specified Class
B Holder or Class C Holder as provided above in clauses (i) and (ii) of
this Section 17(b) by delivering an Exercise Notice as provided herein
within thirty (30) calendar days (provided that, in the case of a Fast-
Track Sale, such Exercise Notice shall be delivered within twenty (20)
calendar days and, in the case of a Tender Offer, such Exercise Notice
shall be delivered within fifteen (15) calendar days) from the date of the
Transfer Notice associated with such Transferred B Interest.
(c) In the event that, pursuant to their respective Exercise Notices, the
Acquiring Specified Class B Holders, the Acquiring Class C Holders and GE have
agreed to acquire an entire Transferred B Interest, then the Specified Class B
Transferor shall Transfer such Transferred B Interest to the Acquiring
Specified Class B Holders, the Acquiring Class C Holders and GE, as
applicable, on the B Offered Terms, in accordance with Section 20; provided,
that any Acquiring Stockholder shall be entitled to elect to pay the Cash
Equivalent of any non-cash consideration offered as part of the B Offered
Terms in satisfaction of the foregoing; and provided, further, that:
(i) for avoidance of doubt, in the case of a Transfer Notice that relates
to a Public Sale, the Current Market Price per share of the applicable
Transferred B Interest as of the date of the applicable Transfer Notice
shall be the purchase price;
(ii) in the case of a Transfer Notice that relates to a Tender Offer, if
the Tender Offer price per share is changed from that specified in the
applicable Transfer Notice after any Exercise Notices are delivered by any
Stockholders, then (A) the Specified Class B Transferor shall provide
written notice of such change to each other Specified Class B Holder, each
Class C Holder and GE within 48 hours of such change, (B) the B Offered
Terms shall thereupon be deemed amended to reflect such change (and any
applicable response deadline specified above shall be tolled for 48 hours)
and (C) notwithstanding anything to the contrary contained in this
Agreement, any Exercise Notice delivered prior to receipt of notice of such
change may be revoked by the applicable Stockholder by delivery of written
notice of revocation to each Stockholder receiving a copy of such Exercise
Notice within 48 hours of receipt of notice of such change; and
(iii) in the case of a Transfer Notice that relates to a Tender Offer, if
the Tender Offer expires or is terminated and the tender offeror does not
consummate the purchase of any Common Stock subject to the Tender Offer for
any reason (other than the failure to satisfy a condition of the Tender
Offer that requires that a specified number or percentage of shares be
tendered or that requires that certain identified persons tender their
shares, as a result of a Specified Class B Transferor being unable to
tender the Transferred B Interest as a result of the operation of this
Section 17), then notwithstanding anything to the contrary contained in
this Agreement, any Transfer Notice or Exercise Notice delivered in respect
thereof shall be deemed null and void.
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In the event, however, that the Acquiring Specified Class B Holders, the
Acquiring Class C Holders and GE do not collectively agree to acquire all of a
Transferred B Interest pursuant to this Section 17, then the Specified Class B
Transferor shall be entitled to:
(A) Transfer all but not less than all (subject to Section 17(d)) of such
Transferred B Interest to the Person and on the terms set forth in the
Transfer Notice associated with such Transferred B Interest (it being
understood that if the Transfer Notice relates to a Public Sale, such terms
shall be at one or more Public Sales of the type described in the Transfer
Notice at any available price in connection with such sales); provided,
however, that if such Transfer is not consummated within one hundred and
eighty (180) calendar days (ninety (90) calendar days in the case of a Fast
Track Sale) following the date of such Transfer Notice (subject to
extension for an additional period not to exceed 90 additional days as
required to secure any necessary approvals of any governmental entity
required for such Transfer, and subject to extension for a period equal to
the period during which time periods for delivery of Exercise Notices were
tolled pursuant to the penultimate sentence of Section 17(b)), such
Transferred B Interest shall once again be subject to the right of first
refusal process of this Section 17;
(B) Transfer to the Acquiring Specified Class B Holder, the Acquiring
Class C Holders and GE, as applicable, in accordance with Section 20 (and
as provided above), the portion of such Transferred B Interest that they
respectively agreed to acquire, allocated pursuant to this Section 17, and
retain the remainder of the Transferred B Interest; or
(C) retain such Transferred B Interest;
provided that if the Specified Class B Transferor does not notify each
Acquiring Specified Class B Holder, each Acquiring Class C Holder and GE (if
applicable) in writing of its election pursuant to this Section 17(c) within
five calendar days after the date of the last Exercise Notice delivered in
respect thereof, then the Specified Class B Transferor shall be conclusively
deemed to have elected to take the action described in clause (B) hereof.
(d) A Specified Class B Transferor may Transfer less than all of the
Transferred B Interest if required (i) in the case of a Public Sale, by
prevailing market conditions at the time of the Transfer or required by
underwriter's cut-backs or (ii) in the case of a Tender Offer, as a result of
proration by the tender offeror.
(e) At the option of any Specified Class B Transferor any shares of Class B
Stock comprising a Transferred B Interest may be converted pursuant to the
Charter prior to the Transfer thereof pursuant to this Section 17 into and may
be Transferred as shares of Class A Stock; provided, however, that such
Specified Class B Transferor shall have indicated on the applicable Transfer
Notice its election to Transfer such shares of its Transferred B Interest as
shares of Class A Stock. Any such election, when made, shall be irrevocable
and shall apply both to the Transfer of such Transferred B Interest to the
Person set forth in the Transfer Notice associated with such Transferred B
Interest and to the Transfer of such Transferred B Interest to the Acquiring
Specified Class B Holders, the Acquiring Specified Class C Holders and GE
hereunder.
(f) In the case of any Transfer of Covered B Securities pursuant to a Public
Sale, if the Company exercises any right to delay the filing or effectiveness
of a registration statement relating to such Covered B Securities or to
suspend sales under such registration statement, then the 180-day or 90-day
period in which the Specified Class B Transferor has the right to Transfer
such Covered B Securities pursuant to Section 17(c) shall be tolled during the
period of any such delay or suspension.
(g) From and after the Class C Termination Date, the time periods set forth
in Section 17(b) (other than those that relate to Fast-Track Sales and Tender
Offers) shall each be shortened by 5 calendar days.
Section 18. Right of First Refusal for Class C Stock. (a) Except with
respect to Transfers described in clauses (i), (iii), (iv) or (v) of Section
13(b), if at any time any Class C Holder (each, a "Class C Transferor",
provided that for purposes of this Section 18, TWE and Newhouse, together with
their respective Affiliates, shall be deemed to be a single Class C Holder and
a single Acquiring Class C Holder (unless either of them is a Class C
Transferor, in which case each shall be a separate Class C Holder)) proposes
to Transfer any Covered C
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Securities held of record or owned beneficially by such Class C Transferor
(collectively, the "Transferred C Interest"), such Class C Transferor shall be
free to negotiate with any prospective transferee to obtain an offer to
purchase all or any portion of the Transferred C Interest. In the event that
the Class C Transferor (i) receives from a prospective transferee (other than
a Transferee under clause (i), (iii), (iv) or (v) of Section 13(b)) a bona
fide, fully financed offer on terms that such Class C Transferor is willing to
accept or (ii) seeks to Transfer the Transferred C Interest pursuant to a
Public Sale or a Tender Offer, such Class C Transferor shall provide a
Transfer Notice to each Class C Holder (other than the Class C Transferor),
each Specified Class B Holder, GE and the Company. Each such Transfer Notice
shall include (i) in the case of a Transfer other than pursuant to a Public
Sale or a Tender Offer, the identity of the prospective buyer, the price per
share offered, the terms of the prospective buyer's financing and the other
material terms of the offer, (ii) in the case of a Transfer pursuant to a
Public Sale, the Current Market Price of the applicable Transferred C Interest
as of the date of such Transfer Notice (or a reference that the Board must
determine such Current Market Price, if applicable) and whether or not such
Public Sale is to be a Fast-Track Sale, and (iii) in the case of a Transfer
pursuant to a Tender Offer, the Tender Offer price per share (the foregoing
being the "C Offered Terms").
(b) Upon receipt of a Transfer Notice relating to Covered C Securities of a
Class C Transferor, each other Class C Holder, each Specified Class B Holder
and GE shall have the right, in the priority and within the time periods
specified below, to irrevocably elect to acquire the applicable Transferred C
Interest (or portions thereof) by delivering an Exercise Notice to such Class
C Transferor, each other Class C Holder, each Specified Class B Holder and GE,
as applicable. Any such Exercise Notice shall specify the maximum amount of
the Transferred C Interest that the Person delivering such notice is willing
to purchase. In the event that the Board is required to determine the Current
Market Price for purposes of this Section 18, notice thereof shall be promptly
delivered by the Company to each Specified Class B Holder, each Class C Holder
and GE, and any time periods provided under this Section 18 for delivery of an
Exercise Notice shall be tolled during the period of such determination.
Subject to the foregoing, no Class C Holder, Specified Class B Holder or GE
shall have the right to elect to acquire a Transferred C Interest (or portions
thereof) if such Class C Holder, such Specified Class B Holder or GE, as
applicable, fails to provide to the Class C Transferor and to each other Class
C Holder, each Specified Class B Holder and GE, as applicable, an Exercise
Notice with respect to such Transferred C Interest within the time periods
specified in this Section 18(b).
(i) First, a Class C Holder (other than a Class C Transferor) shall have
the right to elect to acquire a Transferred C Interest (in an amount
determined as specified below) by delivering an Exercise Notice as provided
herein within twenty (20) calendar days (provided that, in the case of a
Fast-Track Sale, such Exercise Notice shall be delivered within ten (10)
calendar days and, in the case of a Tender Offer, such Exercise Notice
shall be delivered within seven (7) calendar days) from the date of the
Transfer Notice associated with such Transferred C Interest. In the event
that a Class C Holder delivers an Exercise Notice with respect to a
Transferred C Interest as provided herein, such Acquiring Class C Holder
shall have the right to acquire its pro rata portion (or a smaller amount)
of the Transferred C Interest (based on the respective holdings of Class C
Stock of each Acquiring Class C Holder at the time of the Transfer Notice)
until all of such Transferred C Interest has been allocated pro rata among
the Acquiring Class C Holders; provided, that if any Acquiring Class C
Holder elects to acquire a smaller amount than its pro rata portion of a
Transferred C Interest, then each other Acquiring Class C Holder that
stated in its Exercise Notice a willingness to acquire more than its pro
rata portion of such Transferred C Interest shall be allocated the excess
pro rata based on the respective holdings of Class C Stock of each such
Acquiring Class C Holder at the time of the Transfer Notice, in each case
up to the maximum specified in the applicable Acquiring Class C Holder's
Exercise Notice.
(ii) Second, each Specified Class B Holder shall have the right to
acquire any portion of a Transferred C Interest that has not been acquired
by any Class C Holder as provided above in Section 18(b)(i) (in an amount
determined as specified below) by delivering an Exercise Notice as provided
herein within twenty five (25) calendar days (provided that, in the case of
a Fast-Track Sale, such Exercise Notice shall be delivered within fifteen
(15) calendar days and, in the case of a Tender Offer, such Exercise Notice
shall be delivered within eleven (11) calendar days) from the date of the
Transfer Notice associated with such
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Transferred C Interest. In the event that an Acquiring Specified Class B
Holder delivers an Exercise Notice with respect to a Transferred C Interest
as provided herein, such Acquiring Specified Class B Holder shall have the
right to acquire its pro rata portion (or a smaller amount) of the
remaining portion of such Transferred C Interest (based on the respective
holdings of Class B Stock of each Acquiring Specified Class B Holder at the
time of the Transfer Notice) until all of such remaining portion has been
allocated pro rata among the Acquiring Specified Class B Holders; provided,
that if any Acquiring Specified Class B Holder elects to acquire a smaller
amount than its pro rata portion of a Transferred C Interest, then each
other Acquiring Specified Class B Holder that stated in its Exercise Notice
a willingness to acquire more than its pro rata portion of such Transferred
C Interest shall be allocated the excess (pro rata based on the respective
holdings of Class B Stock of each such Acquiring Specified Class B Holder
at the time of the Transfer Notice), in each case up to the maximum
specified in the applicable Acquiring Specified Class B Holder's Exercise
Notice. Notwithstanding the foregoing, (i) if only one Acquiring Specified
Class B Holder delivers an Exercise Notice with respect to a Transferred C
Interest as provided herein, or (ii) in a case covered by the proviso of
the preceding sentence, if only one Acquiring Specified Class B Holder
states in its Exercise Notice a willingness to acquire more than its pro
rata portion of such Transferred C Interest, then such Acquiring Specified
Class B Holder shall have the right to acquire up to 100% of the remaining
portion of such Transferred C Interest, or of such excess, as the case may
be, subject to the maximum specified in such Acquiring Specified Class B
Holder's Exercise Notice, without regard to the number of shares of Class B
Stock (if any) held by such Acquiring Specified Class B Holder at the time
of the applicable Transfer Notice.
(iii) Third, GE shall have the right to acquire the remaining portion of
a Transferred C Interest that has not been acquired by any Class C Holder
or Specified Class B Holder as provided above in clauses (i) and (ii) of
this Section 18(b) by delivering an Exercise Notice as provided herein
within thirty (30) calendar days (provided that, in the case of a Fast-
Track Sale, such Exercise Notice shall be delivered within twenty (20)
calendar days and, in the case of a Tender Offer, such Exercise Notice
shall be delivered within fifteen (15) calendar days) from the date of the
Transfer Notice associated with such Transferred C Interest.
(c) In the event that, pursuant to their respective Exercise Notices, the
Acquiring Class C Holders, the Acquiring Specified Class B Holders and GE have
agreed to acquire an entire Transferred C Interest, then the Class C
Transferor shall Transfer such Transferred C Interest to the Acquiring Class C
Holders, the Acquiring Specified Class B Holders or GE, as applicable, on the
C Offered Terms, in accordance with Section 20; provided, that any Acquiring
Stockholder shall be entitled to elect to pay the Cash Equivalent of any non-
cash consideration offered as part of the C Offered Terms in satisfaction of
the foregoing; and provided, further, that:
(i) for avoidance of doubt, in the case of a Transfer Notice that relates
to a Public Sale, the Current Market Price per share of the applicable
Transferred C Interest as of the date of the applicable Transfer Notice
shall be the purchase price;
(ii) in the case of a Transfer Notice that relates to a Tender Offer, if
the Tender Offer price per share is changed from that specified in the
applicable Transfer Notice after any Exercise Notices are delivered by any
Stockholders, then (A) the Class C Transferor shall provide written notice
of such change to each Specified Class B Holder, each other Class C Holder
and GE within 48 hours of such change, (B) the C Offered Terms shall
thereupon be deemed amended to reflect such change (and any applicable
response deadline specified above shall be tolled for 48 hours) and (C)
notwithstanding anything to the contrary contained in this Agreement, any
Exercise Notice delivered prior to receipt of notice of such change may be
revoked by the applicable Stockholder by delivery of written notice of
revocation to each Stockholder receiving a copy of such Exercise Notice
within 48 hours of receipt of notice of such change; and
(iii) in the case of a Transfer Notice that relates to a Tender Offer, if
the Tender Offer expires or is terminated and the tender offeror does not
consummate the purchase of any Common Stock subject to the Tender Offer for
any reason (other than the failure to satisfy a condition of the Tender
Offer that requires that a specified number or percentage of shares be
tendered or that requires that certain identified persons tender their
shares as a result of a Class C Transferor being unable to tender the
Transferred C Interest as a
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result of the operation of this Section 18), then notwithstanding anything
to the contrary contained in this Agreement, any Transfer Notice or
Exercise Notice delivered in respect thereof shall be deemed null and void.
In the event, however, that the Acquiring Class C Holders, the Acquiring
Specified Class B Holders and GE do not collectively agree to acquire all of a
Transferred C Interest pursuant to this Section 18, then the Class C
Transferor shall be entitled to:
(A) Transfer all but not less than all (subject to Section 18(d)) of such
Transferred C Interest to the Person and on the terms set forth in the
Transfer Notice associated with such Transferred C Interest (it being
understood that if the Transfer Notice relates to a Public Sale, such terms
shall be at one or more Public Sales of the type described in the Transfer
Notice at any available price in connection with such sales); provided,
however, that if such Transfer is not consummated within one hundred and
eighty (180) calendar days (ninety (90) calendar days in the case of a Fast
Track Sale) following the date of such Transfer Notice (subject to
extension for an additional period not to exceed 90 additional days as
required to secure any necessary approvals of any governmental entity
required for such Transfer, and subject to extension for a period equal to
the period during which time periods for delivery of Exercise Notices were
tolled pursuant to the penultimate sentence of Section 18(b)), such
Transferred C Interest shall once again be subject to the right of first
refusal process of this Section 18;
(B) Transfer to the Acquiring Class C Holders, the Acquiring Specified
Class B Holders and GE, as applicable, in accordance with Section 20 (and
as provided above), the portion of such Transferred C Interest that they
respectively agreed to acquire, allocated pursuant to this Section 18, and
retain the remainder of the Transferred C Interest; or
(C) retain such Transferred C Interest;
provided, that if the Class C Transferor does not notify each Acquiring Class
C Holder, each Acquiring Specified Class B Holder and GE (if applicable) in
writing of its election pursuant to this Section 18(c) within five calendar
days after the date of the last Exercise Notice delivered in respect thereof,
then the Class C Transferor shall be conclusively deemed to have elected to
take the action described in clause (B) hereof.
All shares of Class C Stock comprising a Transferred C Interest shall be
Transferred as shares of Class C Stock to any Acquiring Class C Holder
pursuant to this Section 18(c). No shares of Class C Stock comprising a
Transferred C Interest may be Transferred pursuant to this Section 18(c) as
shares of Class C Stock to any Person other than an Acquiring Class C Holder
and any such shares shall be converted prior to such Transfer into, and shall
be Transferred as, shares of Class B Stock, in accordance with the Charter.
(d) A Class C Transferor may Transfer less than all of the Transferred C
Interest if required (i) in the case of a Public Sale, by prevailing market
conditions at the time of the Transfer or required by underwriter's cut- backs
or (ii) in the case of a Tender Offer, as a result of proration by the tender
offeror.
(e) In the case of any Transfer of Covered C Securities pursuant to a Public
Sale, if the Company exercises any right to delay the filing or effectiveness
of a registration statement relating to such Covered C Securities or to
suspend sales under such registration statement, then the 180-day or 90-day
period in which the Class C Transferor has the right to Transfer such Covered
C Securities pursuant to Section 18(c) shall be tolled during the period of
any such delay or suspension.
(f) From and after the Class C Termination Date, the time periods set forth
in Section 18(b) (other than those that relate to Fast-Track Sales and Tender
Offers) shall each be shortened by 5 calendar days.
