<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: April 15, 1998
Date of Earliest Event Reported: April 1, 1998
PRIMESTAR, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-23883 84-1441684
(Commission File Number) (I.R.S. Employer Identification No.)
8085 SOUTH CHESTER, SUITE 300
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 712-4600
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has dully caused this report to be signed on its behalf by the
undersigned hereunto dully authorized.
Dated May 15, 1998
PRIMESTAR, INC.
(Registrant)
By: /s/ Kenneth G. Carroll
--------------------------------
Name: Kenneth G. Carroll
Title: Senior Vice President and
Chief Financial Officer
2
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
- ------ --------------------------------------
On February 6, 1998, the Registrant, a wholly-owned subsidiary of TCI
Satellite Entertainment, Inc. ("TSAT"), entered into (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 ("TSAT Merger Agreement") and (iv) certain other agreements
contemplated by the Restructuring Agreement. The transactions contemplated by
the Restructuring Agreement, the TSAT Asset Transfer Agreement, the TSAT Merger
Agreement and such other agreements are hereinafter referred to, collectively,
as the "Roll-up Plan". The Roll-up Plan is a two step transaction.
Effective April 1, 1998, certain of the transactions (collectively, the
"Restructuring Transaction") contemplated by the Restructuring Agreement and the
TSAT Asset Transfer Agreement were consummated. The Restructuring Transaction,
which is the first step of the Roll-up Plan, comprised (i) the contribution of
substantially all of TSAT's assets and liabilities to the Registrant, and (ii)
the concurrent contribution to the Registrant by the existing partners (the
"Partners") of PRIMESTAR Partners L.P. (the "Partnership") of their respective
interests in the PRIMESTAR(R) digital satellite business.
In connection with such mergers and asset transfers, the parties to the
Restructuring Transaction received, directly or indirectly, from the Registrant
a combination of cash (or an assumption of indebtedness by the Registrant) and
shares of common stock of the Registrant, in an amount determined pursuant to
the Restructuring Agreement.
As a result of the Restructuring Transaction, the Registrant owns the
entire PRIMESTAR(R) digital satellite business and TSAT and the Partners (or
their respective
3
<PAGE>
affiliates) own, in the aggregate, all the outstanding capital stock of the
Registrant. The Partners include (i) Time Warner Entertainment Company L.P.
("TWE"), a subsidiary of Time Warner, Inc., (ii) Advance/Newhouse Partnership
("Newhouse"), a subsidiary of Newhouse Broadcasting Corporation, (iii) Cox
Communications, Inc. ("Cox"), (iv) Comcast Corporation (`Comcast"), (v) MediaOne
of Delaware, Inc. (`MediaOne"), a subsidiary of US WEST, Inc. and (vi) GE
American Communications, Inc. (`GE Americom") a subsidiary of General Electric
Company ("GE").
Under the Restructuring Agreement, the amount of cash received by, or debt
assumed in respect of, each of TSAT, Comcast, Cox, MediaOne, TWE and Newhouse at
the closing of the Restructuring Transaction was dependent upon subscriber
counts and TSAT's debt balance on such date. The approximate cash consideration
paid to Cox and MediaOne was $74.0 million and $76.6 million, respectively, the
approximate debt assumed in respect of TWE and Newhouse (collectively) and
Comcast was $239.5 million and $74.7 million, respectively, and the approximate
debt assumed in respect of TSAT was $475 million, plus outstanding letters of
credit in the aggregate amount of $30 million. Under the Restructuring
Agreement, the debt assumed by the Registrant in respect of GE Americom was
fixed at $14.0 million.
As of the date of the Restructuring Transaction, the approximate ownership
of the Registrant's common stock was as set forth in the following table:
<TABLE>
<CAPTION>
Name of Beneficial Owner Ownership Percentage Voting Power
------------------------ -------------------- ------------
<S> <C> <C>
TSAT 37.23% 38.02%
TWE and Newhouse (collectively) 30.02% 30.66%
Comcast 9.50% 9.70%
MediaOne 9.69% 9.90%
Cox 9.43% 9.63%
GE Americom 4.13% 2.09%
</TABLE>
4
<PAGE>
The total amount of funds paid by the Registrant in connection with the
closing of the Restructuring Transaction aggregated approximately $499 million,
of which approximately $479 million was paid to the Restructuring parties other
than TSAT as cash consideration (or assumption of debt in lieu of cash
consideration) and approximately $20 million was paid to fund financing costs
and other expenses related thereto. Such consideration and expenses were
financed by a $350 million unsecured senior subordinated interim loan (the
"Interim Loan") and through borrowings under the Registrant's credit facility.
In addition, the Registrant assumed indebtedness of TSAT and the Partnership
aggregating approximately $1,046 million, including (i) $571 million outstanding
under the Partnership's bank credit facility, (ii) $373 million under TSAT's 10
7/8% Senior Subordinated Notes and 12 1/4% Senior Subordinated Discount Notes,
(iii) $100 million outstanding prior to the closing of the Restructuring
Transaction under TSAT's credit facility and (iv) $2 million of other debt.
The second step of the Roll-up Plan (the "TSAT Merger"), in which TSAT will
be merged with and into the Registrant, is subject to regulatory approval of the
transfer of certain licenses held by TSAT. Assuming that necessary regulatory
approvals are received and that the other conditions provided for in the TSAT
Merger Agreement are satisfied or waived, the stockholders of TSAT will receive,
in a transaction designed to be tax-free to such stockholders, (i) one share of
Class A Common Stock of the Registrant for each share of TSAT's Series A Common
Stock outstanding immediately prior to the closing of the TSAT Merger, and (ii)
one share of Class B Common Stock of the Registrant for each share of TSAT's
Series B Common Stock outstanding immediately prior to the closing of the TSAT
Merger. Each share of the Registrant's common stock then held by TSAT will be
canceled.