(g) Notwithstanding anything to the contrary in this Section 18, Newhouse
shall individually be an Acquiring Class C Holder for purposes of this Section
18 in the event that TWE intends to Transfer pursuant to this Section 18 any
shares of Class C Stock held of record or beneficially owned by TWE and (i)
pursuant to
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such Transfer, TWE, Newhouse and their respective Affiliates shall cease to
have the right to nominate any C Directors pursuant to Section 7 and (ii)
Newhouse shall not have Transferred (other than to an Affiliate of Newhouse)
any of the shares of Class C Stock held of record or beneficially owned by
Newhouse on the Effective Date. In such event, TWE shall provide Newhouse with
a Transfer Notice as provided in the Newhouse Voting Agreement, and Newhouse
shall have the right to acquire, prior to any other Class C Holder, any
Specified Class B Holder or GE, up to a number of shares of Class C Stock
proposed to be Transferred by TWE as shall be necessary for Newhouse to become
entitled pursuant to Section 7(a)(i) to nominate one C Director (but not
including any additional shares that would need to be acquired by Newhouse to
prevent Section 7(a)(ii) from being applicable to it). Any shares of Class C
Stock acquired by Newhouse from TWE pursuant to this Section 18(g) shall be
Transferred to Newhouse on the terms set forth in the Transfer Notice
associated with such shares. After the acquisition of such shares by Newhouse,
any remaining shares of Class C Stock proposed to be Transferred by TWE shall
be subject to the provisions of this Section 18.
Section 19. Claw Back Rights. (a) In the event that any Specified Class B
Holder or any Class C Holder (provided that, for purposes of this Section 19,
TWE and Newhouse, together with their respective Affiliates, shall
collectively be a single Class C Holder) shall at any time hold record or
beneficial ownership of, or the direct or indirect right to vote, any shares
of capital stock of the Company which, together with all shares of capital
stock of the Company held of record or beneficially owned by all Affiliates of
such Specified Class B Holder or Class C Holder, as applicable, shall entitle
such Class B Holder or Class C Holder and its Affiliates to hold the record or
beneficial ownership of, or vote or direct the vote of, shares of capital
stock of the Company with aggregate voting power in excess of 49% of the total
outstanding voting power with respect to the election of directors that are
elected by all the Company's stockholders voting as a single class (the
"Common Director Voting Power"), such Specified Class B Holder or Class C
Holder, as applicable (the "High Voting Holder"), shall be required to offer,
and shall cause its Affiliates (if applicable and necessary) to offer
(collectively, the "Claw Back Offer"), to each other Specified Class B Holder
and Class C Holder (pro rata based on the percentage of the total Common
Director Voting Power that they respectively control as of the date of such
offer) such number of shares of Class B Stock or Class C Stock as would be
necessary (assuming conversion of all such shares to Class A Stock immediately
after such Transfer) to reduce the aggregate Common Voting Power of the High
Voting Holder and its Affiliates to 49% or less (such amount, the "High Vote
Offered Interest"), as well as their pro rata portion of any such shares of
the High Vote Offered Interest not acquired by any such other Specified Class
B Holder or Class C Holders pursuant to this Section 19. Each Claw Back Offer
must be made by written notice from the High Voting Holder to each such other
Specified Class B Holder and Class C Holder given within ten (10) calendar
days from the date on which the High Voting Holder and its Affiliates (if
applicable) first holds of record or owns beneficially, or has the right to
vote or cause the vote of, a number of shares of capital stock of the Company
with aggregate voting power in excess of 49% of the Common Director Voting
Power. Each such other Specified Class B Holder and Class C Holder, as
applicable, shall have the right to exercise their respective right to acquire
their pro rata share of the High Vote Offered Interest of the High Voting
Holder and its Affiliates (if applicable) by delivery of written notice to the
High Voting Holder specifying the maximum number of shares of the High Vote
Offered Interest such other Specified Class B Holder or Class C Holder is
willing to purchase within twenty (20) calendar days from the applicable Claw
Back Offer. Any shares of Class B Stock or Class C Stock required to be
offered pursuant to this Section 19(a) but not acquired after compliance
herewith shall cease to be subject to the provisions of this Section 19.
(b) Any Class B Stock or Class C Stock Transferred pursuant to a Claw Back
Offer as provided in Section 19(a) shall be converted into Class A Stock prior
to the acquisition thereof and shall be Transferred, in accordance with
Section 20, at its Current Market Price calculated as of the trading day
immediately preceding the closing date for such acquisition; provided,
however, that in the event that the Board is required to determine the Current
Market Price for purposes of this Section 19, such Current Market Price shall
be calculated as of the date of the applicable Claw Back Offer and notice
thereof shall be promptly delivered by the Company to each Specified Class B
Holder and Class C Holder, and any time periods provided under this Section 19
for delivery of a notice accepting a Claw Back Offer under this Section 19
shall be tolled during the period of such determination.
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Section 20. Closing Mechanics; Agreement to Cooperate. (a) The date, place
and time of the closing of a Transfer of any Covered B Securities, Covered C
Securities or other shares of Common Stock pursuant to the exercise of a Cable
Sale Call Right under Section 16, a right of first refusal under Sections 17
or 18, or a Claw Back Offer under Section 19, shall be determined by the
applicable Transferor and communicated to each applicable Acquiring
Stockholder, in writing, at least seven (7) calendar days prior to such
closing; provided, however, that in no event shall such closing be later than
sixty (60) calendar days from the date of the last notice of exercise
delivered in connection with such closing pursuant to Section 16, 17, 18 or
19, as applicable (subject to extension for an additional period not to exceed
90 additional days as required to secure any necessary approvals of any
governmental entity required for such Transfer). At any such closing, the
Transferor shall deliver certificates evidencing the securities required to be
Transferred at such closing, duly endorsed or accompanied by written
instruments of Transfer in form satisfactory to the applicable Acquiring
Stockholders, duly executed by such Transferor, free and clear of any liens or
other encumbrances, against delivery of the applicable purchase price therefor
by the applicable Acquiring Stockholder.
(b) Each party to this Agreement hereby agrees to use its commercially
reasonable efforts to cooperate with any Specified Class B Holder, any Class C
Holder or GE, as applicable, to effect any Transfer of Covered B Securities,
Covered C Securities or other shares of Common Stock by such Specified Class B
Holder, such Class C Holder or GE in compliance with Sections 13, 16, 17, 18
or 19 herein, including by (i) having qualified personnel attend and
participate in hearings and meetings scheduled for the purpose of obtaining
relevant consents, approvals or authorizations that may be required to effect
such Transfer and (ii) making all necessary or appropriate filings with, and
giving all necessary or appropriate notices to, governmental authorities and
third parties to effect such Transfer. No party to this Agreement shall take
any action that is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, discourage or adversely affect a Transfer of
Covered B Securities, Covered C Securities or other shares of Common Stock in
compliance with Sections 13, 16, 17, 18 or 19 herein.
(c) Notwithstanding anything to the contrary in this Agreement, no party to
this Agreement shall be required to agree to any prohibition, limitation or
other requirements that would (i) prohibit or limit the ownership or operation
by such party or any of its subsidiaries or affiliates of any portion of the
business or assets of such party or any of its subsidiaries or affiliates, or
compel such party or any of its subsidiaries or affiliates to dispose of or
hold separate any portion of the business or assets of such party or any of
its subsidiaries or affiliates, (ii) impose limitations on the ability of such
party to acquire or hold, or exercise full rights of ownership of, any shares
of capital stock of the Company, including the right to vote the capital stock
of the Company acquired by it on all matters properly presented to the
stockholders of the Company, (iii) prohibit such party or any of its
subsidiaries or affiliates from effectively controlling in any material
respect the business or operations of such party or any of its subsidiaries or
affiliates or (iv) change in any respect the governance of the Company from
that set forth in Charter and By-laws, or change such party's rights under
this Agreement or the Newhouse Voting Agreement, or impose limitations on the
ability of such party to exercise any such rights.
Section 21. Initial Board Resolution. The form of board resolution attached
hereto as Exhibit B sets forth certain matters that will require the approval
of a simple majority of the Board. The parties hereto agree to use their
commercially reasonable efforts to cause such resolution to be adopted by the
Board at the first meeting of the Board immediately after the Effective Date.
Section 22. Representations and Warranties. (a) Each Specified Class B
Holder, each Class C Holder and GE, severally and not jointly, hereby
represents and warrants to each other Stockholder that such Stockholder owns
of record and beneficially and has good and valid title to the number of
shares of Common Stock of the Company set forth opposite his or its name on
Exhibit A attached hereto and has voting control of such shares of Common
Stock, in each case as of the Effective Date. The shares of Common Stock so
listed constitute all securities of the Company owned of record or
beneficially by such Stockholder and all such securities as to which such
Stockholder has voting control, in each case as of the Effective Date.
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(b) Each party to this Agreement hereby represents and warrants to each
other party that (i) such party has the right, power and authority to enter
into this Agreement and perform its obligations hereunder, (ii) this Agreement
has been duly authorized by all necessary action prerequisite to the execution
and delivery thereof by such party and is the valid and binding obligation of
such party enforceable in accordance with its terms and (iii) the execution,
delivery and performance of this Agreement by such party and the transactions
contemplated hereby do not, with or without the giving of notice or the
passage of time or both, (x) violate any law, ordinance, rule or regulation or
any judgment, writ, injunction or order of any court, arbitrator or
governmental, administrative or self-regulatory body or agency, applicable to
such party, (y) except for (A) requirements, if any, arising out of any
required pre-merger notification and related filings with the Federal Trade
Commission and the Antitrust Division of the Department of Justice pursuant to
the HSR Act and (B) requirements, if any, arising out of the rules and
regulations adopted by the Federal Communications Commission, require the
consent or authorization of or waiver by or filing with any governmental,
administrative, self-regulatory body or agency or any other Person or entity
or (z) conflict with, result in the breach of any provision of, result in the
modification or termination of, require the consent or authorization of or
waiver by or filing with any other parties (other than such as has been
obtained prior to the date hereof) to, or result in the creation or imposition
of any lien or other encumbrance pursuant to or constitute a default under any
material agreement, permit, indenture, note, lease, license or franchise or
any other material instrument to which such party is a party.
(c) Each of the Stockholders, severally and not jointly, represents and
warrants to each other Stockholder and the Company that, except for this
Agreement (and, in the case of TWE and Newhouse, the Newhouse Voting
Agreement, and, in the case of TSAT and Malone, the TSAT Stockholders
Agreement), and except as otherwise described in Schedule 22 attached hereto,
at the Effective Date, such Stockholder has the sole right to vote and dispose
of its Covered Securities in its sole discretion and none of such Covered
Securities is subject to any voting trust or other agreement, arrange ment, or
restriction with respect to the voting thereof and there is no option,
warrant, right, call, proxy or other contract or agreement to which such
Stockholder is a party, or by which such Stockholder or any of its Covered
Securities is bound or affected, that directly or indirectly provides for the
sale, pledge or other Transfer of any of such Stockholder's Covered Securities
or any interest therein or any rights with respect thereto, relates to the
voting, Transfer or control of any thereof, or obligated such Stockholder or
any Affiliate of such Stockholder to grant, offer or enter into any of the
foregoing.
Section 23. No Other Voting Agreements. Subject to Sections 13(a)(B) and
13(b)(C), each Stockholder hereby agrees, and agrees to cause its Affiliates,
not to enter into any voting agreement (other than this Agreement) with, nor
to grant any proxies or powers of attorney (other than as contemplated by this
Agreement) to, nor to deposit into a voting trust with or otherwise directly
or indirectly transfer voting power (except as contemplated by this Agreement,
including Sections 13(a)(B) and 13(b)(C)) to, any other party herein or any of
such party's Affiliates or to any other Person. Notwithstanding this Section
23, each Stockholder hereby acknowledges and agrees that (i) each of TWE and
Newhouse are expressly permitted to enter into, and are concurrently with the
execution of this Agreement entering into, the Newhouse Voting Agreement and
(ii) each of Malone and TSAT are expressly permitted to enter into, and are
concurrently with the execution of this Agreement, entering into, the TSAT
Stockholders Agreement. Each of TWE and Newhouse hereby agrees not to amend
the Newhouse Voting Agreement without the prior written consent of each other
Stockholder.
Section 24. Events of Default. The following events shall constitute Events
of Default with respect to any Stockholder (each, a "Defaulting Party"):
(i) any of the representations or warranties made by such Stockholder
herein shall not be true and correct in all material respects on the date
of this Agreement; or
(ii) any breach or default in the performance by such Stockholder of any
material provision of this Agreement.
Section 25. Remedies; Specific Performance. (a) Upon the occurrence and
continuance of an Event of Default for fifteen (15) calendar days after
delivery by any other Stockholder to the Defaulting Party of a written notice
of such Event of Default: (i) each Stockholder that is not a Defaulting Party
shall be entitled to any
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<PAGE>
remedies that may be available to such Stockholder with respect to such Event
of Default at law or in equity, including seeking to enjoin such Event of
Default or seeking to obtain specific performance of a Defaulting Party's
obligations; and (ii) each Stockholder that is not a Defaulting Party shall be
entitled to, so long as such Event of Default shall continue,
(x) take any action as shall be necessary or appropriate to cause the
removal from the Board of each director nominated or designated by the
Defaulting Party in accordance with this Agreement; and
(y) deliver notice to the Defaulting Party stating that such non-
Defaulting Party is exercising its right pursuant to this Section 25(a)(y),
and upon receipt of such a notice, the Defaulting Party shall immediately
cease to have any rights under this Agreement; provided, that such rights
shall be automatically reinstated at such time as such Event of Default
shall be cured;
provided, however, that in all other respects the Defaulting Party shall
continue to have the obligations set forth in this Agreement.
(b) In order to effectuate the provisions of Section 25(a)(x), each
Stockholder hereby irrevocably grants to and appoints each other Stockholder
(and any officer of such Stockholder or each of them individually), such
Stockholder's proxy and attorney-in-fact (with full power of substitution), for
and in the name, place and stead of such Stockholder, to vote, act by written
consent or grant a consent, proxy or approval in respect of such granting
Stockholder's shares of, in the case of a Specified Class B Holder, Class B
Stock, in the case of GE, GE Shares, and in the case of a Class C Holder, Class
C Stock, in each case exclusively to remove from the Board the directors
nominated or designated by such granting Stockholder in accordance with this
Agreement; provided, that such proxy will only become effective upon the date
that such granting Stockholder becomes a Defaulting Party and shall only remain
in effect for so long as the Event of Default which caused the granting
Stockholder to become a Defaulting Stockholder has not been cured, subject to
being reinstated on the foregoing terms if such granting Stockholder shall
thereafter again become a Defaulting Stockholder. Each Stockholder hereby
affirms that the irrevocable proxy set forth in this Section 25(b) is given in
connection with the execution of the asset transfer and merger agreements
executed in respect of the Restructuring Transaction and that such irrevocable
proxy is given to secure the performance of the obligations of such Stockholder
under this Agreement. Each such Stockholder hereby further affirms that each
proxy hereby granted shall, for the term of this Agreement, be irrevocable and
shall be deemed coupled with an interest, in accordance with Section 212(e) of
the GCL.
(c) The remedies set forth in this Section 25 shall not be mutually
exclusive, and selection of or resort to any such remedy shall not preclude the
selection of or resort to any other such remedy and no selection of or resort
to a remedy shall constitute a waiver of any other remedy available hereunder.
(d) The parties hereto acknowledge that the benefits to them under this
Agreement are unique, that they are willing to enter into this Agreement only
upon performance by each other Stockholder of all their obligations hereunder
and that monetary damages would not afford an adequate remedy for failure to
perform any such obligations hereunder. Accordingly, the parties hereby consent
to specific performance of their obligations hereunder and waive any
requirement for securing or posting of any bond in connection with the
obtaining of any injunctive or other equitable relief to enforce their rights
hereunder.
Section 26. Covenants of the Company. (a) The Company hereby agrees that
until the earlier to occur of (x) the fifth anniversary of the Effective Date
and (y) the Class C Termination Date, any "Ancillary Investment" (as defined
below) in excess of U.S. $50,000,000 shall not be effected by the Company
without the affirmative vote of (i) a simple majority (as defined by the By-
laws) of the Board, (ii) a simple majority of the B Directors and (iii) a
simple majority of the C Directors. As used herein, "Ancillary Investment"
shall mean any investment or activity described in clause (ii) or (iii) of the
definition of Satellite Television Business.
(b) The Company hereby agrees that until the Class C Termination Date, it
shall not engage in any business other than the Satellite Television Business,
except for (x) any engagement resulting from the acquisition of a
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business or division at least a majority of the consolidated annual revenues
of which (as of the date of the applicable acquisition agreement) were derived
from the Satellite Television Business, if the portion of the acquired
business or division which is not engaged in or useful to the Satellite
Television Business has a fair market value (determined as set forth in clause
(iii) of the definition of Cash Equivalent) of U.S. $100,000,000 or less or
(y) any engagement for which the Company obtains the prior written consent of
either (A) any two of Comcast, Cox and MediaOne or (B) the holders of at least
83% of the total voting power of the then outstanding shares of Class C Stock
and the holders of at least a majority of the total voting power of the then
outstanding shares of Class B Stock.
Section 27. Term; Parties in Interest; Liability. (a) This Agreement shall
become effective on the date hereof and shall continue in effect until the
tenth anniversary of the date hereof whereupon it shall terminate, provided
that obligations incurred under this Agreement prior to such termination shall
survive such termination, and the provisions of this Section 27 and Sections
28 through 36 shall survive such termination.
(b) At such time as a party to this Agreement (other than the Company) shall
cease to be a Stockholder, such former Stockholder shall cease to have any
rights or obligations under this Agreement (other than under Section 29 hereof
in respect of the matters addressed in the proviso hereto); provided, that any
such former Stockholder shall be entitled to enforce any rights (and pursue
any claims in respect thereof) accruing to such former Stockholder under this
Agreement prior to the time that it ceased to be a Stockholder, and such
former Stockholder shall continue to be liable for all obligations incurred by
such former Stockholder under this Agreement prior to the time that it ceased
to be a Stockholder.
(c) MediaOne hereby agrees that it shall be liable (jointly and severally
with the MediaOne Transferors) for all obligations of the MediaOne Transferors
under this Agreement.
Section 28. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
Section 29. Exclusive Jurisdiction. With respect to any suit, action or
proceeding relating to this Agreement (collectively, a "Proceeding"), each
party to this Agreement irrevocably:
(i) consents and submits to the exclusive jurisdiction of the courts of
the States of New York and Delaware and any court of the United States
located in the Borough of Manhattan in New York City or the State of
Delaware;
(ii) waives any objection which such party may have at any time to the
laying of venue of any Proceeding brought in any such court, waives any
claim that such Proceeding has been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceeding, that
such court does not have jurisdiction over such party; and
(iii) consents to the service of process at the address set forth for
notices in Section 30 herein; provided that such manner of service of
process shall not preclude the service of process in any other manner
permitted under applicable law.
Section 30. Notices. Any notice or other communication that is required or
that may be given in connection with this Agreement shall be in writing and
shall be delivered personally, telecopied or sent by certified, registered or
express mail or by Federal Express or similar courier service, postage
prepaid, and shall be deemed given when so received if delivered personally or
by telecopy or, if mailed, seven (7) calendar days after the date of mailing
(three (3) calendar days in the case of express mail, Federal Express or
similar courier service), as follows:
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If to the Company:
8085 South Chester Street, Suite 300
Englewood, CO 80112
Attention of President
Facsimile: (303) 712-4977
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (212) 705-5125
If to TSAT:
8085 South Chester Street, Suite 300
Englewood, CO 80112
Attention of: Kenneth G. Carroll
Facsimile: (303) 712-4973
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Marc A. Leaf, Esq.
Facsimile: (202) 705-5125
If to TWE:
290 Harbor Drive
Stamford, CT 06902
Attention of General Counsel, Time Warner Cable
Facsimile: (203) 328-4840
With a separate copy delivered to:
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
Attention of John T. Gaffney, Esq.
Facsimile: (212) 474-3700
If to Newhouse:
5015 Campuswood Drive
East Syracuse, NY 13057
Attention of Robert J. Miron
Facsimile: (315) 463-4127
With a separate copy delivered to:
Sabin, Bermant & Gould
350 Madison Avenue
New York, NY 10017
Attention of Arthur J. Steinhauer, Esq.
Facsimile: (212) 692-4406
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If to Comcast:
1500 Market Street
Philadelphia, PA 19102
Attention of General Counsel
Facsimile: (215) 981-7794
With a separate copy delivered to:
Comcast Corporation
1500 Market Street
Philadelphia, PA 19102
Attention of Kathleen M. Hyneman, Esq.
Facsimile: (215) 981-7794
If to Cox:
1400 Lake Hearn Drive
Atlanta, GA 30319
Attention of Ajit Dalvi
Facsimile: (404) 847-6542
With a separate copy delivered to:
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, DC 20036
Attention of Stuart Sheldon, Esq.
Facsimile: (202) 776-222
If to MediaOne:
US WEST Media Group, Inc.
9785 Maroon Circle, Suite 420
Englewood, CO 80111
Attention of President
Facsimile: (303) 754-5452
With a separate copy delivered to:
US WEST Media Group, Inc.
188 Inverness Drive
Englewood, CO 80112
Attention of General Counsel
Facsimile: (303) 793-6707
If to GE:
Four Research Way
Princeton, NJ 08540
Attention of General Counsel
Facsimile: (609) 987-4233
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<PAGE>
With a separate copy delivered to:
Hogan & Hartson
555 13th Street N.W.
Washington DC 20004
Attention of Timothy A. Lloyd, Esq.
Facsimile: (202) 637-5910
If to Malone:
Tele-Communications, Inc.
4100 East Drycreek Road
Littleton, CO 80122
Attention of Stephen M. Brett, Esq.
Facsimile: (303) 488-3245
With a separate copy delivered to:
Baker & Botts, LLP
599 Lexington Avenue
New York, NY 10022
Attention of Elizabeth M. Markowski, Esq.
Facsimile: (212) 705-5125
Section 31. No Assignment. This Agreement shall inure to the benefit of and
be binding upon the Parties hereto and their respective successors and
permitted assigns, and, with respect to Malone, in the event of Malone's
incapacity or death, his legal representative, the executor or administrator
of his estate, and his heirs and beneficiaries. Except as specifically
provided herein, this Agreement and the rights and obligations hereunder may
not be assigned, in whole or in part. In connection with any Transfer by a
Stockholder to a Permitted Transferee of such Stockholder in accordance with
Section 13, such Permitted Transferee shall, as a condition precedent to such
Transfer, become a party to this Agreement, by executing and delivering to
each other party to this Agreement a counterpart hereof, whereupon such
Permitted Transferee shall become a party to this Agreement as a Specified
Class B Holder or a Class C Holder or GE, as applicable, and shall be bound by
and entitled to the benefits of this Agreement, for all purposes hereof. Upon
such execution and delivery by a Permitted B Transferee or Permitted C
Transferee, such Permitted B Transferee or Permitted C Transferee shall become
a Specified Class B Holder or a Class C Holder, respectively, for all purposes
herein, including the right to exercise a right of first refusal pursuant to
Sections 17 and 18; provided, that no Specified Class B Holder, Class C Holder
or GE shall be under any obligation to deliver Transfer Notices or Exercise
Notices to such Person under Section 17 or 18, as applicable, in respect of a
proposed Transfer the Transfer Notices for which were sent prior to the date
such Person became a Specified Class B Holder or Class C Holder (however, such
Person shall be entitled to exercise a right of first refusal in respect of
such Transfer if such Person is able to meet the applicable deadline for
delivery of an Exercise Notice pursuant to such Section 17 or 18, as
applicable). Any purported assignment in violation of this Section 31 shall be
void and unenforceable.
Section 32. Descriptive Headings. The headings in this Agreement are for
reference purposes only and do not form part of this Agreement, nor shall such
headings in any way affect the meaning or interpretation of any provisions
herein.
Section 33. Severability. If any Section, sentence, subsection, term or
provision in this Agreement is determined to be illegal, invalid or
unconstitutional by any court, such determination shall have no effect on the
validity of any other Section, sentence, subsection, term or provision herein,
all of which shall remain in full force and effect for the term of this
Agreement; provided, however, that the Parties agree to negotiate in good
faith with respect to an equitable modification of any such Section, sentence,
subsection, term or provision or application thereof held to be illegal,
invalid or unconstitutional so as to put each party in substantially the same
G-30
<PAGE>
position with respect to such Section, sentence, subsection, term or provision
or application thereof as such party was prior to such determination. To the
extent permissible under applicable law, each party to this Agreement hereby
waives any provision of applicable law that would render any Section,
sentence, subsection, term or provision in this Agreement invalid, illegal or
unenforceable in any respect.
Section 34. Amendments. This Agreement may not be amended except by a
written instrument duly signed by each Stockholder and, if such amendment
alters any obligations of the Company hereunder, the Company.
Section 35. Share Number Adjustment. All references in this Agreement to a
number of shares of Class B Stock or Class C Stock outstanding on the
Effective Date (in each case, a "Share Number") shall mean the applicable
Share Number as adjusted, from time to time, on a cumulative basis, as
provided in the next sentence. If after the Effective Date the Company (A)
splits, subdivides, or combines its outstanding shares of such Class B Stock
or Class C Stock into a greater or smaller number of shares, (B) issues by
reclassification or recapitalization of such Class B Stock or Class C Stock
any shares of capital stock of the Corporation, or (C) pays a dividend or
makes a distribution on, such shares of Class B Stock or Class C Stock in
shares of Class B Stock or Class C Stock (as applicable), the applicable Share
Number as in effect immediately prior to such action shall be adjusted to
reflect the number of such shares that would have been outstanding on the
Effective Date had such action been taken on the Effective Date prior to
computation of such Share Number.
Section 36. Integration. This Agreement, the Restructuring Agreement, the
Merger Agreements, the Asset Transfer Agreements, the US West Guarantee, the
Reimbursement Agreements, the Malone Letter, the Newhouse Voting Agreement,
the Registration Rights Agreement, the Voting Agreements, the Tax Sharing
Agreement, the TSAT Merger Agreement, the TSAT Stockholders Agreement, the
Drop Down Agreement and the TSAT Tempo Agreement (each as defined in the
Restructuring Agreement) constitute the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior agreements
and under standings among the parties with respect thereto.
Section 37. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed as of the day first written above.
Primestar, Inc., a Delaware
corporation,
by
-----------------------------------
Name:
Title:
TCI Satellite Entertainment, Inc., a
Delaware corporation,
by
-----------------------------------
Name:
Title:
G-31
<PAGE>
Time Warner Entertainment Company,
L.P., a Delaware limited
partnership,
by American Television and
Communications Corporation, a
general partner,
by
-------------------------------
Name:
Title:
Advance/Newhouse Partnership, a New
York general partnership,
by Advance Communication Corp., a
general partner,
by
--------------------------------
Name:
Title:
Comcast Corporation, a Pennsylvania
corporation,
by
------------------------------------
Name:
Title:
Cox Communications, Inc., a Delaware
corporation,
by
------------------------------------
Name:
Title:
Mediaone of Delaware, Inc., a
Delaware corporation,
by
------------------------------------
Name:
Title:
G-32
<PAGE>
Continental Satellite Company, Inc.,
by
----------------------------------
Name:
Title:
Continental Satellite Company of
Chicago, Inc.,
by
----------------------------------
Name:
Title:
Continental Satellite Company of
Minnesota, Inc.,
by
----------------------------------
Name:
Title:
Continental Satellite Company of New
England, Inc.,
by
----------------------------------
Name:
Title:
Continental Satellite Company of
Michigan, Inc.,
by
----------------------------------
Name:
Title:
Continental Satellite Company of
Ohio, Inc.,
by
----------------------------------
Name:
Title:
G-33
<PAGE>
Continental Satellite Company of
Virginia, Inc.,
by
----------------------------------
Name:
Title:
Mediaone Satellite II, Inc.,
by
----------------------------------
Name:
Title:
GE American Communications, Inc., a
Delaware corporation,
by
----------------------------------
Name:
Title:
-------------------------------------
John C. Malone
G-34
<PAGE>
EXHIBIT A
[Shares--To be attached on Closing Date]
G-35
<PAGE>
EXHIBIT B
FORM OF BOARD RESOLUTION OF THE COMPANY
RESOLVED, that until the Board of Directors by resolution otherwise
provides, each of the following actions by the Company shall require the prior
approval of the Board of Directors, by the requisite vote thereof as specified
in the By-laws:
(i) the approval, amendment or substitution of the annual budget of the
Company and its subsidiaries;
(ii) any expenditure by the Company or any of its subsidiaries not
contemplated by the approved budget that individually is in excess of
$1,000,000 or that collectively in any annual period exceeds $10,000,000.
(iii) the appointment and removal of senior executive officers of the
Company (including the Chief Executive Officer, the Chief Financial Officer
and the Chief Operating Officer);
(iv) the incurrence by the Company (or any subsidiary thereof) of any
indebtedness or other liability (including contingent liabilities pursuant
to guarantees or otherwise) for borrowed money (other than borrowings under
credit facilities made in accordance with approved budgets), any
refinancings of outstanding indebtedness for borrowed money of the Company
(or any subsidiary thereof), the issuance by the Company (or any subsidiary
thereof) of any debt securities or the entering by the Company into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing, in each case individually involving an obligation of the Company
(or any subsidiary thereof) in excess of U.S. $10,000,000 or collectively
in excess of U.S. $25,000,000;
(v) the grant of any security for any indebtedness for borrowed money of
the Company (or any subsidiary thereof) or the provision of any additional
security for any of their respective secured indebtedness for borrowed
money or the grant of any security for the purchase price of any property
(other than purchase money security interests attaching only to the
property so acquired), in each case individually involving a capital
commitment (contingent or otherwise) by the Company (or any subsidiary
thereof) in excess of U.S. $10,000,000 or collectively in excess of U.S.
$25,000,000;
(vi) the making of any capital expenditures (including with respect to
equipment, satellites, programming or other matters to be agreed upon) that
are not specifically provided for in the approved budget and that are
individually in excess of U.S. $1,000,000 or collectively in excess of U.S.
$10,000,000 for any fiscal year;
(vii) matters relating to any material litigation involving the Company
or any of its Affiliates;
(viii) any issuance by the Company of equity securities not subject to
super-majority approval, other than issuances upon the conversion, exercise
or exchange of outstanding rights and convertible or exchangeable
securities;
(ix) any amendment, alteration or repeal of any provision of the Charter
or By-laws not subject to super-majority approval or other requisite vote
expressly provided for; and
(x) the making by the Company (or any controlled subsidiary thereof) of
any loans or advances to others (other than loans and advances by the
Company to its wholly owned subsidiaries or by a wholly owned subsidiary to
another wholly owned subsidiary of the Company) or the acquisition by the
Company (or any controlled subsidiary thereof) of debt securities of
others, in each case other than in the ordinary course of business.
G-36
<PAGE>
APPENDIX H
H-1
VOTING AGREEMENT (this "Agreement"), dated as of June 12, 1997, among John
C. Malone ("Malone"), TIME WARNER CABLE, a division of Time Warner
Entertainment Company, L.P., a Delaware limited partnership ("TWC"), COMCAST
CORPORATION, a Pennsylvania corporation ("Comcast"), TCI SATELLITE
ENTERTAINMENT, INC., a Delaware corporation ("TSAT"), COX COMMUNICATIONS,
INC., a Delaware corporation ("Cox"), MEDIAONE OF DELAWARE INC., a Delaware
corporation ("MediaOne"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York general
partnership ("Newhouse"), and GE AMERICAN COMMUNICATIONS, INC., a Delaware
corporation ("GE", and together with TWC, Comcast, TSAT, Cox, MediaOne and
Newhouse, the "Parties" and each individually, a "Party").
WHEREAS, the Parties have agreed to exchange their respective interests in
PRIMESTAR Partners L.P., a Delaware limited partnership, and certain related
assets for (i) an amount of cash (or the assumption of debt by a public
company ("NewCo") that will be the ultimate parent entity of or otherwise hold
the assets of TSAT) and (ii) shares of NewCo Common Stock and certain voting
rights in connection therewith (collectively, the "Roll-up"); and
WHEREAS, the transactions contemplated by the Parties in connection with the
Roll-up are described in the Letter and Summary of Business Terms attached
hereto as Exhibit A.
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Malone and each Party hereby agrees as follows:
Section 1. Agreement to Vote. In connection with any vote or written consent
of stockholders of TSAT to approve the Roll-up, Malone hereby agrees, and
represents and warrants to each Party, that he shall vote or cause to be voted
(or act by consent in respect of) all shares (the "Shares") of TSAT Common
Stock which he shall have the power to vote or direct the vote of, in each
case at the time of such stockholder vote or action by written consent,
exclusively in favor of each transaction described in the Letter and Summary
of Business Terms for the PRIMESTAR Partners Roll-Up attached hereto as
Exhibit A, substantially in the form contemplated therein.
Section 2. Proxy. Malone hereby irrevocably appoints each Party (and any
officer of such Party or each of them individually), with full power of
substitution, the proxy of such stockholder with full power and authority, in
the event that he shall at any time fail to perform his obligations under
Section 1 hereof, to vote or act by written consent in respect of the Shares
exclusively in favor of each transaction described in the Letter and Summary
of Business Terms for the PRIMESTAR Partners Roll-Up attached hereto as
Exhibit A, substantially in the form contemplated therein. The proxy hereby
granted shall, for the term of this Agreement, be irrevocable and shall be
deemed coupled with an interest, in accordance with Section 212 of the
Delaware General Corporation Law.
Section 3. Restriction on Transfer. Malone shall not, directly or
indirectly, (i) offer for sale, sell, transfer, tender, pledge, encumber,
assign or otherwise dispose of, or enter into any contract, option, or other
arrangement or understanding with respect to or consent to the offer for sale,
sale, transfer, tender, pledge, encumbrance, assignment or other disposition
of any or all of the Shares or any interest therein (except, in the case of a
transfer, if the transferee agrees in writing to be bound by the terms of this
Voting Agreement), (ii) except as contemplated by this Agreement, grant any
proxies or power of attorney, deposit any Shares into a voting trust or enter
into a voting agreement with respect to the Shares; or (iii) take any action
that would have the effect of preventing or disabling him from performing his
obligations under this Agreement.
Section 4. Stop Transfer. Malone agrees with, and covenants to, each Party,
that he shall not request that TSAT register the transfer (book entry or
otherwise) of any certificate or uncertificated interest representing any of
the Shares, unless such transfer is made in compliance with this Agreement
(including the provisions of
H-1-1
<PAGE>
Section 3 hereof). TSAT agrees with, and covenants to, each other Party that
TSAT shall not register the transfer (book entry or otherwise) of any
certificate or uncertificated interest representing any of the Shares, unless
such transfer is made in compliance with this Agreement (including the
provisions of Section 3 hereof). In the event of a stock dividend or
distribution, or any change in TSAT's stock by reason of any stock dividend,
split-up, recapitalization, combination, exchange of shares or the like, the
term "Shares" shall be deemed to refer to and include the Shares as well as
all such stock dividends and distributions and any shares into which or for
which any or all of the Shares may be changed or exchanged.
Section 5. Specific Performance. In the event of any breach of the
provisions hereof by Malone, each Party shall be entitled, in addition to any
other remedies that such Party may have at law or in equity, to injunctive
relief or an order of specific performance. No failure or delay by any Party
in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege hereunder.
Section 6. Term. This Agreement shall become effective on the date hereof
and shall continue in effect until the earlier of (i) the termination of the
Letter and Summary of Business Terms for the PRIMESTAR Partners Roll-Up
attached hereto as Exhibit A pursuant to the provisions set forth therein and
(ii) the consummation of all transactions contemplated in the Letter and
Summary of Business Terms for the PRIMESTAR Partners Roll-Up attached hereto
as Exhibit A and (iii) August 31, 1998.
Section 7. Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of Delaware, without
regard to any conflicts of law principles.
Section 8. Assignment. No party hereto may assign any of its rights or
obligations under this Agreement to any person. Any purported assignment in
violation of this Section 8 shall be void and unenforceable.
Section 9. Integration. This Agreement shall constitute the entire
understanding among the parties hereto with respect to the subject matter
hereof and shall supersede any prior or contemporaneous agreements among such
parties with respect thereto.
Section 10. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
H-1-2
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed as of the date first above written.
John C. Malone
/s/ John C. Malone
_____________________________________
Time Warner Cable, a division of
Time Warner Entertainment Company,
L.P., a Delaware limited
partnership,
/s/ Kevin J. Leddy
by___________________________________
Name: Kevin J. Leddy
Title: Sr. Vice President--
Marketing
Comcast Corporation, a Pennsylvania
corporation,
/s/ Julian A. Brodsky
by___________________________________
Name: Julian A. Brodsky
Title: Vice Chairman
TCI Satellite Entertainment, Inc., a
Delaware corporation,
/s/ Gary S. Howard
by___________________________________
Name: Gary S. Howard
Title: Chief Executive Officer
Cox Communications, Inc., a Delaware
corporation,
/s/ Ajit Dalvi
by___________________________________
Name: Ajit Dalvi
Title: Senior Vice President
MediaOne of Delaware Inc., a
Delaware corporation,
/s/ Douglas D. Holmes
by___________________________________
Name: Douglas D. Holmes
Title: E.V.P. Finance & Strategy
H-1-3
<PAGE>
Advance/Newhouse Partnership, a New
York general partnership,
by Advance Communication Corp., a
New York corporation and a general
partner
/s/ Robert Miron
by___________________________________
Name: Robert Miron
Title: President
GE American Communications, Inc., a
Delaware corporation,
/s/ John Connelly
by___________________________________
Name: John Connelly
Title: Chairman and CEO
H-1-4
<PAGE>
H-2
VOTING AGREEMENT (this "Agreement"), dated as of June 12, 1997, among DONNE
F. FISHER, as Co-Personal Representative of the Estate of Robert Magness (the
"Representative"), TIME WARNER CABLE, a division of Time Warner Entertainment
Company, L.P., a Delaware limited partnership ("TWC"), COMCAST CORPORATION, a
Pennsylvania corporation ("Comcast"), TCI SATELLITE ENTERTAINMENT, INC., a
Delaware corporation ("TSAT"), COX COMMUNICATIONS, INC., a Delaware
corporation ("Cox"), MEDIAONE OF DELAWARE INC., a Delaware corporation
("MediaOne"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York general partnership
("Newhouse"), and GE AMERICAN COMMUNICATIONS, INC., a Delaware corporation
("GE", and together with TWC, Comcast, TSAT, Cox, MediaOne and Newhouse, the
"Parties" and each individually, a "Party").