5
<PAGE>
The nature of all material relationships between the Registrant and any of
the parties to the Restructuring Transaction or any of their respective
affiliates, any director or officer of the Registrant, or any associate of any
such director or officer, has been previously reported in TSAT's Current Report
on Form 8-K dated February 11, 1998 (Commission File No. 0-21317). Please see
the sections entitled "THE ROLL-UP PLAN--Interests of Certain Persons in the
Roll-up Plan" and "RELATED AGREEMENTS" included therein.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
- ------ -------------------------------------------------------------------
(a) Financial Statements.
Time Warner Satellite Services Group-
Combined financial statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31,
1997.
Cox Communications, Inc.-Direct Broadcast Satellite Business-
Financial statements as of December 31, 1997 and 1996 and for each
of the years in the three-year period ended December 31, 1997.
Comcast Satellite Communications, Inc. and Comcast DBS, Inc.-
Combined financial statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31,
1997.
MediaOne of Delaware, Inc.-Direct Broadcast Satellite Business
(Successor) and Direct Broadcast Satellite Business of Continental
Cablevision, Inc. (Predecessor)-
Combined financial statements as of December 31, 1997 and 1996 and
for the year ended December 31, 1997, the period November 15, 1996
through December 31, 1996, the period from January 1, 1996 through
November 14, 1996, and the year ended December 31, 1995.
PRIMESTAR Partners L.P.
Financial statements as of December 31, 1997 and 1996 and for each
of the years in the three-year period ended December 31, 1997.
(b) Pro Forma Financial Statements.
PRIMESTAR, Inc. Condensed Pro Forma Combined Financial Statements -
year ended December 31, 1997.
(c) Exhibits.
None.
6
<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, 1997 and 1996, and the
related combined statements of operations, cash flows and group deficit for
each of the three years in the period ended December 31, 1997. 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 relates 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, 1997 and
1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 13, 1998
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED BALANCE SHEET
DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables, less allowances of $1,301 and $1,278............ $ 15,301 $ 18,398
Receivables from related parties............................. -- 2,347
Prepaid expenses............................................. 106 104
-------- --------
Total current assets......................................... 15,407 20,849
Investment in PRIMESTAR Partners, L.P. ...................... 17,270 31,021
Property, plant & equipment, net............................. 447,438 396,110
Other assets................................................. 96 73
-------- --------
Total assets................................................. $480,211 $448,053
======== ========
</TABLE>
LIABILITIES AND GROUP DEFICIT
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 24,788 $ 33,537
Accrued charges from PRIMESTAR Partners, L.P. .............. 29,789 28,060
Other current liabilities................................... 18,611 16,448
-------- --------
Total current liabilities................................... 73,188 78,045
Due to TWE and TWEAN........................................ 518,910 430,607
Group deficit............................................... (111,887) (60,599)
-------- --------
Total liabilities and group deficit......................... $480,211 $448,053
======== ========
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $377,226 $277,083 $130,926
-------- -------- --------
Costs and expenses:
Operating (a).................................. 211,194 156,897 76,253
Selling, general and administrative (b)........ 96,986 84,669 39,220
Depreciation................................... 67,472 45,449 20,261
-------- -------- --------
Total costs and expenses...................... 375,652 287,015 135,734
-------- -------- --------
Operating income (loss)......................... 1,574 (9,932) (4,808)
Equity in losses of PRIMESTAR Partners, L.P. ... (23,284) (5,314) (8,957)
Interest and other, net (c)..................... (29,578) (21,975) (12,733)
-------- -------- --------
Net loss........................................ $(51,288) $(37,221) $(26,498)
======== ======== ========
(a) Includes expenses resulting from transac-
tions with affiliates (Note 6).............. $184,644 $135,997 $ 64,066
======== ======== ========
(b) Includes expenses resulting from transac-
tions with affiliates (Note 6).............. $ 9,431 $ 6,927 $ 3,273
======== ======== ========
(c) Includes expenses resulting from transac-
tions with affiliates (Note 5).............. $ 27,921 $ 20,921 $ 11,910
======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF GROUP DEFICIT
(THOUSANDS)
<TABLE>
<CAPTION>
GROUP DEFICIT
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1994..................................... $ (33,647)
Net loss....................................................... (26,498)
Capital contribution resulting from Advance/Newhouse
transaction................................................... 36,767
---------
BALANCE AT DECEMBER 31, 1995..................................... (23,378)
Net loss....................................................... (37,221)
---------
BALANCE AT DECEMBER 31, 1996..................................... (60,599)
Net loss....................................................... (51,288)
---------
BALANCE AT DECEMBER 31, 1997..................................... $(111,887)
=========
</TABLE>
See accompanying notes.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
COMBINED STATEMENT OF CASH FLOWS
DECEMBER 31,
(THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATIONS
Net loss........................................ $(51,288) $(37,221) $(26,498)
Adjustments for noncash and nonoperating items:
Depreciation................................... 67,472 45,449 20,261
Equity in losses of PRIMESTAR Partners, L.P.... 23,284 5,314 8,957
Changes in operating assets and liabilities:
Receivables.................................... 5,444 (1,011) (16,310)
Accounts payable and accrued expenses.......... (7,020) 24,580 12,142
Other balance sheet changes.................... (1,172) 9,953 (467)
-------- -------- --------
Cash provided (used) by operations.............. 36,720 47,064 (1,915)
-------- -------- --------
INVESTING ACTIVITIES
Capital expenditures............................ (116,126) (169,793) (183,135)
Investments in and advances to PRIMESTAR Part-
ners, L.P...................................... (8,897) (19,711) (15,449)
-------- -------- --------
Cash used by investing activities............... (125,023) (189,504) (198,584)
-------- -------- --------
FINANCING ACTIVITIES
Advances from TWE and TWEAN..................... 478,158 425,851 315,286
Repayments of advances from TWE and TWEAN....... (389,855) (283,411) (114,787)
-------- -------- --------
Cash provided by financing activities........... 88,303 142,440 200,499
-------- -------- --------
CHANGE IN CASH AND EQUIVALENTS.................. -- -- --
CASH AND EQUIVALENTS AT BEGINNING OF YEAR....... -- -- --
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR............. $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMA-
TION:
Interest paid................................... $ 27,921 $ 20,921 $ 11,910
======== ======== ========
Noncash capital contribution.................... $ -- $ -- $ 36,767
======== ======== ========
</TABLE>
See accompanying notes.