WHEREAS, the Parties have agreed to exchange their respective interests in
PRIMESTAR Partners L.P., a Delaware limited partnership, and certain related
assets for (i) an amount of cash (or the assumption of debt by a public
company ("NewCo") that will be the ultimate parent entity of or otherwise hold
the assets of TSAT) and (ii) shares of NewCo Common Stock and certain voting
rights in connection therewith (collectively, the "Roll-up"); and
WHEREAS, the transactions contemplated by the Parties in connection with the
Roll-up are described in the Letter and Summary of Business Terms attached
hereto as Exhibit A.
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Representative and each Party hereby agrees
as follows:
Section 1. Agreement to Vote. In connection with any vote or written consent
of stockholders of TSAT to approve the Roll-up, the Representative hereby
agrees, and represents and warrants to each Party, that the Representative
shall vote or cause to be voted (or act by consent in respect of) all shares
(the "Shares") of TSAT Common Stock which the Representative, in his capacity
as personal representative of the estate of Robert Magness, shall have the
power to vote or direct the vote of, in each case at the time of such
stockholder vote or action by written consent, exclusively in favor of each
transaction described in the Letter and Summary of Business Terms for the
PRIMESTAR Partners Roll-Up attached hereto as Exhibit A, substantially in the
form contemplated therein.
Section 2. Proxy. The Representative hereby irrevocably appoints each Party
(and any officer of such Party or each of them individually), with full power
of substitution, the proxy of such stockholder with full power and authority,
in the event that the Representative shall at any time fail to perform his
obligations under Section 1 hereof, to vote or act by written consent in
respect of the Shares exclusively in favor of each transaction described in
the Letter and Summary of Business Terms for the PRIMESTAR Partners Roll-Up
attached hereto as Exhibit A, substantially in the form contemplated therein.
The proxy hereby granted shall, for the term of this Agreement, be irrevocable
and shall be deemed coupled with an interest, in accordance with Section 212
of the Delaware General Corporation Law.
Section 3. Specific Performance. In the event of any breach of the
provisions hereof by the Representative, each Party shall be entitled, in
addition to any other remedies that such Party may have at law or in equity,
to injunctive relief or an order of specific performance. No failure or delay
by any Party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder.
Section 4. Term. This Agreement shall become effective on the date hereof
and shall continue in effect until the earlier of (i) the termination of the
Letter and Summary of Business Terms for the PRIMESTAR Partners Roll-Up
attached hereto as Exhibit A pursuant to the provisions set forth therein and
(ii) the
H-2-1
<PAGE>
consummation of all transactions contemplated in the Letter and Summary of
Business Terms for the PRIMESTAR Partners Roll-Up attached hereto as Exhibit A
and (iii) August 31, 1998.
Section 5. Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of Delaware, without
regard to any conflicts of law principles.
Section 6. Assignment. No party hereto may assign any of its rights or
obligations under this Agreement to any person. Any purported assignment in
violation of this Section 6 shall be void and unenforceable.
Section 7. Integration. This Agreement shall constitute the entire
understanding among the parties hereto with respect to the subject matter
hereof and shall supersede any prior or contemporaneous agreements among such
parties with respect thereto.
Section 8. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed as of the date first above written.
Donne F. Fisher, as Co-Personal
Representative of the Estate of
Robert Magness,
/s/ Donne F. Fisher
_____________________________________
Time Warner Cable, a division of
Time Warner Entertainment Company,
L.P., a Delaware limited
partnership,
/s/ Kevin J. Leddy
by __________________________________
Name: Kevin J. Leddy
Title: Sr. Vice President--
Marketing
Comcast Corporation, a Pennsylvania
corporation,
/s/ Julian A. Brodsky
by __________________________________
Name: Julian A. Brodsky
Title: Vice Chairman
H-2-2
<PAGE>
TCI Satellite Entertainment, Inc., a
Delaware corporation,
/s/ Gary S. Howard
by __________________________________
Name: Gary S. Howard
Title: Chief Executive Officer
Cox Communications, Inc., a Delaware
corporation,
/s/ Ajit Dalvi
by __________________________________
Name: Ajit Dalvi
Title: Senior Vice President
MediaOne of Delaware Inc., a
Delaware corporation,
/s/ Douglas D. Holmes
by __________________________________
Name: Douglas D. Holmes
Title: E.V.P. Finance & Strategy
Advance/Newhouse Partnership, a New
York general partnership,
by Advance Communication Corp., a
New York corporation and a
general partner,
/s/ Robert Miron
by _______________________________
Name: Robert Miron
Title: President
GE American Communications, Inc., a
Delaware corporation,
/s/ John Connelly
by __________________________________
Name: John Connelly
Title: Chairman and CEO
H-2-3
<PAGE>
H-3
AGREEMENT (this "Agreement"), dated as of June 12, 1997, among TELE-
COMMUNICATIONS, INC., a Delaware corporation ("TCI"), John C. Malone
("Malone"), TIME WARNER CABLE, a division of Time Warner Entertainment
Company, L.P., a Delaware limited partnership ("TWC"), COMCAST CORPORATION, a
Pennsylvania corporation ("Comcast"), TCI SATELLITE ENTERTAINMENT, INC., a
Delaware corporation ("TSAT"), COX COMMUNICATIONS, INC., a Delaware
corporation ("Cox"), MEDIAONE OF DELAWARE INC., a Delaware corporation
("MediaOne"), ADVANCE/NEWHOUSE PARTNERSHIP, a New York general partnership
("Newhouse"), and GE AMERICAN COMMUNICATIONS, INC., a Delaware corporation
("GE", and together with Malone, TWC, Comcast, TSAT, Cox, MediaOne and
Newhouse, the "Parties" and each individually, a "Party").
WHEREAS, the Parties have agreed to exchange their respective interests in
PRIMESTAR Partners L.P., a Delaware limited partnership, and certain related
assets for (i) an amount of cash (or the assumption of debt by a public
company ("NewCo") that will be the ultimate parent entity of or otherwise hold
the assets of TSAT) and (ii) shares of NewCo Common Stock and certain voting
rights in connection therewith (collectively, the "Roll-up"); and
WHEREAS, the transactions contemplated by the Parties in connection with the
Roll-up are described in the Letter and Summary of Business Terms attached
hereto as Exhibit A (the "Roll-up Letter").
NOW, THEREFORE, in consideration of the mutual promises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, TCI and each Party hereby agrees as follows:
Section 1. Agreement to Vote. In connection with any vote or written consent
of stockholders of TSAT to approve the Roll-up, TCI hereby agrees, and
represents and warrants to each Party, that it shall vote or cause to be voted
(or act by consent in respect of) all shares (the "Shares") of TSAT Common
Stock which TCI shall have the power to vote or direct the vote of, if any, in
each case at the time of such stockholder vote or action by written consent,
exclusively in favor of each transaction described in the Roll-up Letter,
substantially in the form contemplated therein.
Section 2. Proxy. TCI hereby irrevocably appoints each Party (and any
officer of such Party or each of them individually), with full power of
substitution, the proxy of such stockholder with full power and authority, in
the event that TCI shall at any time fail to perform his obligations under
Section 1 hereof, to vote or act by written consent in respect of the Shares
exclusively in favor of each transaction described in the Roll-up Letter,
substantially in the form contemplated therein. The proxy hereby granted
shall, for the term of this Agreement, be irrevocable and shall be deemed
coupled with an interest, in accordance with Section 212 of the Delaware
General Corporation Law.
Section 3. Restriction on Transfer. TCI shall not, directly or indirectly,
(i) offer for sale, sell, transfer, tender, pledge, encumber, assign or
otherwise dispose of, or enter into any contract, option, or other arrangement
or understanding with respect to or consent to the offer for sale, sale,
transfer, tender, pledge, encumbrance, assignment or other disposition of any
or all of the Shares or any interest therein (except, in the case of a
transfer, if the transferee agrees in writing to be bound by the terms of this
Voting Agreement), (ii) except as contemplated by this Agreement, grant any
proxies or power of attorney, deposit any Shares into a voting trust or enter
into a voting agreement with respect to the Shares; or (iii) take any action
that would have the effect of preventing or disabling it from performing its
obligations under this Agreement.
Section 4. Stop Transfer. TCI agrees with, and covenants to, each Party,
that it shall not request that TSAT register the transfer (book entry or
otherwise) of any certificate or uncertificated interest representing any of
the Shares, unless such transfer is made in compliance with this Agreement
(including the provisions of Section 3 hereof). TSAT agrees with, and
covenants to, each other Party that TSAT shall not register the transfer
H-3-1
<PAGE>
(book entry or otherwise) of any certificate or uncertificated interest
representing any of the Shares, unless such transfer is made in compliance
with this Agreement (including the provisions of Section 3 hereof). In the
event of a stock dividend or distribution, or any change in TSAT's stock by
reason of any stock dividend, split-up, recapitalization, combination,
exchange of shares or the like, the term "Shares" shall be deemed to refer to
and include the Shares as well as all such stock dividends and distributions
and any shares into which or for which any or all of the Shares may be changed
or exchanged.
Section 5. Roll-up Letter. If at any time prior to consummation of the Roll-
up, TCI acquires beneficial ownership of any shares of TSAT Common Stock
beneficially owned by Kearns-Tribune Corporation, a Utah corporation
("Kearns") (whether by merger, acquisition or otherwise), or if Kearns fails
to enter into definitive documentation for the Roll-up prior to consummation
of the Roll-up and TCI obtains beneficial ownership of any such shares of TSAT
Common Stock at any time at or after the consummation of the Roll-up, TCI
shall enter into and become a party to the Roll-up Letter (and to any
stockholders agreement or other definitive documentation entered into by the
other parties to such Roll-up Letter in accordance therewith) as a "Specified
Series B Holder", to the same extent as if TCI were an original party thereto
and all references therein to Kearns referred instead to TCI.
Section 6. Kearns Merger. TCI and Kearns are parties to an agreement (the
"TCI/KT Agreement") which provides for the acquisition of Kearns by TCI in
accordance with the terms thereof (the "TCI/KT Transaction"). TCI currently
expects (but cannot assure) that the TCI/KT Transaction will be consummated
during the second quarter of 1997. TCI hereby represents and warrants that the
TCI/KT Agreement contains provisions restricting the right of Kearns to
transfer assets of Kearns without the prior consent of TCI. TCI agrees that it
will not grant any consent to or otherwise permit Kearns to transfer any
shares of TSAT Common Stock unless Kearns shall first have entered into and
become a party to the Roll-up Letter (and to any stockholders agreement or
other definitive documentation entered into by the other parties to such Roll-
up Letter in accordance therewith) and the proposed transferee of such shares
shall have agreed to enter into and become a party to all such agreements.
Section 7. Specific Performance. In the event of any breach of the
provisions hereof by TCI, each Party shall be entitled, in addition to any
other remedies that such Party may have at law or in equity, to injunctive
relief or an order of specific performance. No failure or delay by any Party
in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege hereunder.
Section 8. Term. This Agreement shall become effective on the date hereof
and shall continue in effect until the earlier of (i) the termination of the
Roll-up Letter pursuant to the provisions set forth therein and (ii) 180 days
after the consummation of all transactions contemplated in the Roll-up Letter
and (iii) August 31, 1998.
Section 9. Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of Delaware, without
regard to any conflicts of law principles.
Section 10. Assignment. No party hereto may assign any of its rights or
obligations under this Agreement to any person. Any purported assignment in
violation of this Section 10 shall be void and unenforceable.
Section 11. Integration. This Agreement shall constitute the entire
understanding among the parties hereto with respect to the subject matter
hereof and shall supersede any prior or contemporaneous agreements among such
parties with respect thereto.
Section 12. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed as of the date first above written.
JOHN C. MALONE,
/s/ John C. Malone
_____________________________________
Tele-Communications, Inc., a
Delaware corporation,
/s/ Stephen M. Brett
by___________________________________
Name: Stephen M. Brett
Title: Executive Vice President
Time Warner Cable, a division of
Time Warner Entertainment Company,
L.P., a Delaware limited
partnership,
/s/ Kevin J. Leddy
by___________________________________
Name: Kevin J. Leddy
Title: Sr. Vice President--
Marketing
Comcast Corporation, a Pennsylvania
corporation,
/s/ Julian A. Brodsky
by___________________________________
Name: Julian A. Brodsky
Title: Vice President
TCI Satellite Entertainment, Inc., a
Delaware corporation,
/s/ Gary S. Howard
by___________________________________
Name: Gary S. Howard
Title: Chief Executive Officer
Cox Communications, Inc., a Delaware
corporation,
/s/ Ajit Dalvi
by___________________________________
Name: Ajit Dalvi
Title: Senior Vice President
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Mediaone of Delaware Inc., a
Delaware corporation,
/s/ Douglas D. Holmes
by___________________________________
Name: Douglas D. Holmes
Title: E.V.P. Finance & Strategy
Advance/Newhouse Partnership, a New
York general partnership,
by Advance Communication Corp., a
New York corporation and a
general partner,
/s/ Robert Miron
by________________________________
Name: Robert Miron
Title: President
GE American Communications, Inc., a
Delaware corporation,
/s/ John Connelly
by___________________________________
Name: John Connelly
Title: Chairman and CEO
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APPENDIX I
[MERRILL LYNCH LETTERHEAD]
[LOGO] MERRILL LYNCH
February 6, 1998
Board of Directors
TCI Satellite Entertainment, Inc.
8085 South Chester Street
Suite 300
Englewood, CO 80112
Members of the Board of Directors:
TCI Satellite Entertainment, Inc., a Delaware corporation ("TSAT")
proposes to enter into (i) a Merger and Contribution Agreement dated as of
February 6, 1998 (together with the exhibits and schedules thereto, the "Merger
and Contribution Agreement"), among (1) PRIMESTAR, Inc. ("New PRIMESTAR") and
(2) TSAT, Time Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse
Partnership ("Newhouse"), Comcast Corpora tion ("Comcast"), Cox Communications,
Inc. ("Cox"), MediaOne of Delaware, Inc. ("MediaOne" and together with TWE,
Newhouse, Comcast and Cox, the "Series C Stockholders"), and GE American
Communications, Inc. ("GE Americom") (collectively, the "Restructuring
Parties"), (ii) an Asset Transfer Agreement dated as of February 6, 1998
(together with the exhibits and schedules thereto, the "TSAT Asset Transfer
Agreement") between TSAT and New PRIMESTAR, (iii) an Agreement and Plan of
Merger dated as of February 6, 1998 (together with the exhibits and schedules
thereto, the "TSAT Merger Agreement"), between TSAT and New PRIMESTAR, (iv) each
of the other agreements contemplated by the Restructuring Agreement to which
TSAT is a party and (v) the transactions con templated by the Restructuring
Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger Agreement and such
other agreements (collectively, the "Roll-up Plan"). The Roll-up Plan includes
the Restructuring Transaction (as defined below) and the TSAT Merger (as defined
below). You have informed us that (i) if the Roll-up Plan is ap proved, the
Restructuring Transaction will be consummated prior to the anticipated closing
date of the TSAT Merger and (ii) TSAT intends to consummate the TSAT Merger as
expeditiously as possible after the consummation of the Restructuring
Transaction, subject to the satisfaction or waiver of the conditions to closing
set forth in the TSAT Merger Agreement. Under the Merger and Contribution
Agreement, the businesses of each of TSAT and PRIMESTAR Partners L.P.
("Partnership"), and the PRIMESTAR distribution businesses of TWE, Newhouse, Com
cast, Cox and affiliates of MediaOne will be consolidated into New PRIMESTAR
(the "Restructuring Transaction"). You have informed us that New PRIMESTAR is a
newly formed wholly-owned subsidiary of TSAT.
The draft Merger and Contribution Agreement dated February 6, 1998
reviewed by us and pro vided by TSAT provides for, among other things, the
following transactions to occur on the closing date of the Re structuring
Transaction:
(1) the contribution and transfer by TSAT to New PRIMESTAR pursuant to the
TSAT Asset Transfer Agreement (the "TSAT Asset Transfer") of all the
assets and liabilities of TSAT except (i) the capital stock of Tempo
Satellite, Inc., a wholly-owned subsidiary of TSAT ("Tempo"), (ii) the
consideration to be received by TSAT in the Restructuring Transaction
and (iii) the rights and obligations of TSAT under agreements with New
PRIMESTAR;
(2) the merger (each a "Merger" and, collectively, the "Mergers") of each
of (i) Comcast DBS, Inc. ("Comcast DBS"), a subsidiary of Comcast,
(ii) Comcast Satellite Communications, Inc. ("Comcast SCI" and,
together with Comcast DBS, "Comcast Satellite"), (iii) Cox Satellite,
Inc. ("Cox SI"), a sub sidiary of Cox, and (iv) GE Americom Services,
Inc. ("GEAS"), a subsidiary of GE Americom, with and into New
PRIMESTAR, in each case in accordance with the terms of a merger
agreement with New PRIMESTAR (each, a "Merger Agreement" and,
collectively, the "Merger Agreements"); and
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[LOGO] MERRILL LYNCH
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(3) the contribution and transfer to New PRIMESTAR by each of TWE,
Newhouse, and MediaOne of its respective partnership interest in the
Partnership and its PRIMESTAR(R) subscribers and certain other related
assets (collectively, and together with all such assets to be acquired
by New PRIMESTAR in the Restructuring Transaction, the "PRIMESTAR
Assets") and related liabilities (collectively the "PRIMESTAR
Liabilities"). The TSAT Asset Transfer and the contribution and
transfer of assets by each of TWE, Newhouse and MediaOne are each
sometimes referred to herein as an "Asset Transfer" and collectively
as the "Asset Transfers," and the TSAT Asset Transfer Agreement and
the asset contribution agreements between New PRIMESTAR and each of
TWE, Newhouse and MediaOne (and certain of its subsidiaries) are each
sometimes referred to herein as an "Asset Transfer Agreement" and
collectively as the "Asset Transfer Agreements."
The TSAT Merger Agreement provides for, among other things, the merger
of TSAT with and into New PRIMESTAR, with New PRIMESTAR as the surviving
corporation (the "TSAT Merger"). As a result of the TSAT Merger (i) each
outstanding share (other than any shares held by TSAT in treasury) of Series A
Common Stock, $1.00 par value per share, of TSAT ("TSAT Series A Common Stock")
will be converted into the right to receive one share of Class A Common Stock,
$.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class A Common
Stock") and (ii) each outstanding share (other than any shares held by TSAT in
treasury) of Series B Com mon Stock, $1.00 par value per share, of TSAT ("TSAT
Series B Common Stock" and, together with the TSAT Series A Common Stock, "TSAT
Common Stock") will be converted into the right to receive one share of Class B
Common Stock, $.01 par value per share, of New PRIMESTAR ("New PRIMESTAR Class B
Common Stock"). Each share of New PRIMESTAR's common stock then held by TSAT
will be canceled. You have informed us that, if the Roll-up Plan is approved,
the Restructuring Transaction will be consummated prior to the anticipated
closing date of the TSAT Merger. You have informed us that consummation of the
TSAT Merger is subject to regulatory approval and other conditions set forth in
the TSAT Merger Agreement and that your intention is to act in accordance with
the TSAT Merger Agreement to consummate the same.
In connection with the Mergers and the Asset Transfers, each of TSAT,
Comcast, Cox, MediaOne, Newhouse, TWE and GE Americom will, directly or
indirectly, receive from New PRIMESTAR (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 as sumption of indebtedness by New PRIMESTAR, (ii) New PRIMESTAR Class A
Common Stock, (iii) in the case of TSAT only, New PRIMESTAR Class B Common
Stock, and (iv) except in the case of TSAT and GE Americom, New PRIMESTAR Class
C Common Stock, in each case in an amount determined pursuant to the Merger and
Contribu tion Agreement.
You have asked us whether the consideration to be received by TSAT and
its stockholders pursu ant to the Roll-Up Plan, including the consideration to
be received by TSAT pursuant to the Merger and Contribution Agreement, the TSAT
Tempo Agreement and the TSAT Asset Transfer Agreement and the consideration to
be re ceived by TSAT's stockholders pursuant to the TSAT Merger Agreement, taken
as a whole, is fair to TSAT and its stockholders (other than any stockholders
that are affiliates of TSAT) from a financial point of view. In arriving at our
opinion, we have, among other things:
(1) reviewed certain publicly available business and financial information
relating to TSAT and the Partnership that we deemed relevant;
(2) reviewed certain financial information, including financial forecasts,
relating to the business, earnings, cash flow, assets, liabilities and
prospects of the Partnership, each of the other Restruc turing Parties
and New PRIMESTAR, as well as the amount and timing of the projected
cost sav ings and related expenses expected to result from the Roll-up
Plan (the "Expected Cost Savings") furnished to us by TSAT, the
Partnership and each of the other Restructuring Parties, respectively;
(3) conducted discussions with members of senior management and
representatives of TSAT con cerning the matters described in clauses
(1) and (2) above, as well as their respective businesses and
prospects before and after giving effect to the Roll-up Plan and the
Expected Cost Savings;
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[LOGO] MERRILL LYNCH
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(4) attended meetings of the Partnership during which the Restructuring
Parties discussed the Roll-up Plan;
(5) reviewed the historical market prices, trading activity and valuation
multiples for TSAT Common Stock and compared them with those of
certain publicly traded companies that we deemed to be comparable;
(6) compared the proposed financial terms of the Roll-up Plan with the
financial terms of certain other private acquisition transactions that
we believed to be generally comparable;
(7) participated in certain discussions and negotiations among
representatives of TSAT, the Partner ship and each of the other
Restructuring Parties and their financial and legal advisors;
(8) reviewed the Limited Partnership Agreement dated February 8, 1990, and
amendments thereto dated September 1, 1993, December 15, 1993 and
October 18, 1996 among ATC Satellite Inc., Com cast DBS, Inc.,
Continental Satellite Company, Inc., Cox Satellite, Inc., G.E.
Americom Services, Inc., New Vision Satellite, TCI K-1, Inc., United
Artists K-1 Investments, Inc., Viacom K-Band, Inc. and Warner Cable
SSD, Inc.;
(9) reviewed drafts dated February 6, 1998 of the Merger and Contribution
Agreement, the TSAT As set Transfer Agreement, the TSAT Merger
Agreement, the TSAT Tempo Agreement, the TSAT Stockholders Agreement,
the Stockholders Agreement, and the Registration Rights Agreement, and
the forms of the proposed certificate of incorporation and by-laws of
New Primestar (collectively, the "Relevant Documents");
(10) reviewed the preliminary proxy statement as filed on January 26, 1998;
(11) reviewed the draft commitment letter dated January 30, 1998 and
related term sheet relating to in terim financing to be provided in
connection with the Restructuring Transaction; and
(12) reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including an
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have, at your direction, assumed and
relied on the accuracy and completeness of all information supplied or otherwise
made available to us by TSAT, the Partnership and the other Restructuring
Parties or publicly available or discussed with or reviewed by or for us, and we
have, at your direc tion, not assumed any responsibility for independently
verifying such information or undertaken an independent evaluation or appraisal
of any of the assets or liabilities of TSAT, the Partnership or the other
Restructuring Parties or been furnished with any such evaluation or appraisal.
In addition, we have, at your direction, not assumed any ob ligation to conduct
any physical inspection of the properties or facilities of TSAT, the Partnership
or the other Re structuring Parties. With respect to the financial forecast
information and the Expected Cost Savings furnished to or discussed with us by
TSAT, the Partnership or the other Restructuring Parties, we have, at your
direction, assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of TSAT's, the Partnership's or the
other Restructuring Parties' management as to the expected future financial
performance and the Expected Cost Savings of TSAT, New PRIMESTAR, the
Partnership or the other Restructuring Parties, as the case may be. We have
also assumed that the final form of the Merger and Contribution Agreement, the
TSAT Asset Transfer Agreement, the TSAT Merger Agreement and the other Relevant
Documents will be substantially similar to the last drafts reviewed by us.
At your direction, in rendering its opinion, Merrill Lynch has assumed
that TSAT is not and will not be subject to registration or regulation under the
Investment Company Act of 1940, and therefore has not consid ered the effect or
impact upon the business, operations or prospects of TSAT or the value of the
capital stock of TSAT of TSAT becoming subject to regulation or registration
under the Investment Company Act of 1940, as amended.
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[LOGO] MERRILL LYNCH
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Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and on the information made
available to us as of, the date hereof. In addition, at your direc tion, we
have assumed (i) that the TSAT Asset Transfer will be treated for U.S. federal
income tax purposes as a tax-free exchange and that no gain or loss will be
recognized by TSAT except for the possibility that gain or income may be
recognized by TSAT in connection with the assumption of TSAT's outstanding debt;
(ii) that if the TSAT Merger is consummated pursuant to the TSAT Merger
Agreement, the TSAT Merger will qualify as a tax-free reorganization pursuant to
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended, and that no
gain or loss will be rec ognized by TSAT or by TSAT stockholders as a result of
the TSAT Merger; (iii) that in the course of obtaining the necessary regulatory
approvals or other consents or approvals (contractual or otherwise) for the
Restructuring Transaction and the TSAT Merger, no restrictions, requirements,
amendments or modifications will be imposed that will have an adverse effect on
the contemplated benefits of the Roll-up Plan; (iv) under U.S. generally
accepted ac counting principles the TSAT Asset Transfer will be recorded at
TSAT's historical cost and the remaining elements of the Restructuring
Transaction will be treated as the acquisition by New PRIMESTAR of the
Partnership interests and the PRIMESTAR Assets, and the assumption by New
PRIMESTAR of the PRIMESTAR Liabilities other than those of TSAT, and such
acquisition will be accounted for using the purchase method of accounting; and
(v) the TSAT Merger will be treated as the acquisition of TSAT by New PRIMESTAR
and such acquisition will be accounted for at TSAT's historical cost. In
addition, you have advised us and we have taken into account your intention to
refinance (subject to market conditions) as soon as practicable after the
consummation of the Restructuring Transaction any interim financing drawn down
at the consummation of the Restructuring Transaction with long-term financing on
market terms.
We are acting as financial advisor to TSAT in connection with the
Roll-up Plan and will receive a fee from TSAT for our services, a significant
portion of which is contingent upon the delivery of our opinion. In ad dition,
TSAT has agreed to indemnify us for certain liabilities arising out of our
engagement. We have in the past provided, and may in the future provide,
financial advisory and financing services to TSAT and/or its affiliates and have
received, and may receive, customary fees for the rendering of such services.
In addition, in the ordinary course of our business, we may actively trade debt
and/or equity securities, including the Series A and Series B Common Stock of
TSAT as well as any debt and/or equity securities of the Restructuring Parties
and New PRIMESTAR for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of
TSAT. Our opinion does not address the merits of the underlying decision by
TSAT to engage in the Roll-up Plan and does not constitute a rec ommendation to
any shareholder of TSAT as to how such shareholder should vote on the Roll-up
Plan.
We are not expressing any opinion herein as to the prices at which the
New PRIMESTAR Common Stock will trade subsequent to the TSAT Merger. In
addition, we are not expressing any opinion on the fairness of the separate
transaction (the "ASkyB Transaction") whereby it is proposed that New PRIMESTAR
will acquire two high power communications satellites and certain authorizations
granted by the Federal Communications Commis sion or the impact of the
consummation of the ASkyB Transaction on the Roll-up Plan.
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[LOGO] MERRILL LYNCH
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Based on and subject to the assumptions and qualifications set forth
above, it is our opinion that the consideration to be received by TSAT and its
stockholders pursuant to the Roll-up Plan, including the considera tion to be
received by TSAT pursuant to the Merger and Contribution Agreement, the TSAT
Tempo Agreement and the TSAT Asset Transfer Agreement and the consideration to
be received by TSAT's stockholders pursuant to the TSAT Merger Agreement, taken
as a whole, is fair to TSAT and its stockholders (other than any stockholders
that are affiliates of TSAT) from a financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
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APPENDIX J
1997 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
OF
TCI SATELLITE ENTERTAINMENT, INC.
1. Purpose of the Plan. This Nonemployee Director Stock Option Plan (the
"Plan") is intended as an incentive to retain and attract persons of training,
experience and ability to serve as independent directors on the Board of
Directors of TCI Satellite Entertainment, Inc., a Delaware corporation (the
"Company"), to encourage the sense of proprietorship of such persons and to
stimulate the active interest of such persons in the development and financial
success of the Company. It is further intended that the options granted
pursuant to this Plan (the "Options") will be nonqualified options within the
meaning of Section 83 of the Internal Revenue Code of 1986, as amended (the
"Code").
2. Effective Date. This plan shall be effective as of the date (the
"Effective Date") it was approved by the Board of Directors of the Company;
provided however, that all options granted pursuant to this Plan are subject
to the approval of the Plan by the stockholders of the Company.
3. Designation of Participants; Automatic Grant of Options. Each director of
the Company who is not an employee of the Company or any Subsidiary (as
hereinafter defined) of the Company (any such director being hereinafter
referred to as a "Nonemployee Director") shall be granted Options as described
hereunder. Each Nonemployee Director who is a director as of the Effective
Date shall automatically be granted Options to purchase 50,000 shares of the
Series A Common Stock of the Company (the "Common Stock") at the Effective
Date. Thereafter, each individual who becomes a Nonemployee Director shall
automatically be granted Options to purchase 50,000 shares of Common Stock
(subject to adjustment as provided in Paragraph 10) on the date such person
first becomes a Nonemployee Director. Notwithstanding the foregoing, in the
case of any grant of Options made on a date subsequent to the Effective Date,
such grant shall only be made if the number of shares then subject to future
grant under this Plan is sufficient to make all automatic grants required to
be made pursuant to this Plan on such date of grant. As used herein, the term
"Subsidiary" of the Company means any present or future subsidiary (as defined
in Section 424(f) of the Code) of the Company, or any business entity in which
the Company owns, directly or indirectly, 50% or more of the voting, capital
or profits interests. An entity shall be deemed a subsidiary of the Company
for purposes of this definition only for such periods as the requisite
ownership or control relationship is maintained.
4. Option Agreement. Each Option granted hereunder shall be embodied in a
written option agreement ("Option Agreement"), which shall be subject to the
terms and conditions set forth above and shall be signed by the Optionee (as
hereinafter defined) and by the Chief Executive Officer, the Chief Operating
Officer, or any Vice President of the Company for and on behalf of the
Company. As used herein, the term "Optionee" means any Nonemployee Director to
whom Options are granted hereunder.
5. Common Stock Reserved for the Plan. Subject to adjustment as provided in
Paragraph 10 hereof, a total of 500,000 shares of Common Stock shall be
reserved for issuance upon the exercise of Options granted pursuant to this
Plan. The Board of Directors and the appropriate officers of the Company shall
from time to time take whatever actions are necessary to execute, acknowledge,
file and deliver any documents required to be filed with or delivered to any
governmental authority or any stock exchange or transaction reporting system
on which shares of Common Stock are listed or quoted in order to make shares
of Common Stock available for issuance to an Optionee pursuant to this Plan.
Common Stock subject to Options that are forfeited or terminated or expire
unexercised shall immediately become re-available for the granting of Options
hereunder, to the extent that such forfeited, terminated or expired Options
were unexercised at the time of such forfeiture, termination or expiration and
did not otherwise result in the issuance of any shares of Common Stock to the
Optionee or any other person.
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6. Option Price.
(a) The purchase price of each share of Common Stock that is subject to
an Option granted pursuant to this Plan shall be the Fair Market Value (as
defined in Paragraph 6(b)) of such share of Common Stock on the date the
Option is granted.
(b) The Fair Market Value of a share of Common Stock on a particular date
means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Common Stock,
as applicable, on such day (or, if such day is not a trading day, on the
next preceding trading day) as reported on the Nasdaq Stock Market or, if
not reported on the Nasdaq Stock Market, as quoted by the National
Quotation Bureau Incorporated, or if the Common Stock is listed on an
exchange, on the principal exchange on which the Common Stock is listed.
7. Option Period. Each Option granted pursuant to this Plan shall terminate
and be of no force and effect with respect to any shares of Common Stock not
purchased by the Optionee at 5 p.m., Denver, Colorado time, on the earliest to
occur of the following: (a) the day that immediately precedes the tenth
anniversary of the date upon which the Option is granted; (b) the first
business day following the expiration of the one-year period which begins on
the date upon which the Optionee ceases to be a Director for any reason other
than voluntary termination of Director status; or (c) the first business day
following the expiration of the three-month period which begins on the date
upon which the Optionee voluntarily terminates his Director status.
8. Exercise of Options.
(a) Options granted pursuant to this Plan shall be exercisable, on a
cumulative basis, as follows: (i) with respect to 20% of the total number
of shares of Common Stock initially subject to any Option, such Option
shall be exercisable on the first anniversary of the date of grant; and
(ii) with respect to the remaining shares of Common Stock subject to any
Option, such Option shall be exercisable with respect to an additional 20%
of the total number of shares initially subject thereto as of the second,
third, fourth and fifth anniversaries of the date of the grant.
(b) An Option may be exercised solely by the Optionee during his lifetime
or after his death by the person or persons entitled thereto under his will
or the laws of descent and distribution, subject to any enforceable
provisions of a QDRO as defined in Section 9 below.
c) In the event that, prior to the occurrence of any Change of Control,
an Optionee voluntarily ceases his status as a Director, an Option granted
to such Optionee may be exercised only to the extent such Option was
exercisable at the time he ceased to serve in such capacity.
(d) In the event that an Optionee ceases to serve as a Director for any
reason other than voluntary termination of Director status, at a time when
an Option granted hereunder is still in force and unexpired under the terms
of Paragraph 7 hereof, the vesting and exercisability of each such
unmatured Option shall be accelerated. Such acceleration shall be effective
immediately prior to the effective termination of Director status and each
Option so accelerated shall be exercisable in full for so long as it is
still in force and unexpired under the terms of Paragraph 7 hereof.
(e) Upon the occurrence of a Change in Control, as defined in Paragraph
10(c), the vesting and exercisability of all Options previously granted and
still in force and unexpired under the terms of Paragraph 7 hereof shall be
accelerated effective as of such Change in Control.
(f) The purchase price of the shares as to which an Option is exercised
shall be paid in full at the time of the exercise. The method or methods of
payment of the purchase price for the shares to be purchased upon exercise
of an Option shall be determined by the Board of Directors and may consist
of (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Common
Stock or of Series B Common Stock of the Company already owned by the
Optionee, (v) the withholding of shares of Common Stock issuable upon such
exercise of the Option, (vi) the delivery, together with a properly
executed exercise notice, of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan
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proceeds required to pay the purchase price, (vii) any combination of the
foregoing methods of payment, or (viii) such other consideration and method
of payment as may be permitted for the issuance of shares under the
Delaware General Corporation Law. The permitted method or methods of
payment of the amounts payable upon exercise of an Option, if other than in
cash, shall be set forth in the applicable Agreement and may be subject to
such conditions as the Board of Directors deems appropriate. Without
limiting the generality of the foregoing, if an Optionee is permitted to
elect to have shares of Common Stock issuable upon exercise of an Option
withheld to pay all or any part of the amounts payable in connection with
such exercise, then the Board of Directors shall have the sole discretion
to approve or disapprove such election, which approval or disapproval shall
be given after such election is made. No holder of an Option shall be, or
have any of the rights or privileges of, a stockholder of the Company in
respect of any shares subject to any Option unless and until certificates
evidencing such shares shall have been issued by the Company to such
holder.
9. Assignability. No Option shall be assignable or otherwise transferable
except by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order ("QDRO") as defined by the Code or Title I
of the Employee Retirement Income Security Act, or the rules thereunder. Any
attempted assignment of an Option in violation of this Paragraph 9 shall be
null and void.
10. Adjustments.
(a) The existence of outstanding Options shall not affect in any manner
the right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations or other changes
in the capital stock of the Company or its business or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred
stock or other debt or equity securities (whether or not such issue is
prior to, on a parity with or junior to the Common Stock) or the
dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or
proceeding of any kind, whether or not of a character similar to that of
the acts or proceedings enumerated above.
(b) If the Company subdivides its outstanding shares of Common Stock into
a greater number of shares of Common Stock (by stock dividend, stock split,
reclassification or otherwise) or combines its outstanding shares of Common
Stock into a smaller number of shares of Common Stock (by reverse stock
split, reclassification or otherwise), or if the Board of Directors
determines that any stock dividend, extraordinary cash dividend,
reclassification, recapitalization, reorganization, split-up, spin-off,
combination, merger, consolidation, exchange of shares, warrants or rights
offering to purchase Common Stock, or other similar corporate event affects
the Common Stock such that an adjustment is required in order to preserve
the benefits or potential benefits intended to be made available under this
Plan, then the Board of Directors shall, in its sole discretion and in such
manner as the Board of Directors may deem equitable and appropriate, make
such adjustments to any or all of (i) the number and kind of shares
reserved under this Plan, (ii) the number and kind of shares subject to any
outstanding Options, and (iii) the exercise price with respect to any
outstanding Options, provided, however, that the number of shares subject
to any Option shall always be a whole number. The Board of Directors may,
if deemed appropriate, provide for a cash payment to any Optionee in
connection with any adjustment made pursuant to this Section 10(b). In the
event of a corporate merger, consolidation, acquisition of property or
stock, reorganization, liquidation or similar transaction, the Board of
Directors shall be authorized to issue or assume stock options by means of
substitution of new options for previously issued options or an assumption
of previously issued options, or to make provision for the acceleration of
the exercisability of, or lapse of restrictions with respect to, the
termination of unexercised options in connection with such transaction.