<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 February 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. Although these financial
statements are presented as if the Company had operated as a corporation,
the Company was initially formed as a partnership for tax purposes and
continued to operate in a partnership structure through December 31, 1997.
In June 1997, the Financial Accounting Standards Board ("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
accounting 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 statements.
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.
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 $12.4 million, $18.8
million and $12.9 million for the years ended December 31, 1997, 1996 and
1995, respectively.
<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 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>
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- --------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements........................... $ 310 $ 204
Distribution equipment............................... 560,125 455,902
Furniture and other equipment........................ 8,195 6,301
--------- --------
568,630 462,407
Less accumulated depreciation........................ (121,192) (66,297)
--------- --------
Total.............................................. $ 447,438 $396,110
========= ========
</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.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2.PROPOSED TRANSACTIONS
TWE and the Advance/Newhouse Partnership ("Advance/Newhouse") entered into
agreements in February 1998 (the "Roll-up Transaction") 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 is ultimately expected to be
the publicly traded parent 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 by Newco), subject to adjustment pursuant to the Roll-
up Transaction.
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
(the "PrimeStar ASkyB Transaction" and, when taken together with the
PrimeStar Roll-up Transaction, the "PrimeStar Transactions"). 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,
will 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. The PrimeStar Roll-up Transaction is expected to close on or
about April 1, 1998. The PrimeStar ASkyB Transaction is 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 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, 1995,
the Company would have reported, for the year ended December 31, 1995
revenues of $146.6 million, depreciation of $25.3 million, operating losses
of $8.5 million and a net loss of $34.2 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.
<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>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue........................................ $626,104 $412,999 $180,595
Operating loss................................. 58,654 16,823 38,395
Net loss....................................... 74,417 15,702 42,037
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Current assets........................................ $156,706 $137,048
Total assets.......................................... 725,650 688,273
Current liabilities (including $565.0 and $521.0
million of short-term debt due under PrimeStar credit
facility at December 31, 1997 and 1996,
respectively......................................... 668,541 584,907
Other liabilities..................................... 3,952 4,227
Partners' capital..................................... 53,157 99,139
</TABLE>
The PrimeStar credit facility matures on September 30, 1998 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 $27.9 million, $20.9 million and $11.9 million
for the years ended December 31, 1997, 1996 and 1995, 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 programming services through
PrimeStar, 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 $129.5 million, $93.3 million and
$42.6 million for the years ended December 31, 1997, 1996 and 1995,
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 $55.1 million, $42.7 million and $21.5 million for the
years ended December 31, 1997, 1996 and 1995, 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 $9.4
million, $6.9 million and $3.3 million for the years ended December 31,
1997, 1996 and 1995, respectively.
<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 were non- interest bearing,
and amounted to $2.3 million at December 31, 1996 and are classified as
receivables from related parties. The Company fully settled these
receivables in October 1997 through a reduction of the Company's balance
due to TWEAN.
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 approximately $772,000, $742,000 and
$270,000 for the years ended December 31, 1997, 1996 and 1995,
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 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 approximately
$333,000, $262,000, and $200,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
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
------------------
1997 1996
-------- --------
(THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $ 523 $ 514
Investment in PRIMESTAR Partners, L.P............... 1,782 5,328
Tax losses utilized by Time Warner.................. 103,763 61,428
-------- --------
Total gross deferred tax assets................... 106,068 67,270
Less: valuation allowance............................. (59,055) (38,438)
-------- --------
Net deferred tax assets............................... 47,013 28,832
-------- --------
Deferred tax liabilities:
Depreciation........................................ (47,013) (28,832)
-------- --------
Total gross deferred tax liabilities.............. (47,013) (28,832)
-------- --------
Net deferred tax assets............................... $ -- $ --
======== ========
</TABLE>
In 1997, 1996 and 1995, income tax benefits of approximately $20.6 million,
$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.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 $228.2 million during the three years ended
December 31, 1997. However, at December 31, 1997, the Company, which
operated as a partnership during the periods presented herein, has no net
operating loss carryforwards for tax purposes because such losses were
primarily allocated to and 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 $44.7
million at December 31, 1997.
9.COMMITMENTS AND CONTINGENCIES
In connection with its guarantee of the PrimeStar credit facility, the
Company is required to provide 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, 1997, TWEAN had issued
on the Company's behalf, 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 TWEAN on the Company's
behalf. At December 31, 1997, TWEAN had entered into letters of credit
amounting to $75.0 million to cover the Company's maximum obligation under
this agreement.
At December 31, 1997, the Company's future minimum commitments to purchase
satellite reception equipment aggregated approximately $13.0 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, 1997, 1996 and 1995
totaled $2.2 million, $1.5 million and $920,000, respectively.
Future minimum rental payments at December 31, 1997 under noncancelable
operating leases were as follows:
<TABLE>
<CAPTION>
TOTAL RENTAL
COMMITMENT
------------
(THOUSANDS)
<S> <C>
Year Ending December 31:
1998....................................................... $1,322
1999....................................................... 1,102
2000....................................................... 881
2001....................................................... 220
2002 and thereafter........................................ --
------
$3,525
======
</TABLE>
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.