(c) An Option shall become fully exercisable upon a Change in Control of
the Company. As used herein, "Change in Control" means the occurrence of
any of the following events: (i) after the Effective Date, any person (as
such term is defined in Sections 13(d)(3) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), corporation or
other entity (other than the Company, any
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Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner"
(as such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances)
having the right to vote in the election of directors (calculated as
provided in Rule 13d-3(d) under the Exchange Act in the case of rights to
acquire the Company's securities); (ii) the Company is a party to a merger,
consolidation, sale of assets or other reorganization, or a proxy contest,
as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; or (iii) during any period
of two consecutive years, individuals who at the beginning of such period
constituted the entire Board of Directors cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election, of each new director was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the
beginning of the period. For purposes of this definition, "Controlling
Person" means each of (a) the Chairman of the Board, the President and each
of the directors of the Company as of the Effective Date of this Plan, (b)
John C. Malone, (c) the respective family members, estates and heirs of
each of the persons referred to in clauses (a) and (b) above, and of Bob
Magness, and any trust or other investment vehicle for the primary benefit
of the persons referred to in clauses (a) and (b) above, and of Bob
Magness, or their respective family members or heirs and (d) Kearns-Tribune
Corporation, a Delaware corporation. As used with respect to any person,
the term "family member" means the spouse, siblings and lineal descendants
of such person.
11. Purchase for Investment. Unless the Options and shares of Common Stock
covered by this Plan have been registered under the Securities Act of 1933, as
amended, each person exercising an Option under this Plan may be required by
the Company to give a representation in writing in form and substance
satisfactory to the Company to the effect that he is acquiring such shares for
his own account for investment and not with a view to, or for sale in
connection with, the distribution of such shares or any part thereof.
12. Taxes. The Company may make such provisions as it may deem appropriate
for the withholding of any taxes that it determines is required in connection
with any Options granted to any Optionee hereunder.
13. Amendments or Termination. The Board of Directors of the Company may
amend, alter or discontinue this Plan, except that (a) no amendment or
alteration that would impair the rights of any Optionee under any Option that
he has been granted shall be made without his consent, (b) no amendment or
alteration shall be effective prior to approval by the Company's stockholders
to the extent such approval is then required pursuant to Rule 16b-3 (or any
successor provision) under the Exchange Act in order to preserve the
applicability of any exemption provided by such Rule to any Option then
outstanding (unless the holder of such Option consents) or to the extent
stockholder approval is otherwise required by applicable legal requirements,
and (c) the Plan shall not be amended more than once every six months to the
extent such limitation is required by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Exchange Act as then in effect.
14. Government Regulations. This Plan, and the granting and exercise of
Options hereunder, and the obligation of the Company to sell and deliver
shares of Common Stock under such Options, shall be subject to all applicable
laws, rules and regulations, and to such approvals on the part of any
governmental agencies or national securities exchanges or transaction
reporting systems as may be required.
15. Governing Law. This Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by mandatory provisions
of the Code or the securities laws of the United States, shall be governed by
and construed in accordance with the laws of the State of Delaware.
16. Miscellaneous. The granting of any Option shall not impose upon the
Company, the Board of Directors of the Company or any other directors of the
Company any obligation to nominate any Optionee for election as a director,
and the right of the stockholders of the Company to remove any person as a
director of the Company shall not be diminished or affected by reason of the
fact that an Option has been granted to such person.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides, generally,
that a corporation shall have the power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (except actions by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against all expenses, judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. A corporation may
similarly indemnify such person for expenses actually and reasonably incurred
by such person in connection with the defense or settlement of any action or
suit by or in the right of the corporation, provided such person acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, in the case of claims, issues and
matters as to which such person shall have been adjudged liable to the
corporation, provided that a court shall have determined, upon application,
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Section 102(b)(7) of the Delaware General Corporation Law provides,
generally, that the certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision may not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under section 174 of Title 8 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. No such provision may eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such
provision became effective.
Article VII of the Restated Certificate of Incorporation of PRIMESTAR, Inc.
will provide as follows:
"Limitation on Directors' Liability; Directors'
Indemnification. (a) Limitation on Directors' Liability. To the fullest
extent permitted by the Delaware General Corporation Law as it presently
exists and as amended from time to time, no director of the Corporation
shall be personally liable to the Corporation or any of its stockholders
for monetary damages for breach of fiduciary duty as a director. Any repeal
or modification of this Section (a) shall be prospective only and shall not
adversely affect any limitation, right or protection of a director of the
Corporation existing at the time of such repeal or modification with
respect to acts or omissions occurring prior to such repeal or
modification.
(b) Directors' Indemnification. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any Person that was or is made or is
threatened to be made a party or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(collectively, a "Proceeding"), by reason of the fact that such Person is
or was a director or officer of the Corporation or, while a director or
officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or
nonprofit entity, including service with respect to employee benefit plans,
against all liability and loss suffered and expenses (including attorneys'
fees) reasonably incurred by such Person. Such right of indemnification
shall inure whether or not the claim asserted is based on matters which
antedate the adoption of this Section (b). Subject to the second sentence
of the next paragraph, the Corporation shall be required to indemnify or
make advances
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<PAGE>
(pursuant to the following paragraph) to a Person in connection with a
Proceeding (or part thereof) initiated by such Person only if the
initiation of such Proceeding (or part thereof) was authorized by the Board
of Directors of the Corporation.
The Corporation shall pay the expenses (including attorneys' fees)
incurred by any Person that is or was a director or officer of the
Corporation or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, in defending any Proceeding in advance of
its final disposition, provided, however, that the payment of expenses
incurred by such a Person in advance of the final disposition of the
Proceeding shall be made only upon receipt of an undertaking by such Person
to repay all amounts advanced if it should be ultimately determined that
such Person is not entitled to be indemnified under this Section (b) or
otherwise. If a claim for indemnification or advancement of expenses under
this Section (b) is not paid in full within sixty (60) calendar days after
a written claim therefor has been received by the Corporation, the claimant
may file suit to recover the unpaid amount of such claim and, if successful
in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the
burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
The rights conferred on any Person by this Section (b) shall not be
exclusive of any other rights which such Person may have or hereafter
acquire under any statute, provision of this Restated Certificate of
Incorporation, the Bylaws of the Corporation, agreement, vote of
stockholders or resolution of disinterested directors or otherwise. The
Corporation's obligation, if any, to indemnify any Person that was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit
entity shall be reduced by any amount such Person may collect as
indemnification from such other corporation, partnership, joint venture,
trust, enterprise or nonprofit entity, as applicable.
Any amendment, modification or repeal of the foregoing provisions of this
Section (b) shall not adversely affect any right or protection hereunder of
any Person in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
(c) Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by or granted pursuant
to this Article VII shall, unless otherwise provided when authorized or
ratified, continue as to a Person who has ceased to be a director, officer,
employee or agent of the Corporation or other Person indemnified hereunder
and shall inure to the benefit of the heirs, executors and administrators
of such Person."
Article VII of the Bylaws of PRIMESTAR, Inc. will also contain an identical
indemnity provision.
Under the TSAT Merger Agreement, all rights to indemnification for acts or
omissions occurring prior to the TSAT Effective Time now existing in favor of
the current or former directors or officers of TSAT and its subsidiaries as
provided in their respective certificates of incorporation or bylaws will
survive the TSAT Merger and will continue in full force and effect in
accordance with their terms. Additionally, the TSAT Merger Agreement requires
PRIMESTAR, Inc. to cause to be maintained for a period of not less than three
years from the TSAT Effective Time, TSAT's current directors' and officers'
insurance and indemnification policy to the extent that it provides coverage
for events occurring prior to the TSAT Effective Time (the "D&O Insurance")
for all persons who are directors and officers of TSAT on the date of the TSAT
Merger Agreement, so long as the annual premium therefor would not be in
excess of 150% of the last annual premium paid prior to the date of the TSAT
Merger Agreement (such 150% amount, the "Maximum Premium"). If the existing
D&O Insurance expires, is terminated or canceled during such three-year
period, PRIMESTAR, Inc. will use all reasonable efforts to cause to be
obtained as much D&O Insurance as can be obtained for the remainder of such
period for an annualized premium not in excess of the Maximum Premium, on
terms and conditions no less advantageous than the existing D&O Insurance.
In addition, pursuant to an Indemnification Agreement dated May 15, 1997,
TSAT has agreed to indemnify John W. Goddard, a director of TSAT, to the
fullest extent permitted by law, in accordance with the terms and
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<PAGE>
conditions therein, and pursuant to an Indemnification Agreement dated March
21, 1997, TSAT has agreed to indemnify William E. Johnson, a director of TSAT,
to the fullest extent permitted by law, in accordance with the terms and
conditions therein.
In addition, pursuant to an Indemnification Agreement dated December 4,
1996, TCI has agreed to indemnify Gary S. Howard, Chief Executive Officer of
TSAT, in accordance with the terms and conditions set forth therein.
PRIMESTAR, Inc. is also expected to enter into indemnification agreements
with each of its directors (each director, an "indemnitee"). The
indemnification agreements will provide (i) for the prompt indemnification to
the fullest extent permitted by law against any and all expenses, including
attorneys' fees and all other costs, expenses and obligations paid or incurred
in connection with investigating, defending, being a witness or participating
in (including on appeal), or in preparing for ("Expenses"), any threatened,
pending or completed action, suit or proceeding, or any inquiry or
investigation ("Claim"), related to the fact that such indemnitee is or was a
director, officer, employee, agent or fiduciary of PRIMESTAR, Inc. or is or
was serving at PRIMESTAR, Inc.'s request as a director, officer, employee,
trustee, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by a director or officer in any such capacity, and
against any and all judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection therewith) of any Claim, unless the Reviewing Party (one or more
members of the Board of Directors or other person appointed by the Board of
Directors, who is not a party to the particular claim, or independent legal
counsel) determines that such indemnification is not permitted under
applicable law and (ii) for the prompt advancement of Expenses, and for
reimbursement to PRIMESTAR, Inc. if the Reviewing Party determines that such
indemnitee is not entitled to such indemnification under applicable law. In
addition, the indemnification agreements will provide (i) a mechanism through
which an indemnitee may seek court relief in the event the Reviewing Party
determines that the indemnitee would not be permitted to be indemnified under
applicable law (and therefore is not entitled to indemnification or expense
advancement under the indemnification agreement) and (ii) indemnification
against all expenses (including attorneys' fees), and advancement thereof if
requested, incurred by the indemnitee in seeking to collect an indemnity claim
or advancement of expenses from PRIMESTAR, Inc. or incurred in seeking to
recover under a directors' and officers' liability insurance policy,
regardless of whether successful or not. Furthermore, the indemnification
agreements will provide that after there has been a "change in control" in
PRIMESTAR, Inc. (as defined in the indemnification agreements), other than a
change in control approved by a majority of directors who were directors prior
to such change, then, with respect to all determinations regarding a right to
indemnity and the right to advancement of Expenses, PRIMESTAR, Inc. will seek
legal advice only from independent legal counsel selected by the indemnitee
and approved by PRIMESTAR, Inc.
The indemnification agreements will impose upon PRIMESTAR, Inc. the burden
of proving that an indemnitee is not entitled to indemnification in any
particular case and negate certain presumptions that may otherwise be drawn
against an indemnitee seeking indemnification in connection with the
termination of actions in certain circumstances. Indemnitees' rights under the
indemnification agreements are not exclusive of any other rights they may have
under Delaware law, the Bylaws of PRIMESTAR Inc. or otherwise. Although not
requiring the maintenance of directors' and officers' liability insurance, the
indemnification agreements will require that an indemnitee be provided with
the maximum coverage available for any director or officer of PRIMESTAR, Inc.
if there is such a policy.
PRIMESTAR, Inc. may purchase liability insurance policies covering its
directors and officers.
II-3
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
2.1. Merger and Contribution Agreement dated as of February 6, 1998, among
TCI Satellite Entertainment, Inc. ("TSAT"), PRIMESTAR, Inc., 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") (Attached as
Appendix A-1 to the Proxy Statement/ Prospectus included in this
Registration Statement).
2.2. Asset Transfer Agreement dated as of February 6, 1998, between TSAT
and PRIMESTAR, Inc. (Attached as Appendix A-2 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.3. Asset Acquisition Agreement dated as of June 11, 1998, by and among
The News Corporation Limited ("News Corp."), MCI Telecommunications
Corporation ("MCI"), American Sky Broadcasting LLC ("AskyB"),
PRIMESTAR Partners L.P. (the "Partnership") for certain purposes only,
each of the general and limited partners of the Partnership
(Incorporated by reference to Exhibit 2.2 of TSAT's Current Report on
Form 8-K dated July 1, 1997 (Commission File No. 0-21317)).
2.4. Agreement and Plan of Merger dated as of February 6, 1998, between
TSAT and PRIMESTAR, Inc. (Attached as Appendix B to the Proxy
Statement/Prospectus included in this Registration Statement).
2.5.++ Agreement and Plan of Merger dated as of February 6, 1998, between
PRIMESTAR, Inc. and Comcast DBS, Inc.*
2.6.++ Asset Transfer Agreement dated as of February 6, 1998, between
PRIMESTAR, Inc. and Newhouse.*
2.7. Form of Reimbursement Agreements between PRIMESTAR, Inc. and each of
(i) TWE, (ii) Comcast, (iii) Cox and (iv) MediaOne, each to be entered
into at the closing of the Restructuring Transaction.*
2.8. Guarantee Agreement dated as of February 6, 1998, by US WEST Media
Group, Inc. ("US West"), in favor of each of TSAT, PRIMESTAR, Inc.,
TWE, Newhouse, Comcast, Cox and GE Americom.*
2.9. Letter Agreement dated as of February 6, 1998, between John C. Malone
and TSAT, PRIMESTAR, Inc., TWE, Newhouse, Comcast, Cox, MediaOne and
GE Americom, for the benefit of TSAT, PRIMESTAR, Inc., TWE, Newhouse,
Comcast, Cox, MediaOne and GE Americom.*
2.10. Voting Agreement dated as of June 12, 1997, among John C. Malone, Time
Warner Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne,
Newhouse and GE Americom (Attached as Appendix H-1 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.11. Voting Agreement dated as of June 12, 1997, among Donne F. Fisher, as
Co-Personal Representative of the Estate of Bob Magness, Time Warner
Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne, Newhouse and
GE Americom (Attached as Appendix H-2 to the Proxy Statement/
Prospectus included in this Registration Statement).
2.12. Voting Agreement dated as of June 12, 1997, among TCI, John C. Malone,
Time Warner Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne,
Newhouse and GE Americom (Attached as Appendix H-3 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.13. Form of Stockholders Agreement among PRIMESTAR, Inc., TSAT, TWE,
Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company, Inc.,
Continental Satellite Company of Chicago, Inc., Continental Satellite
Company of Minnesota, Inc., Continental Satellite Company of New
England, Inc., Continental Satellite Company of Michigan, Inc.,
Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc. GE American and
John C. Malone, to be entered into at the closing of the Restructuring
Transaction (Attached as Appendix G to the Proxy Statement/Prospectus
included in this Registration Statement).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
2.14. Form of Registration Rights Agreement among PRIMESTAR, Inc., TSAT,
TWE, Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company,
Inc., Continental Satellite Company of Chicago, Inc., Continental
Satellite Company of Minnesota, Inc., Continental Satellite Company of
New England, Inc., Continental Satellite Company of Michigan, Inc.,
Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom
and John C. Malone, to be entered into at the closing of the
Restructuring Transaction.*
2.15. Form of Voting Agreement between TWE and Newhouse, to be entered into
at the closing of the Restructuring Transaction.*
2.16. Stockholders Agreement dated as of February 6, 1998, among PRIMESTAR,
Inc., TSAT and John C. Malone (Attached as Appendix D to the Proxy
Statement/Prospectus included in this Registration Statement).
2.17. TSAT Tempo Agreement dated as of February 6, 1998, between PRIMESTAR,
Inc. and TSAT (Attached as Appendix C to the Proxy
Statement/Prospectus included in this Registration Statement).
3.1. Form of Restated Certificate of Incorporation of PRIMESTAR, Inc.
(Attached as Appendix E to the Proxy Statement/Prospectus included in
this Registration Statement).
3.2. Form of Bylaws of PRIMESTAR, Inc. (Attached as Appendix F to the Proxy
Statement/Prospectus included in this Registration Statement).
4.1. Article VI of the Form of Restated Certificate of Incorporation of
PRIMESTAR, Inc. (Included in Exhibit 3.1).
4.2. Article II, Section 3 of Article III and Article VI of the Form of By-
laws of PRIMESTAR, Inc. (Included in Exhibit 3.2).
4.3. Specimen Stock Certificate for the Class A Common Stock, $.01 par
value per share, of
PRIMESTAR, Inc.*
4.4. Specimen Stock Certificate for the Class B Common Stock, $.01 par
value per share, of
PRIMESTAR, Inc.*
4.5. Indenture, dated as of February 20, 1997 between TSAT and The Bank of
New York, as Trustee, with respect to $200 million aggregate principal
amount of 10% Senior Subordinated Notes due 2007 (Incorporated by
reference to Exhibit 4.3 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission File No. 0-21317)).
4.6. Indenture, dated as of February 20, 1997 between TSAT and The Bank of
New York, as Trustee, with respect to $275 million aggregate principal
amount at maturity of 12 1/4% Senior Subordinated Discount Notes due
2007 (Incorporated by reference to Exhibit 4.4 of TSAT's Annual Report
on Form 10-K for the year ended December 31, 1996 (Commission File No.
0-21317)).
4.7. Registration Rights Agreement dated as of February 20, 1997 among TSAT
and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc Capital
Markets, Inc.; and Scotia Capital Markets (USA) Inc., relating to the
10 7/8% Senior Subordinated Notes due 2007 (Incorporated by reference
to Exhibit 4.5 of TSAT's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-21317)).
4.8. Registration Rights Agreement dated as of February 20, 1997 among TSAT
and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc Capital
Markets, Inc.; and Scotia Capital Markets (USA) Inc., relating to the
12 1/4% Senior Subordinated Discount Notes due 2007 (Incorporated by
reference to Exhibit 4.6 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission File No. 0-21317)).
4.9. Form of Certificate of Designation of the Cumulative Convertible
Preferred Stock of
PRIMESTAR, Inc.*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
5. Opinion of Baker & Botts, L.L.P., regarding validity of securities
being registered.*
8. Opinion of Baker & Botts, L.L.P., regarding certain federal income tax
matters.