<PAGE>
TIME WARNER SATELLITE SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10.OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(THOUSANDS)
<S> <C> <C>
Accrued expenses......................................... $ 6,220 $ 8,117
Sales and other taxes.................................... 3,825 2,107
Accrued salaries and employee benefits................... 2,220 1,948
Accrued data processing.................................. 3,720 1,967
Subscriber related liabilities........................... 2,387 1,452
Other.................................................... 239 857
------- -------
Total.................................................. $18,611 $16,448
======= =======
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1996
and 1997, 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,
1997. 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 $11,536,000
and $7,685,000 in Primestar at December 31, 1996 and 1997, respectively, and
of $4,087,000, $1,397,000, and $6,788,000 in Primestar's net loss for the
years ended December 31, 1995, 1996, and 1997, respectively, are included in
the accompanying financial statements. Those statements were audited by other
auditors whose report (which includes an explanatory paragraph regarding
Primestar'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 the Company as of December 31, 1996 and 1997 and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 27, 1998
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Cash................................................. $ 1,860 $ 2,271
Accounts receivable, less allowance for doubtful
accounts of $1,041 in 1997
and $391 in 1996.................................... 7,317 4,672
Plant and equipment
Satellite reception equipment...................... 126,947 94,679
Subscriber installation costs...................... 36,378 27,700
Support equipment.................................. 972 659
----------- -----------
164,297 123,038
Less accumulated depreciation........................ (47,679) (24,210)
----------- -----------
116,618 98,828
----------- -----------
Investment in PrimeStar Partners, L.P. .............. 7,685 11,536
Other assets......................................... 11,770 10,812
----------- -----------
Total assets..................................... $145,250 $128,119
=========== ===========
LIABILITIES AND EQUITY
Accounts payable..................................... $ 3,497 $ 10,905
Accrued charges from PrimeStar Partners, L.P. ....... 5,447 7,105
Other accrued expenses............................... 6,313 5,956
Amounts due to Cox Communications, Inc ("CCI")....... 204,314 150,829
Deferred income taxes................................ 3,221 2,523
----------- -----------
Total liabilities................................ 222,792 177,318
----------- -----------
Deficiency in net assets............................. (77,542) (49,199)
----------- -----------
Total liabilities and equity..................... $145,250 $128,119
=========== ===========
</TABLE>
See notes to financial statements.
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
--------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
REVENUES
Programming and equipment rental............. $ 97,826 $ 53,434 $ 18,547
Installation................................. 11,820 14,857 9,002
--------- --------- --------
109,646 68,291 27,549
COSTS AND EXPENSES
Programming and other charges from PrimeStar
Partners, L.P............................... 53,688 30,731 11,483
Other operating.............................. 11,433 6,610 2,389
Selling, general and administrative.......... 33,790 28,805 12,889
Depreciation................................. 36,385 21,704 6,323
--------- --------- --------
OPERATING LOSS................................. (25,650) (19,559) (5,535)
OTHER INCOME (EXPENSE)
Interest expense............................. (10,659) (6,898) (3,630)
Share of losses of PrimeStar Partners, L.P... (6,788) (1,397) (4,087)
Other, net................................... (497) (151) (66)
--------- --------- --------
LOSS BEFORE INCOME TAXES....................... (43,594) (28,005) (13,318)
Income tax benefit............................. 15,251 9,791 4,657
--------- --------- --------
NET LOSS....................................... $ (28,343) $ (18,214) $ (8,661)
========= ========= ========
</TABLE>
See notes to financial statements.
<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, 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........................................................ (28,343)
---------
Balance at December 31, 1997...................................... $ (77,542)
=========
</TABLE>
See notes to financial statements.
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
--------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $ (28,343) $ (18,214) $ (8,661)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation................................ 36,385 21,704 6,323
Share of losses of PrimeStar Partners, L.P.
........................................... 6,788 1,397 4,087
Deferred income taxes....................... 1,179 978 1,148
Increase in accounts receivable............... (2,645) (4,123) (39)
Increase (decrease) in accounts payable and
accrued expenses............................. (8,709) 7,193 5,742
Other, net.................................... (1,439) (402) (784)
--------- --------- --------
Net cash provided by operating
activities............................... 3,216 8,533 7,816
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................... (54,175) (70,522) (40,768)
Investments in PrimeStar Partners............. (2,937) (6,571) (7,098)
--------- --------- --------
Net cash used in investing activities..... (57,112) (77,093) (47,866)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in amounts due to CCI................ 53,485 66,118 44,733
--------- --------- --------
Net cash provided by financing
activities............................... 53,485 66,118 44,733
--------- --------- --------
Net increase (decrease) in cash............... (411) (2,442) 4,683
Cash at beginning of period................... 2,271 4,713 30
--------- --------- --------
Cash at end of period......................... $ 1,860 $ 2,271 $ 4,713
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................... 10,659 6,898 3,630
Cash refunded for income taxes.............. (13,532) (3,362) (5,524)
</TABLE>
See notes to financial statements.
<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 75.0% owned subsidiary of Cox
Enterprises, Inc. ("CEI"), is among the nation's five largest multiple
system operators, serving some 3.2 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
Cox entered into a binding letter agreement dated February 6, 1998 (the
"Restructuring 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 ("PrimeStar, Inc.") 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 PrimeStar, Inc. Cox DBS as an operating company will
cease to exist upon consummation of the Restructuring Transaction. Upon
completion of the Restructuring Transaction but before the acquisition of
certain satellite assets, Cox will hold approximately 9.35% of PrimeStar,
Inc. The Restructuring Transaction is expected to close in the second
quarter of 1998.
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 PrimeStar, Inc. 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 PrimeStar, Inc. Consummation of the transactions
contemplated by the ASkyB agreement are contingent on , among other things,
receipt of all necessary government and regulatory approvals. The
Restructuring Agreement and the ASkyB Agreement are not conditioned on each
other and may close independently.
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.
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.
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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"). 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.
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Recently Issued Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
This Statement requires that Cox DBS (a) classify, by nature, items of
comprehensive income in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of the
balance sheet. This Statement also requires Cox DBS to report comprehensive
income, a measure of performance that includes all non-owner sources of
changes in equity, in addition to net income reported in the financial
statements. Reclassification of financial statements for earlier periods is
required for comparative purposes. This Statement is effective beginning
fiscal year December 31, 1998.
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 financial information of PrimeStar Partners:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
-------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues............................ $626,104 $ 412,999 $ 180,595
Operating loss...................... (58,654) (16,823) (38,395)
Net loss............................ (74,417) (15,702) (42,037)
<CAPTION>
DECEMBER 31
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current assets...................... $ 156,706 $ 137,048
Noncurrent assets................... 568,944 551,225
Current liabilities................. 668,541 584,907
Noncurrent liabilities.............. 3,952 4,227
Partner's Capital................... 53,157 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, 1997, 1996 and 1995, the charges from
PrimeStar Partners for programming services and other items were
approximately $53,688,000, $30,731,000 and $11,483,000, respectively.
Amounts payable to PrimeStar Partners at December 31, 1997 and 1996, were
approximately $5,447,000 and $7,105,000, respectively.
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 $35,400,000
and $32,400,000 to the partnership as of December 31, 1997 and 1996,
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.
5.INCOME TAXES
Current and deferred income tax expenses (benefits) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
-------- -------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Current........................................ $(16,430) $(10,769) $(5,805)
Deferred....................................... 1,179 978 1,148
-------- -------- -------
Net income tax benefit....................... $(15,251) $ (9,791) $(4,657)
Effective tax rate............................. 34.98% 34.96% 34.97%
-------- -------- -------
</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
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Plant and equipment............................... $ (3,253) $ (2,541)
Other............................................. 32 18
----------- -----------
Net deferred tax liability...................... $ (3,221) $ (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,
1997, 1996 and 1995 of approximately $4,741,000, $2,720,000 and $1,089,000,
respectively, related to these services. Cox DBS pays rent and certain
other occupancy costs to Cox for its office facilities, which amounts
approximated $511,000, $664,000 and $194,000 for the years ended December
31, 1997, 1996 and 1995, 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
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 basis points above
Cox's commercial paper borrowings. This rate as of December 31, 1997 and
1996 was 6.4% and 6.6%, respectively.
Included in amounts due to Cox are the following transactions:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
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......................... 2,966
Net operating expense allocations and
reimbursements................................... 50,519
--------
Intercompany due to Cox, December 31, 1997.......... $204,314
========
</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 leases office facilities and various items of equipment under
noncancellable operating leases. Future minimum lease payments as of
December 31, 1997 for all noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
----------------------
<S> <C>
1998.................................................. $127
1999.................................................. 120
2000.................................................. 80
2001.................................................. 65
2002.................................................. 14
Thereafter............................................ 0
----
Total............................................... $406
====
</TABLE>
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.
Cox DBS anticipates the pay out of involuntary termination benefits to
certain employees in connection with the consummation of the Restructuring
Transaction. As of December 31, 1997, Cox DBS has neither
<PAGE>
COX COMMUNICATIONS, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
established the benefits that current employees will receive upon
termination nor the specific number of employees to be terminated.
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>
1997
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER(a) QUARTER(a) QUARTER QUARTER
------- ------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Revenue.................................. $ 22,736 $ 26,734 $ 29,303 $ 30,873
Operating loss........................... (7,175) (7,437) (8,388) (2,650)
Loss before income taxes................. (10,040) (13,719) (11,922) (7,913)
Income tax benefit....................... 3,524 5,008 4,089 2,630
Net loss................................. (6,516) (8,711) (7,833) (5,283)
<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)
Loss before income taxes................. (4,922) (6,625) (7,399) (9,059)
Income tax benefit....................... 2,245 2,735 1,647 3,164
Net loss................................. (2,677) (3,890) (5,752) (5,895)
</TABLE>
(a) Results for the first and second quarters of 1997 have been revised to
correct the timing of recognition of depreciation and other operating
expenses and interest expense. These revisions increased the operating loss
for the first quarter of 1997 by $1,690, loss before income taxes by $1,526
and net loss (after related income tax benefit) by $1,137. Second quarter
losses decreased by corresponding amounts.
<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, 1997 and 1996, and the related
combined statements of operations, stockholder's deficiency and of cash flows
for each of the three years in the period ended December 31, 1997. 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 $30,104,000 and
$22,120,000 in Primestar's accumulated losses at December 31, 1997 and 1996,
respectively, and of $7,984,000, $1,647,000 and $4,385,000 in Primestar's net
loss for the years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
April 1, 1998
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 10,527 $ 5,956
Accounts receivable, less allowance for doubtful accounts
of $915 and $887........................................ 6,871 2,807
Other current assets..................................... 950 843
Due from affiliates...................................... -- 99
-------- --------
Total current assets................................... 18,348 9,705
-------- --------
Investment in Primestar.................................... 5,544 10,340
-------- --------
Property and equipment..................................... 144,566 93,726
Accumulated depreciation................................. (35,708) (17,052)
-------- --------
Property and equipment, net.............................. 108,858 76,674
-------- --------
Subscriber installation costs.............................. 40,882 27,205
Accumulated amortization................................. (15,746) (7,473)
-------- --------
Subscriber installation costs, net....................... 25,136 19,732
-------- --------
$157,886 $116,451
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses.................... $ 22,275 $ 24,376
Accrued interest on notes payable to affiliate........... 1,288 461
Notes payable to affiliate............................... 210,436 --
Due to affiliates........................................ 1,226 --
-------- --------
Total current liabilities.............................. 235,225 24,837
-------- --------
Notes payable to affiliate................................. -- 131,471
-------- --------
Commitments and Contingencies
Stockholder's Deficiency
Common stock............................................. -- --
Additional capital....................................... 31,855 31,633
Accumulated deficit...................................... (109,194) (71,490)
-------- --------
Total stockholder's deficiency......................... (77,339) (39,857)
-------- --------
$157,886 $116,451
======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service income................................... $114,128 $ 65,574 $ 27,726
-------- -------- --------
Costs and expenses
Operating...................................... 76,216 40,241 19,755
Selling, general and administrative............ 23,671 21,780 14,031
Depreciation and amortization.................. 27,957 17,956 6,973
-------- -------- --------
127,844 79,977 40,759
-------- -------- --------
Operating loss................................... (13,716) (14,403) (13,033)
Other (income) expense
Interest expense on notes payable to affili-
ate........................................... 16,285 8,442 3,174
Investment income and other.................... (281) (126) (68)
Equity in net loss of Primestar................ 7,984 1,647 4,385
-------- -------- --------
23,988 9,963 7,491
-------- -------- --------
Net loss......................................... $(37,704) $(24,366) $(20,524)