10.1. Reorganization Agreement dated as of December 4, 1996, among Tele-
Communications, Inc. ("TCI"), TCI Communications, Inc. ("TCIC"), Tempo
Enterprises, Inc., TCI Digital Satellite Entertainment, Inc., TCI K-1,
Inc., United Artists K-1 Investments, Inc., TCISE Partner 1, Inc.,
TCISE Partner 2, Inc. and TSAT (Incorporated by reference to Exhibit
2.1 of TSAT's Annual Report on Form 10-K for the year ended December
31, 1996 (Commission File No. 0-21317)).
10.2. Indemnification Agreement dated as of June 11, 1997 among News Corp.,
TSAT, the Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse,
and GE Americom.*
10.3. Indemnification Agreement dated as of December 4, 1996, by and between
TSAT and TCI UA 1, Inc. (Incorporated by reference to Exhibit 10.1 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.4. Indemnification Agreement dated as of December 4, 1996, by and between
TSAT and TCIC (Incorporated by reference to Exhibit 10.2 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.5. Indemnification Agreement dated December 4, 1996, by and between TCI
and Gary S. Howard. (Incorporated by reference to Exhibit 10.5 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.6. TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan
(Attached as Appendix J to the Proxy Statement/Prospectus included in
this Registration Statement).
10.7. TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.4 of TSAT's Registration
Statement on Form 10 filed with the SEC on October 19, 1996
(Commission File No. 0-21317)).
10.8. Qualified Employee Stock Purchase Plan of TSAT (Incorporated by
reference to Exhibit 10.4 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission
File No. 0-21317)).
10.9. Option Agreement dated as of December 4, 1996, by and between TSAT and
Gary S. Howard (Incorporated by reference to Exhibit 10.6 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.10. Option Agreement dated as of December 4, 1996, by and between TSAT and
Larry E. Romrell (Incorporated by reference to Exhibit 10.7 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.11. Option Agreement dated as of December 4, 1996, by and between TSAT and
Brendan R. Clouston (Incorporated by reference to Exhibit 10.8 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.12. Option Agreement dated as of December 4, 1996, by and between TSAT and
David P. Beddow (Incorporated by reference to Exhibit 10.9 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.13. Equipment Sale Agreement dated as of June 4, 1997, between ResNet
Communications, LLC ("ResNet LLC") and TCI Satellite MDU, Inc. ("TSAT-
MDU").*
10.14. Subordinated Convertible Term Loan Agreement dated as of June 4, 1997,
by and between ResNet LLC, as Borrower, and TSAT-MDU, as Lender.*
10.15. Option Agreement dated as of June 4, 1997, between ResNet LLC and
TSAT-MDU.*
10.16. Subscription Agreement dated as of June 4, 1977, between ResNet LLC
and TSAT-MDU.*
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
10.17. Limited Liability Company Agreement of ResNet LLC dated as of June 4,
1997, between TSAT-MDU and ResNet Communications, Inc.*
10.18. Standstill Agreement dated as of June 4, 1997, between LodgeNet
Entertainment, Corp. and TSAT.*
10.19. Limited Partnership Agreement of K Prime Partners dated February 8,
1990, among ATC Satellite Inc., Comcast DBS, Inc., Continental
Satellite Company, Inc., Cox Satellite, Inc., G.E. Americom Services,
Inc., New Vision Satellite, TCI K-1, Inc., United Artists K-1
Investments, Inc., Viacom K-Band, Inc. and Warner Cable SSD, Inc.
(Incorporated by reference to Exhibit 4.6 of TSAT's Registration
Statement on Form 10 filed with the SEC on September 6, 1996
(Commission
File No. 0-21317)).
10.20. Amendment to Limited Partnership Agreement of the Partnership dated
September 1, 1993 (Incorporated by reference to Exhibit 4.6.1 of
TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.21. Amendment to Limited Partnership Agreement of the Partnership dated
December 15, 1993 (Incorporated by reference to Exhibit 4.6.2 of
TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.22. Amendment to Limited Partnership Agreement of the Partnership dated
October 18, 1996 (Incorporated by reference to Exhibit 4.6.3 of TSAT's
Registration Statement on Form 10 filed with the SEC on October 29,
1996 (Commission File No. 0-21317)).
10.23. 1996 Ancillary Agreement Among Partners dated as of October 18, 1996,
among the Partnership, the Participating Partners named therein, GE
American Services, Inc. and its affiliate GE Americom (Incorporated by
reference to Exhibit 10.11 of TSAT's Registration Statement on Form 10
filed with the SEC on October 29, 1996 (Commission File No. 0-21317)).
10.24. Annex A to the 1996 Ancillary Agreement Among Partners. (Incorporated
by reference to Exhibit 10.11.1 of TSAT's Registration Statement on
Form 10 filed with the SEC on October 29, 1996 (Commission File No. 0-
21317)).
10.25. Tag Along Agreement dated as of February 8, 1990, among Cox
Enterprises, Inc., Comcast Corporation, Continental Cablevision, Inc.,
Newhouse Broadcasting Corporation, Tempo Satellite, Inc. ("Tempo"),
TCI Development Corporation and TCI (Incorporated by reference to
Exhibit 4.7 of TSAT's Registration Statement on Form 10 filed with the
SEC on September 6, 1996 (Commission File No. 0-21317)).
10.26. Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners L.P. (Incorporated by reference to Exhibit 4.8 of TSAT's
Registration Statement on Form 10 filed with the SEC on September 6,
1996 (Commission File No. 0-21317)).
10.27. Letter Agreement dated July 30, 1993, between Tempo and the
Partnership relating to FSS (Incorporated by reference to Exhibit 4.9
of TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.28. Letter Agreement dated July 30, 1993, between Tempo and the
Partnership relating to BSS (Incorporated by reference to Exhibit 4.10
of TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.29. Amended and Restated Reimbursement Agreement dated March 1, 1995,
between TCI UA 1, Inc., Chemical Bank and The Toronto Dominion Bank
(Incorporated by reference to Exhibit 4.11 of TSAT's Registration
Statement on Form 10 filed with the SEC on September 6, 1996
(Commission File No. 0-21317)).
10.30. Contract No. TPO-1-290, BSS Construction Agreement dated as of
February 22, 1990, between Tempo and Space Systems/Loral, Inc.
CONFIDENTIAL TREATMENT HAS BEEN GRANTED BY THE SEC FOR PORTIONS OF
THIS DOCUMENT (Incorporated by reference to Exhibit 4.3 of TSAT's
Registration Statement on Form 10 filed with the SEC on November 8,
1996 (Commission File No. 0-21317)).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.31. U.S. $750,000,000 Credit Agreement dated as of December 31, 1996,
among TSAT, The Bank of Nova Scotia, Nationsbank of Texas, N.A.,
Credit Lyonnais New York Branch and various financial institutions
(Incorporated by reference to Exhibit 10.28 of TSAT's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No. 0-
21317)).
10.32. First Amendment to Credit Agreement dated as of February 19, 1997,
among TSAT, certain financial institutions and the Bank of Nova
Scotia, as Administrative Agent for the Lenders (Incorporated by
reference to Exhibit 10.29 of TSAT's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317)).
10.33. Trade Name and Service Mark License Agreement dated as of December 4,
1996, between TCI and TSAT (Incorporated by reference to Exhibit 10.30
of TSAT's Annual Report on Form 10-K for the year ended December 31,
1996 (Commission File No. 0-21317)).
10.34. Transition Services Agreement dated as of December 4, 1996, between
TCI and TSAT (Incorporated by reference to Exhibit 10.31 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.35. Fulfillment Agreement dated as of August 30, 1996, between TCIC and
TSAT (Incorporated by reference to Exhibit 2.4 of TSAT's Registration
Statement on Form 10 filed with the SEC on November 15, 1996
(Commission File No. 0-21317)).
10.36. Amendment No. 1 to Fulfillment Agreement dated as of July 22, 1997,
between TCIC and TSAT (Incorporated by reference to Exhibit 10.4 of
TSAT's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997 (Commission File No. 0-21317)).
10.37. Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
other subsidiaries of TCI (Incorporated by reference to Exhibit 2.5 of
TSAT's Registration Statement on Form 10 filed with the SEC on October
29, 1996 (Commission File No. 0-21317)).
10.38. First Amendment to Tax Sharing Agreement dated as of October 1995,
among TCIC and certain other subsidiaries of TCI (Incorporated by
reference to Exhibit 2.5.1 of TSAT's Registration Statement on Form 10
filed with the SEC on October 29, 1996 (Commission File No. 0-21317)).
10.39. Second Amendment to Tax Sharing Agreement dated as of December 3,
1996, among TCIC and certain other subsidiaries of TCI (Incorporated
by reference to Exhibit 10.35 of TSAT's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317)).
10.40. TCI/TSAT Tax Sharing Agreement dated June 1997, by and between TSAT
and TCI.*
10.41. Amended and Restated Credit Agreement dated as of February 19, 1997,
between TCIC and TSAT (Incorporated by reference to Exhibit 10.36 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.42. Share Purchase Agreement dated as of December 4, 1996, between TCI and
TSAT (Incorporated by reference to Exhibit 10.37 of TSAT's Annual
Report on Form 10-K for the year ended December 31, 1996 (Commission
File No. 0-21317)).
10.43. Option Agreement dated as of December 4, 1996, between TCI and TSAT
(Incorporated by reference to Exhibit 10.38 of TSAT's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No. 0-
21317)).
21. Subsidiaries of the Registrant.*
23.1. Consent of KPMG Peat Marwick LLP with respect to TSAT.*
23.2. Consent of Ernst & Young LLP with respect to Time Warner Satellite
Services Group.*
23.3. Consent of Deloitte & Touche, LLP with respect to Cox Communications,
Inc.--Direct Broadcast Satellite Business.*
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
23.4. Consent of Deloitte & Touche, LLP with respect to Comcast Satellite
Communications, Inc. and Comcast DBS, Inc.*
23.5. Consent of Deloitte & Touche, LLP with respect to MediaOne, Inc.--
Direct Broadcast Satellite Business.*
23.6. Consent of KPMG Peat Marwick LLP with respect to PRIMESTAR, Inc.*
23.7. Consent of Price Waterhouse LLP with respect to PRIMESTAR Partners
L.P.*
23.8. Consent of Baker & Botts, L.L.P. (Included in Exhibit 5).
23.9. Consent of Baker & Botts, L.L.P. (Included in Exhibit 8).
23.10. Consent of nominees to the Registrant's Board of Directors.*
23.11. Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.*
24 Powers of Attorney (Included on Page II-12).
99.1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Attached as Appendix I to the Proxy Statement/Prospectus included in
this Registration Statement).
99.2 Form of Proxy for Special Meeting of TSAT.*
</TABLE>
- --------
++Attached to this exhibit is a schedule of agreements that are substantially
identical to this exhibit, in accordance with Instruction 2 to Item 601 of
Regulation S-K.
* Previously filed.
(b) Financial Statement Schedules. All schedules have been omitted because
they are either not applicable or the required information is set forth in the
applicable financial statements or notes thereto.
(c) Reports, Opinions or Appraisals. Opinion of Merrill Lynch, Pierce,
Fenner & Smith Incorporated (Attached as Appendix I to the Proxy
Statement/Prospectus included in this Registration Statement).
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective, provided, in
the case of a transaction that (but for the possibility of integration with
other transactions) would itself qualify for an exemption from registration,
that (i) such transaction by itself or when aggregated with other such
transactions made since the filing of the most recent audited financial
statements of PRIMESTAR, Inc. would have a material financial effect upon
PRIMESTAR, Inc. and (ii) the information required to be supplied in a post-
effective amendment by this paragraph 8 is not contained in periodic reports
filed by PRIMESTAR, Inc. pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the undersigned registrant pursuant to the foregoing provisions or otherwise,
the undersigned registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the undersigned registrant of expenses
incurred or paid by a director, officer or controlling person of
II-9
<PAGE>
the undersigned registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the undersigned registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
GREENWOOD VILLAGE, STATE OF COLORADO, ON FEBRUARY 9, 1998.
PRIMESTAR, INC.
/s/ Kenneth G. Carroll
By: _________________________________
NAME: KENNETH G. CARROLL
TITLE: PRESIDENT
II-11
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kenneth G. Carroll his true and lawful
attorney-in-fact and agent with full power of substitution and re-substitution
for him and in his name, place and stead, in any and all capacities, to sign
and file (i) any or all amendments (including post-effective amendments) to
this Registration Statement, with all exhibits thereto, and other documents in
connection therewith, and (ii) a registration statement, and any and all
exhibits thereto, relating to the offering covered hereby filed pursuant to
Rule 462(b) under the Securities Act of 1933, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent and full power and
authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, to all intents and purposes
and as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS (WHICH PERSONS
CONSTITUTE A MAJORITY OF THE BOARD OF DIRECTORS) IN THE CAPACITIES AND ON THE
DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Kenneth G. Carroll President and February 6,
- ------------------------------------- Director (Principal 1998
(KENNETH G. CARROLL) Executive Officer
and Principal
Financial Officer)
/s/ Stephen M. Brett Vice President and February 6,
- ------------------------------------- Director 1998
(STEPHEN M. BRETT)
/s/ William D. Myers Vice President and February 6,
- ------------------------------------- Treasurer 1998
(WILLIAM D. MYERS) (Principal
Accounting Officer)
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1. Merger and Contribution Agreement dated as of February 6, 1998, among
TCI Satellite Entertainment, Inc. ("TSAT"), PRIMESTAR, Inc., 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") (Attached as
Appendix A-1 to the Proxy Statement/Prospectus included in this
Registration Statement).
2.2. Asset Transfer Agreement dated as of February 6, 1998, between TSAT
and PRIMESTAR, Inc. (Attached as Appendix A-2 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.3. Asset Acquisition Agreement dated as of June 11, 1997, by and among
The News Corporation Limited ("News Corp."), MCI Telecommunications
Corporation ("MCI"), American Sky Broadcasting LLC ("AskyB"),
PRIMESTAR Partners L.P. (the "Partnership") for certain purposes only,
each of the general and limited partners of the Partnership
(Incorporated by reference to Exhibit 2.2 of TSAT's Current Report on
Form 8-K dated July 1, 1997 (Commission File No. 0-21317)).
2.4. Agreement and Plan of Merger dated as of February 6, 1998, between
TSAT and PRIMESTAR, Inc. (Attached as Appendix B to the Proxy
Statement/Prospectus included in this Registration Statement).
2.5.++ Agreement and Plan of Merger dated as of February 6, 1998, between
PRIMESTAR, Inc. and Comcast DBS, Inc.*
2.6.++ Asset Transfer Agreement dated as of February 6, 1998, between
PRIMESTAR, Inc. and Newhouse.*
2.7. Form of Reimbursement Agreements between PRIMESTAR, Inc. and each of
(i) TWE, (ii) Comcast, (iii) Cox and (iv) MediaOne, each to be entered
into at the closing of the Restructuring Transaction.*
2.8. Guarantee Agreement dated as of February 6, 1998, by US WEST Media
Group, Inc. ("US West"), in favor of each of TSAT, PRIMESTAR, Inc.,
TWE, Newhouse, Comcast, Cox and GE Americom.*
2.9. Letter Agreement dated as of February 6, 1998, between John C. Malone
and TSAT, PRIMESTAR, Inc., TWE, Newhouse, Comcast, Cox, MediaOne and
GE Americom, for the benefit of TSAT, PRIMESTAR, Inc., TWE, Newhouse,
Comcast, Cox, MediaOne and GE Americom.*
2.10. Voting Agreement dated as of June 12, 1997, among John C. Malone, Time
Warner Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne,
Newhouse and GE Americom (Attached as Appendix H-1 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.11. Voting Agreement dated as of June 12, 1997, among Donne F. Fisher, as
Co-Personal Representative of the Estate of Bob Magness, Time Warner
Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne, Newhouse and
GE Americom (Attached as Appendix H-2 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.12. Voting Agreement dated as of June 12, 1997, among TCI, John C. Malone,
Time Warner Cable, a division of TWE, Comcast, TSAT, Cox, MediaOne,
Newhouse and GE Americom (Attached as Appendix H-3 to the Proxy
Statement/Prospectus included in this Registration Statement).
2.13. Form of Stockholders Agreement among PRIMESTAR, Inc., TSAT, TWE,
Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company, Inc.,
Continental Satellite Company of Chicago, Inc., Continental Satellite
Company of Minnesota, Inc., Continental Satellite Company of New
England, Inc., Continental Satellite Company of Michigan, Inc.,
Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom
and John C. Malone, to be entered into at the closing of the
Restructuring Transaction (Attached as Appendix G to the Proxy
Statement/Prospectus included in this Registration Statement).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.14. Form of Registration Rights Agreement among PRIMESTAR, Inc., TWE,
Newhouse, Comcast, Cox, MediaOne, Continental Satellite Company, Inc.,
Continental Satellite Company of Chicago, Inc., Continental Satellite
Company of Minnesota, Inc., Continental Satellite Company of New
England, Inc., Continental Satellite Company of Michigan, Inc.,
Continental Satellite Company of Ohio, Inc., Continental Satellite
Company of Virginia, Inc., MediaOne Satellite II, Inc., GE Americom
and John C. Malone, to be entered into at the closing of the
Restructuring Transaction.*
2.15. Form of Voting Agreement between TWE and Newhouse, to be entered into
at the closing of the Restructuring Transaction.*
2.16. Stockholders Agreement dated as of February 6, 1998, among PRIMESTAR,
Inc., TSAT and John C. Malone (Attached as Appendix D to the Proxy
Statement/Prospectus included in this Registration Statement).
2.17. TSAT Tempo Agreement dated as of February 6, 1998, between PRIMESTAR,
Inc. and TSAT (Attached as Appendix C to the Proxy
Statement/Prospectus included in this Registration Statement).
3.1. Form of Restated Certificate of Incorporation of PRIMESTAR, Inc.
(Attached as Appendix E to the Proxy Statement/Prospectus included in
this Registration Statement).
3.2. Form of Bylaws of PRIMESTAR, Inc. (Attached as Appendix F to the Proxy
Statement/Prospectus included in this Registration Statement).
4.1. Article VI of the Form of Restated Certificate of Incorporation of
PRIMESTAR, Inc. (Included in Exhibit 3.1).
4.2. Article II, Section 3 of Article III and Article VI of the Form of By-
laws of PRIMESTAR, Inc. (Included in Exhibit 3.2).
4.3. Specimen Stock Certificate for the Class A Common Stock, $.01 par
value per share, of PRIMESTAR, Inc.*
4.4. Specimen Stock Certificate for the Class B Common Stock, $.01 par
value per share, of PRIMESTAR, Inc.*
4.5. Indenture, dated as of February 20, 1997 between TSAT and The Bank of
New York, as Trustee, with respect to $200 million aggregate principal
amount of 10 7/8% Senior Subordinated Notes due 2007 (Incorporated by
reference to Exhibit 4.3 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission File No. 0-21317)).