======== ======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net loss........................................ $(37,704) $(24,366) $(20,524)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization.................. 27,957 17,956 6,973
Equity in net loss of Primestar................ 7,984 1,647 4,385
-------- -------- --------
(1,763) (4,763) (9,166)
Increase in accounts receivable................ (4,064) (983) (1,494)
(Increase) decrease in other current assets.... (107) 2,431 (3,244)
(Decrease) increase in accounts payable and
accrued expenses.............................. (2,101) 14,037 8,460
Increase (decrease) in accrued interest on
notes payable to affiliate.................... 827 (2,713) 3,174
-------- -------- --------
Net cash (used in) provided by operating
activities.................................. (7,208) 8,009 (2,270)
-------- -------- --------
Financing activities
Proceeds from notes payable to affiliate........ 78,965 72,671 46,800
Capital contributions........................... 222 10 7,092
Net transactions with affiliates................ 1,325 (146) (2,449)
-------- -------- --------
Net cash provided by financing activities.... 80,512 72,535 51,443
-------- -------- --------
Investing activities
Capital contributions to Primestar.............. (3,188) (6,580) (7,099)
Capital expenditures............................ (51,868) (52,962) (32,692)
Subscriber installation costs................... (13,677) (15,046) (9,501)
-------- -------- --------
Net cash used in investing activities........ (68,733) (74,588) (49,292)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... 4,571 5,956 (119)
Cash and cash equivalents, beginning of year..... 5,956 -- 119
-------- -------- --------
Cash and cash equivalents, end of year........... $ 10,527 $ 5,956 $ --
======== ======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
COMBINED STATEMENT OF STOCKHOLDER'S DEFICIENCY
<TABLE>
<CAPTION>
COMMON ADDITIONAL ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, January 1, 1995............... $ -- $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)
Net loss............................... -- -- (37,704) (37,704)
Capital contributions.................. -- 222 -- 222
---- ------- --------- --------
Balance, December 31, 1997............. $ -- $31,855 $(109,194) $(77,339)
==== ======= ========= ========
</TABLE>
See notes to combined financial statements.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 United States
("US"). 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, including Comcast
Satellite, throughout the US. Comcast Satellite provided DBS services,
through a distributorship arrangement with Primestar, to approximately
182,000 subscribers as of December 31, 1997.
2.RESTRUCTURING OF PRIMESTAR'S OPERATIONS
On February 6, 1998, Comcast entered into a Merger and Contribution
Agreement (the "Merger and Contribution Agreement") with Primestar and the
affiliates of each of the other partners of Primestar, including TCI
Satellite Entertainment, Inc. ("TSAT"), a publicly-traded company, pursuant
to which Comcast Satellite's DBS operations, Comcast DBS' partnership
interests in Primestar and the Primestar partnership interests and the DBS
operations of the other partners of Primestar will be consolidated into a
newly formed company ("New Primestar"). Under the terms of the Merger and
Contribution Agreement, which closed on April 1, 1998, in exchange for
Comcast's equity interest in the Companies, New Primestar, through a series
of transactions, assumed $74.7 million of the Companies' debt and Comcast
received 9.5% of New Primestar common equity, both subject to adjustment
based on the number of subscribers, inventory amounts and other factors.
Subsequent to the Merger and Contribution Agreement, New Primestar paid
$74.7 million to a subsidiary of Comcast (the "Comcast Subsidiary").
Subject to receipt of regulatory approval and other conditions, TSAT will
merge with and into New Primestar in a transaction in which TSAT's
outstanding common shares will be exchanged for common shares of New
Primestar.
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 conditions,
New Primestar) will acquire certain assets relating to a high-power DBS
business (the "ASkyB Transaction"). 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.
The ASkyB Transaction is 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.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.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997 and
1996, 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>
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.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. INVESTMENT IN PRIMESTAR
The original cost of Comcast DBS' investment in Primestar was $35.6 million
and $32.4 million as of December 31, 1997 and 1996, respectively.
Summarized financial information for Primestar for the years ended December
31, 1997, 1996 and 1995 is presented below (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues................................... $626,104 $412,999 $180,595
Operating, selling, general and administra-
tive expenses............................. 680,876 426,561 216,100
Depreciation and amortization.............. 3,882 3,261 2,890
Operating loss............................. (58,654) (16,823) (38,395)
Net loss (1)............................... (74,417) (15,702) (42,037)
COMCAST DBS' EQUITY IN NET LOSS.............. (7,984) (1,647) (4,385)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
FINANCIAL POSITION
Current assets.......................................... $156,706 $137,048
Noncurrent assets....................................... 568,944 551,225
Current liabilities..................................... 668,541 584,907
Noncurrent liabilities.................................. 3,952 4,227
</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 first
quarter 1998 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. New
Primestar is currently negotiating to refinance the Primestar credit
facility and New 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. There can be no
assurance that 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, 1997.
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 December 31, 1997, indirect wholly owned subsidiaries of Comcast had
unused irrevocable standby letters of credit totaling $98.1 million to
cover potential fundings to Primestar, which expire in September 1998 and
February 1999.
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5.NOTES PAYABLE TO AFFILIATE
As of December 31, 1997 and 1996, notes payable to affiliate consist of the
following notes payable to the Comcast Subsidiary (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Comcast Satellite Revolving Credit Note, interest at
10.00%, payable on demand.............................. $200,900 $124,900
Comcast DBS Revolving Credit Note, interest at 9.50%,
payable on demand...................................... 9,536 6,571
-------- --------
$210,436 $131,471
======== ========
</TABLE>
During the three months ended March 31, 1998, additional interest of $6.5
million on the Notes was added to the principal amount of the Notes.
Maximum available borrowings under the Comcast Satellite Revolving Credit
Note and the Comcast DBS Revolving Credit Note are $220.0 million in the
aggregate. As the Comcast Subsidiary agreed not to demand payment of the
Notes until after December 31, 1997, the Notes were classified as long-term
in the December 31, 1996 combined balance sheet. Prior to the closing of
the Merger and Contribution Agreement, Comcast contributed an aggregate of
$142.2 million to Comcast Satellite and Comcast DBS. Comcast Satellite and
Comcast DBS used the proceeds from such contribution to repay a portion of
the amounts outstanding under the Notes. Subsequent to the closing of the
Merger and Contribution Agreement, New Primestar paid the Comcast
Subsidiary $74.7 million (see Note 2) to repay the remaining amounts
outstanding under the Notes. As the Merger and Contribution Agreement
closed on April 1, 1998, the Notes have been classified as current as of
December 31, 1997 in the accompanying combined balance sheet.
6.CAPITAL STRUCTURE
As of December 31, 1997 and 1996, 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, 1997 and 1996, 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 $3.3 million,
$1.6 million and $1.4 million in 1997, 1996 and 1995, 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, 1997, 1996 and 1995, expenses relating to such
services were $53.7 million, $28.3 million and $11.4 million respectively.
As of December 31, 1997 and 1996, accounts payable and accrued expenses
include $7.1 million and $7.2 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
<PAGE>
COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 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,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Federal tax benefit at statutory rate............ $ 13,196 $ 8,528 $ 7,183
Change in valuation allowance.................... (13,196) (8,528) (7,183)
-------- ------- -------
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,
------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets, principally net operating loss
carryforwards........................................ $ 37,516 $ 24,320
Less valuation allowance.............................. (37,516) (24,320)
-------- --------
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 $15.5 million and $11.2 million in 1997 and 1996, respectively,
with the proceeds from a borrowing under such note. No cash payments for
interest were made in 1995.
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>
1998.................................................................... $350
1999.................................................................... 301
2000.................................................................... 16
</TABLE>
Rental expense of $469,000, $224,000 and $183,000 was charged to operations
in 1997, 1996 and 1995, 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To MediaOne of Delaware, Inc.:
We have audited the accompanying combined balance sheets of MediaOne of
Delaware, Inc.--Direct Broadcast Satellite Business (the "Company") as of
December 31, 1997 and 1996 and the related combined statements of operations,
changes in group equity (deficiency), and cash flows for the year ended
December 31, 1997 and 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 statements of
operations, changes in group equity (deficiency), and cash flows of the Direct
Broadcast Satellite Business of Continental Cablevision, Inc. (the
"Predecessor Corporation") for the period January 1, 1996 through November 14,
1996, and the year ended December 31, 1995. 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 $28,178,000 and $33,931,000 in PrimeStar
Partners, L.P., at December 31, 1997 and 1996, respectively, and of
$8,691,000, $187,000, $1,643,000, and $4,372,000 in that company's net loss
for the year ended December 31, 1997 and for the periods November 15, 1996 to
December 31, 1996 and January 1, 1996 to November 14, 1996 and for the year
ended December 31, 1995, 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 substantial doubt concerning 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 of Delaware,
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, 1997 and 1996 and the
results of their operations and their cash flows for the year ended December
31, 1997 and 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 results of operations and cash
flows of the Predecessor Corporation for the period January 1, 1996 through
November 14, 1996, and the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
March 20, 1998
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 179 $ 393
Accounts receivable, net.................................... 6,729 4,214
Supplies.................................................... 3,130 3,239
Investment in PrimeStar..................................... 28,178 33,931
Tax allocation receivable................................... 34,657 22,530
Property, plant and equipment, net.......................... 163,175 132,636
Other assets, net........................................... 642 271
Goodwill, net............................................... 31,601 32,922
-------- --------
Total..................................................... $268,291 $230,136
======== ========
LIABILITIES AND GROUP EQUITY (DEFICIENCY)
Accounts payable--trade..................................... $ 5,697 $ 5,219
Accrued expenses............................................ 10,974 8,778
Deferred income taxes....................................... 19,036 16,446
Due to parent............................................... 250,437 201,893
-------- --------
Total liabilities......................................... 286,144 232,336
-------- --------
Commitments and contingencies (note 8)......................
Group equity (deficiency)................................... (17,853) (2,200)
-------- --------
Total..................................................... $268,291 $230,136
======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD PERIOD
NOVEMBER 15 JANUARY 1
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 14, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------- -------------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Revenues............................................................... $109,284 $10,561 $ 58,318 $37,050
Costs and expenses:
Programming and other charges from PrimeStar......................... 57,100 5,393 30,251 16,759
Charges from Parent.................................................. 576 109 766 412
Other operating...................................................... 10,106 1,108 5,157 2,986
Other selling, general and administrative............................ 26,593 3,194 14,129 12,547
Depreciation and amortization........................................ 25,082 2,859 11,881 7,356
-------- ------- -------- -------
Total.............................................................. 119,457 12,663 62,184 40,060
-------- ------- -------- -------
Operating loss......................................................... (10,173) (2,102) (3,866) (3,010)
-------- ------- -------- -------
Other expense:
Interest to Parent................................................... 6,121 1,234 10,680 7,464
Equity in net loss of PrimeStar...................................... 8,691 187 1,643 4,372
Other................................................................ 155 15 72 16
-------- ------- -------- -------
Total.............................................................. 14,967 1,436 12,395 11,852
-------- ------- -------- -------
Loss before income taxes............................................... (25,140) (3,538) (16,261) (14,862)
Income tax benefit..................................................... 9,487 1,338 6,504 5,945
-------- ------- -------- -------
Net loss............................................................... $(15,653) $(2,200) $ (9,757) $(8,917)
======== ======= ======== =======
</TABLE>
See notes to combined financial statements.