4.6. Indenture, dated as of February 20, 1997 between TSAT and The Bank of
New York, as Trustee, with respect to $275 million aggregate principal
amount at maturity of 12 1/4% Senior Subordinated Discount Notes due
2007 (Incorporated by reference to Exhibit 4.4 of TSAT's Annual Report
on Form 10-K for the year ended December 31, 1996 (Commission File No.
0-21317)).
4.7. Registration Rights Agreement dated as of February 20, 1997 among TSAT
and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc Capital
Markets, Inc.; and Scotia Capital Markets (USA) Inc., relating to the
10 7/8% Senior Subordinated Notes due 2007 (Incorporated by reference
to Exhibit 4.5 of TSAT's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-21317)).
4.8. Registration Rights Agreement dated as of February 20, 1997 among TSAT
and Donaldson, Lufkin and Jenrette Securities Corporation; Merrill
Lynch, Pierce, Fenner and Smith Incorporated; Nationsbanc Capital
Markets, Inc.; and Scotia Capital Markets (USA) Inc., relating to the
12 1/4% Senior Subordinated Discount Notes due 2007 (Incorporated by
reference to Exhibit 4.6 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission File No. 0-21317)).
4.9. Form of Certificate of Designation of the Cumulative Convertible
Preferred Stock of PRIMESTAR, Inc.*
5. Opinion of Baker & Botts, L.L.P., regarding validity of securities
being registered.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
8. Opinion of Baker & Botts, L.L.P., regarding certain federal income tax
matters.
10.1. Reorganization Agreement dated as of December 4, 1996, among Tele-
Communications, Inc. ("TCI"), TCI Communications, Inc. ("TCIC"), Tempo
Enterprises, Inc., TCI Digital Satellite Entertainment, Inc., TCI K-1,
Inc., United Artists K-1 Investments, Inc., TCISE Partner 1, Inc.,
TCISE Partner 2, Inc. and TSAT (Incorporated by reference to Exhibit
2.1 of TSAT's Annual Report on Form 10-K for the year ended December
31, 1996 (Commission File No. 0-21317)).
10.2. Indemnification Agreement dated as of June 11, 1997 among News Corp.,
TSAT, the Partnership, Time Warner, Comcast, Cox, MediaOne, Newhouse,
and GE Americom.*
10.3. Indemnification Agreement dated as of December 4, 1996, by and between
TSAT and TCI UA 1, Inc. (Incorporated by reference to Exhibit 10.1 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.4. Indemnification Agreement dated as of December 4, 1996, by and between
TSAT and TCIC (Incorporated by reference to Exhibit 10.2 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.5. Indemnification Agreement dated December 4, 1996, by and between TCI
and Gary S. Howard. (Incorporated by reference to Exhibit 10.5 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.6. TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Plan
(Attached as Appendix J to the Proxy Statement/Prospectus included in
this Registration Statement).
10.7. TCI Satellite Entertainment, Inc. 1996 Stock Incentive Plan
(Incorporated by reference to Exhibit 10.4 of TSAT's Registration
Statement on Form 10 filed with the SEC on October 19, 1996
(Commission File No. 0-21317)).
10.8. Qualified Employee Stock Purchase Plan of TSAT (Incorporated by
reference to Exhibit 10.4 of TSAT's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission File No. 0-21317)).
10.9. Option Agreement dated as of December 4, 1996, by and between TSAT and
Gary S. Howard (Incorporated by reference to Exhibit 10.6 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.10. Option Agreement dated as of December 4, 1996, by and between TSAT and
Larry E. Romrell (Incorporated by reference to Exhibit 10.7 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.11. Option Agreement dated as of December 4, 1996, by and between TSAT and
Brendan R. Clouston (Incorporated by reference to Exhibit 10.8 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.12. Option Agreement dated as of December 4, 1996, by and between TSAT and
David P. Beddow (Incorporated by reference to Exhibit 10.9 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.13. Equipment Sale Agreement dated as of June 4, 1997, between ResNet
Communications, LLC ("ResNet LLC") and TCI Satellite MDU, Inc. ("TSAT-
MDU").*
10.14. Subordinated Convertible Term Loan Agreement dated as of June 4, 1997,
by and between ResNet LLC, as Borrower, and TSAT-MDU, as Lender.*
10.15. Option Agreement dated as of June 4, 1997, between ResNet LLC and
TSAT-MDU.*
10.16. Subscription Agreement dated as of June 4, 1977, between ResNet LLC
and TSAT-MDU.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17. Limited Liability Company Agreement of ResNet LLC, dated as of June 4,
1997, between TSAT-MDU and ResNet Communications, Inc.*
10.18. Standstill Agreement dated as of June 4, 1997, between LodgeNet
Entertainment, Corp. and TSAT.*
10.19. Limited Partnership Agreement of K Prime Partners, dated February 8,
1990, among ATC Satellite Inc., Comcast DBS, Inc., Continental
Satellite Company, Inc., Cox Satellite, Inc., G.E. Americom Services,
Inc., New Vision Satellite, TCI K-1, Inc., United Artists K-1
Investments, Inc., Viacom K-Band, Inc. and Warner Cable SSD, Inc.
(Incorporated by reference to Exhibit 4.6 of TSAT's Registration
Statement on Form 10 filed with the SEC on September 6, 1996
(Commission File No. 0-21317)).
10.20. Amendment to Limited Partnership Agreement of the Partnership dated
September 1, 1993 (Incorporated by reference to Exhibit 4.6.1 of
TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.21. Amendment to Limited Partnership Agreement of the Partnership dated
December 15, 1993 (Incorporated by reference to Exhibit 4.6.2 of
TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.22. Amendment to Limited Partnership Agreement of the Partnership dated
October 18, 1996 (Incorporated by reference to Exhibit 4.6.3 of TSAT's
Registration Statement on Form 10 filed with the SEC on October 29,
1996 (Commission File No. 0-21317)).
10.23. 1996 Ancillary Agreement Among Partners dated as of October 18, 1996,
among the Partnership, the Participating Partners named therein, GE
American Services, Inc. and its affiliate GE Americom (Incorporated by
reference to Exhibit 10.11 of TSAT's Registration Statement on Form 10
filed with the SEC on October 29, 1996 (Commission File No. 0-21317)).
10.24. Annex A to the 1996 Ancillary Agreement Among Partners. (Incorporated
by reference to Exhibit 10.11.1 of TSAT's Registration Statement on
Form 10 filed with the SEC on October 29, 1996 (Commission File No. 0-
21317)).
10.25. Tag Along Agreement dated as of February 8, 1990, among Cox
Enterprises, Inc., Comcast Corporation, Continental Cablevision, Inc.,
Newhouse Broadcasting Corporation, Tempo Satellite, Inc. ("Tempo"),
TCI Development Corporation and TCI (Incorporated by reference to
Exhibit 4.7 of TSAT's Registration Statement on Form 10 filed with the
SEC on September 6, 1996 (Commission File No. 0-21317)).
10.26. Option Agreement dated February 8, 1990, between Tempo and K Prime
Partners L.P. (Incorporated by reference to Exhibit 4.8 of TSAT's
Registration Statement on Form 10 filed with the SEC on September 6,
1996 (Commission File No. 0-21317)).
10.27. Letter Agreement dated July 30, 1993, between Tempo and the
Partnership relating to FSS (Incorporated by reference to Exhibit 4.9
of TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.28. Letter Agreement dated July 30, 1993, between Tempo and the
Partnership relating to BSS (Incorporated by reference to Exhibit 4.10
of TSAT's Registration Statement on Form 10 filed with the SEC on
September 6, 1996 (Commission File No. 0-21317)).
10.29. Amended and Restated Reimbursement Agreement dated March 1, 1995,
between TCI UA 1, Inc., Chemical Bank and The Toronto Dominion Bank
(Incorporated by reference to Exhibit 4.11 of TSAT's Registration
Statement on Form 10 filed with the SEC on September 6, 1996
(Commission File No. 0-21317)).
10.30. Contract No. TPO-1-290, BSS Construction Agreement dated as of
February 22, 1990, between Tempo and Space Systems/Loral, Inc.
CONFIDENTIAL TREATMENT HAS BEEN GRANTED BY THE SEC FOR PORTIONS OF
THIS DOCUMENT (Incorporated by reference to Exhibit 4.3 of TSAT's
Registration Statement on Form 10 filed with the SEC on November 8,
1996 (Commission File No. 0-21317)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.31. U.S. $750,000,000 Credit Agreement dated as of December 31, 1996,
among TSAT, The Bank of Nova Scotia, Nationsbank of Texas, N.A.,
Credit Lyonnais New York Branch and various financial institutions
(Incorporated by reference to Exhibit 10.28 of TSAT's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No. 0-
21317)).
10.32. First Amendment to Credit Agreement dated as of February 19, 1997,
among TSAT, certain financial institutions and the Bank of Nova
Scotia, as Administrative Agent for the Lenders (Incorporated by
reference to Exhibit 10.29 of TSAT's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317)).
10.33. Trade Name and Service Mark License Agreement dated as of December 4,
1996, between TCI and TSAT (Incorporated by reference to Exhibit 10.30
of TSAT's Annual Report on Form 10-K for the year ended December 31,
1996 (Commission File No. 0-21317)).
10.34. Transition Services Agreement dated as of December 4, 1996, between
TCI and TSAT (Incorporated by reference to Exhibit 10.31 of TSAT's
Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.35. Fulfillment Agreement dated as of August 30, 1996, between TCIC and
TSAT (Incorporated by reference to Exhibit 2.4 of TSAT's Registration
Statement on Form 10 filed with the SEC on November 15, 1996
(Commission File No. 0-21317)).
10.36. Amendment No. 1 to Fulfillment Agreement dated as of July 22, 1997,
between TCIC and TSAT (Incorporated by reference to Exhibit 10.4 of
TSAT's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997 (Commission File No. 0-21317)).
10.37. Tax Sharing Agreement effective July 1, 1995, among TCIC and certain
other subsidiaries of TCI (Incorporated by reference to Exhibit 2.5 of
TSAT's Registration Statement on Form 10 filed with the SEC on October
29, 1996 (Commission File No. 0-21317)).
10.38. First Amendment to Tax Sharing Agreement dated as of October 1995,
among TCIC and certain other subsidiaries of TCI (Incorporated by
reference to Exhibit 2.5.1 of TSAT's Registration Statement on Form 10
filed with the SEC on October 29, 1996 (Commission File No. 0-21317)).
10.39. Second Amendment to Tax Sharing Agreement dated as of December 3,
1996, among TCIC and certain other subsidiaries of TCI (Incorporated
by reference to Exhibit 10.35 of TSAT's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317)).
10.40. TCI/TSAT Tax Sharing Agreement dated June 1997, by and between TSAT
and TCI.*
10.41. Amended and Restated Credit Agreement dated as of February 19, 1997,
between TCIC and TSAT (Incorporated by reference to Exhibit 10.36 of
TSAT's Annual Report on Form 10-K for the year ended December 31, 1996
(Commission File No. 0-21317)).
10.42. Share Purchase Agreement dated as of December 4, 1996, between TCI and
TSAT (Incorporated by reference to Exhibit 10.37 of TSAT's Annual
Report on Form 10-K for the year ended December 31, 1996 (Commission
File No. 0-21317)).
10.43. Option Agreement dated as of December 4, 1996, between TCI and TSAT
(Incorporated by reference to Exhibit 10.38 of TSAT's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No. 0-
21317)).
21. Subsidiaries of the Registrant.*
23.1. Consent of KPMG Peat Marwick LLP with respect to TSAT.*
23.2. Consent of Ernst & Young LLP with respect to Time Warner Satellite
Services Group.*
23.3. Consent of Deloitte & Touche, LLP with respect to Cox Communications,
Inc.--Direct Broadcast Satellite Business.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.4. Consent of Deloitte & Touche, LLP with respect to Comcast Satellite
Communications, Inc. and Comcast DBS, Inc.*
23.5. Consent of Deloitte & Touche, LLP with respect to MediaOne, Inc.--
Direct Broadcast Satellite Business.*
23.6. Consent of KPMG Peat Marwick LLP with respect to PRIMESTAR, Inc*
23.7. Consent of Price Waterhouse LLP with respect to PRIMESTAR Partners
L.P.*
23.8. Consent of Baker & Botts, L.L.P. (Included in Exhibit 5).
23.9. Consent of Baker & Botts, L.L.P. (Included in Exhibit 8).
23.10. Consent of nominees to the Registrant's Board of Directors.*
23.11. Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.*
24 Powers of Attorney (Included on Page II-12).
99.1 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
(Attached as Appendix I to the Proxy Statement/Prospectus included in
this Registration Statement).
99.2 Form of Proxy for Special Meeting of TSAT.*
</TABLE>
- --------
++Attached to this exhibit is a schedule of agreements that are substantially
identical to this exhibit, in accordance with Instruction 2 to Item 601 of
Regulation S-K.
* Previously filed.
<PAGE>
EXHIBIT 8
BAKER & BOTTS, L.L.P.
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
February 9, 1998
TCI Satellite Entertainment, Inc.
8085 South Chester, Suite 300
Englewood, Colorado 80112
Gentlemen:
We have acted as counsel to TCI Satellite Entertainment, Inc. ("TSAT") in
connection with (i) the proposed contribution by TSAT of all of its assets and
liabilities, other than its stock of Tempo Satellite, Inc., a wholly owned
subsidiary of TSAT ("Tempo"), and the rights and obligations of TSAT under
certain agreements, to PRIMESTAR, Inc., a newly formed, wholly owned
subsidiary of TSAT ("New PRIMESTAR"), in exchange for New PRIMESTAR common
stock (the "TSAT Contribution") pursuant to the terms of the Restructuring
Agreement (as defined below) and the TSAT Asset Transfer Agreement (as defined
below), and (ii) the merger, subject to regulatory approval and certain other
conditions, of TSAT with and into New PRIMESTAR, with New PRIMESTAR as the
surviving corporation (the "TSAT Merger") pursuant to the terms of the TSAT
Merger Agreement (as defined below). The TSAT Contribution and the TSAT Merger
form part of the proposed roll-up plan (the "Roll-Up Plan"), which consists of
(i) the consolidation of the businesses of each of TSAT and PRIMESTAR Partners
L.P. (the "Partnership"), and the PRIMESTAR(R) distribution businesses of Time
Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox"), and affiliates of MediaOne of Delaware, Inc. ("MediaOne"), into New
PRIMESTAR, pursuant to the Restructuring Agreement (the "Restructuring
Transaction"), (ii) the TSAT Merger and (iii) certain other transactions
contemplated by the Restructuring Agreement and certain other agreements
contemplated thereby. In connection with the proposed Roll-Up Plan, TSAT will
enter into (i) a Merger and Contribution Agreement dated as of February 6,
1998 (together with the exhibits and schedules thereto, the "Restructuring
Agreement"), among New PRIMESTAR, TSAT, TWE, Newhouse, Comcast, Cox, MediaOne,
and GE American Communications, Inc. ("GE Americom"), (ii) an Asset Transfer
Agreement dated as of February 6, 1998 (together with the exhibits and
schedules thereto, the "TSAT Asset Transfer Agreement"), between TSAT and New
PRIMESTAR, and (iii) an Agreement and Plan of Merger dated as of February 6,
1998 (together with the exhibits and schedules thereto, the "TSAT Merger
Agreement"), between TSAT and New PRIMESTAR.
In rendering this opinion, we have examined and are relying upon (without
any independent investigation or review thereof) the truth and accuracy at all
relevant times of the statements, covenants, and representations contained in
(i) the Restructuring Agreement, (ii) the TSAT Asset Transfer Agreement, (iii)
the TSAT Merger Agreement, (iv) the registration statement on Form S-4 filed
by New PRIMESTAR with the Securities and Exchange Commission ("SEC") on
February 9, 1998, as amended on the same date (the "Registration Statement"),
and the Proxy Statement/Prospectus included therein (the "Proxy
Statement/Prospectus"), (v) certain of the reports filed by TSAT with the SEC
pursuant to the Securities Exchange Act of 1934, as amended, and (vi) the
officers' certificates dated February 9, 1998, which will be reconfirmed prior
to the closing of the Restructuring Transaction, that were provided to us by
TSAT, New PRIMESTAR, TWE, Newhouse, Comcast, Cox, MediaOne, and GE Americom
and which are attached hereto, and certain representations pertaining to the
TSAT Merger in the officers' certificates provided to us by TSAT and New
PRIMESTAR, which will be reconfirmed prior to the closing of the TSAT Merger.
In addition, we assume that the Restructuring Transaction, the TSAT
Contribution, and the TSAT Merger will be consummated in accordance with the
Restructuring Agreement, the TSAT Asset Transfer Agreement, and the TSAT
Merger Agreement, and as described in the Proxy Statement/Prospectus. Any
inaccuracy in any of the aforementioned statements, representations, and
assumptions or breach of any of the aforementioned covenants could adversely
affect our opinion.
<PAGE>
On the basis of and subject to the foregoing and subject to the limitations
set forth below, it is our opinion that, under presently applicable federal
income tax law: (i) the TSAT Contribution will be a tax-free exchange, and no
gain or loss will be recognized by TSAT except for the possibility that gain
or income may be recognized by TSAT in connection with the assumption of the
Notes (as defined in the Proxy Statement/Prospectus) by New PRIMESTAR, and
(ii) the TSAT Merger will qualify as a tax-free reorganization pursuant to
Section 368(a) of the Code, and no gain or loss will be recognized by TSAT or
TSAT stockholders as a result of the TSAT Merger. Further, it is our opinion
that the discussion titled, "Certain Federal Income Tax Consequences," set
forth in the Proxy Statement/Prospectus as it relates to statements of law or
legal conclusions is correct in all material respects.
Our opinion is based on our interpretation of the Code, applicable Treasury
regulations, judicial authority, and administrative rulings and practice, all
as of the date hereof. There can be no assurance that future legislative,
judicial or administrative changes or interpretations will not adversely
affect the accuracy of the conclusions set forth herein. We do not undertake
to advise you as to any such future changes or interpretations unless we are
specifically retained to do so. Our opinion will not be binding upon the
Internal Revenue Service (the "Service"), and the Service will not be
precluded from adopting a contrary position. Further, no opinion is expressed
as to any matter not specifically addressed above including, without
limitation, the tax consequences of the TSAT Contribution or the TSAT Merger
under any foreign, state, or local tax law.
This opinion is delivered to you solely in connection with and for purposes
of the transactions contemplated by the Roll-Up Plan, including the filing of
the Registration Statement with the SEC. We hereby consent to the filing of
this opinion as Exhibit 8 to the Registration Statement and to the reference
to our firm contained under the heading "LEGAL MATTERS" in the Proxy
Statement/Prospectus. In giving the foregoing consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section
7 of the Securities Act of 1933, as amended, or the rules and regulations of
the Securities and Exchange Commission promulgated thereunder.
Sincerely,
Baker & Botts, L.L.P.
[Attachments Omitted]