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD PERIOD
NOVEMBER 15 JANUARY 1
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 14, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------- -------------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Operating activities:
Net loss............................................................. $(15,653) $ (2,200) $ (9,757) $ (8,917)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization...................................... 25,082 2,859 11,881 7,356
Equity in net loss of PrimeStar.................................... 8,691 187 1,643 4,372
Deferred income taxes.............................................. (2,713) (119) (504) (656)
Changes in working capital:
Accounts receivable, supplies and other............................ (9,601) (203) (6,608) (9,778)
Accounts payable and accrued expenses.............................. 2,653 979 5,772 3,707
-------- -------- -------- --------
Net cash provided (used) by operating activities..................... 8,459 1,503 2,427 (3,916)
-------- -------- -------- --------
Investing activities:
Expenditures for property, plant and equipment....................... (54,279) (13,855) (59,747) (59,503)
Investments in PrimeStar............................................. (2,938) (1,043) (5,528) (7,089)
-------- -------- -------- --------
Net cash used in investing activities.............................. (57,217) (14,898) (65,275) (66,592)
-------- -------- -------- --------
Financing activities:
Advances from parent, net............................................ 48,544 13,611 62,893 70,583
-------- -------- -------- --------
Net cash provided by financing activities.......................... 48,544 13,611 62,893 70,583
-------- -------- -------- --------
Net increase (decrease) in cash........................................ (214) 216 45 75
Cash at beginning of period............................................ 393 177 132 57
-------- -------- -------- --------
Cash at end of period.................................................. $ 179 $ 393 $ 177 $ 132
======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
<PAGE>
MEDIAONE OF DELAWARE, 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......................................................... (15,653)
--------
Balance, December 31, 1997......................................... $(17,853)
========
</TABLE>
See notes to combined financial statements.
<PAGE>
MEDIAONE OF DELAWARE, 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, 1995........................................... $(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.
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
(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 of Delaware, 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 and broadband systems,
telecommunications ventures, programming services, and international
broadband communication ventures. MediaOne was merged with and into
US 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 Due to Parent on the accompanying
combined balance sheets. Certain 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, investment in PrimeStar
Partners, L.P., 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
April 1998.
(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. 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. Certain prior period amounts have been
reclassified to conform to their current presentation.
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 December 31, 1997 and 1996 include the fair value of assets and
liabilities acquired in connection with the Merger. With respect to the
Company's assets, approximately $23,800,000
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
was allocated to the investment in PrimeStar, based upon 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.
All significant intercompany accounts and transactions have been eliminated
in the combined financial statements.
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.
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, and is included in Equity in net
loss of PrimeStar in the accompanying Combined Statements of Operations
(See Note 3).
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 for furniture and equipment and
satellite reception equipment. 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
The Company periodically reviews long-lived assets and certain identifiable
intangibles for impairment, primarily by comparison to the expected
undiscounted cash flows generated by those assets. To date, no impairments
have occurred.
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 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, 1997 and 1996.
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, 1997 and 1996, the carrying value of the Company's financial
instruments approximated fair value.
Allowance for Doubtful Accounts
The allowance for doubtful accounts at December 31, 1997 and 1996 was
$302,000 and $1,422,000, 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 $1,488,000 and $167,000 at December 31, 1997 and 1996.
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") 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. In February 1998, the FASB released SFAS No. 132 "Employers'
Disclosures about Pensions and other Postretirement Benefits". This
pronouncement will be effective in 1998, and will standardize the
disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
as useful as they were when earlier related statements were issued.
(3)INVESTMENT IN PRIMESTAR
The Company owns a 10.4% limited partnership interest in PrimeStar. A
wholly owned subsidiary of MediaOne has issued two standby letters of
credit totaling approximately $98,125,000 as of December 31, 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 the Company. The standby letters of credit are currently
guaranteed by a subsidiary of U S WEST.
The major components of PrimeStar's financial position and results of
operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Costs of satellites under construction................. $547,627 $ 525,746
Property, plant and equipment.......................... 21,221 18,131
Total assets........................................... 725,650 688,273
Total liabilities...................................... 672,493 589,134
Partners' capital...................................... 53,157 99,139
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................... $626,104 $412,999 $180,595
Depreciation and amortization................ 3,882 3,261 2,890
Operating loss............................... (58,650) (16,823) (38,395)
Net loss..................................... (74,417) (15,702) (42,037)
</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
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
number of subscribers. For the year ended December 31, 1997 and the periods
November 15, 1996 to December 31, 1996 and January 1, 1996 to November 14,
1996 and the year ended December 31, 1995, the Company recorded programming
and authorization fees of $57,100,000, $5,393,000, $30,251,000 and
$16,759,000, respectively. Amounts payable to PrimeStar for programming and
authorization fees were $11,790,000 and $8,138,000 as of December 31, 1997
and 1996 and are included in Accounts Payable and Accrued Expenses on the
accompanying combined balance sheets.
(5)PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Reception equipment............................... $ 178,133 $ 127,787
Equipment and fixtures............................ 9,362 7,468
------------ ------------
Total........................................... 187,495 135,255
Less--accumulated depreciation.................... 24,320 2,619
------------ ------------
Property, plant and equipment--net.............. $ 163,175 $ 132,636
============ ============
</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
NOVEMBER 15, 1996 JANUARY 1, 1996
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 14, DECEMBER 31,
1997 1996 1996 1995
------------ ----------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal............... $ (5,927) $ (960) $ (4,723) $ (4,891)
State and local....... (847) (259) (1,277) (398)
Deferred:
Federal............... (2,395) (98) (396) (32)
State and local....... (318) (21) (108) (624)
-------- -------- -------- --------
$ (9,487) $ (1,338) $ (6,504) $ (5,945)
======== ======== ======== ========
</TABLE>
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 14, DECEMBER 31,
1997 1996 1996 1995
------------ ----------------- --------------- ------------
<S> <C> <C> <C> <C>
Computed "expected" tax
benefit................ (35.0)% (35.0)% (35.0)% (35.0)%
State and local income
taxes, net of Federal
income tax benefit..... (5.0) (5.0) (5.0) (5.0)
Goodwill amortization... 2.3 2.2 -- --
----- ----- ----- -----
Total................. (37.7)% (37.8)% (40.0)% (40.0)%
===== ===== ===== =====
</TABLE>
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,
--------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards.............. $ 11,735 $ 9,789
Investment in PrimeStar....................... (9,605) (9,568)
Accrued expenses.............................. 408 949
Valuation allowance........................... (9,789) (9,789)
Property, plant and equipment................. (11,636) (7,686)
Other......................................... (149) (141)
------------ ------------
Net deferred tax assets (liabilities)....... $ (19,036) $ (16,446)
============ ============
</TABLE>
At December 31, 1997 and 1996, the Company had net operating loss
carryforwards of $28,773,000 and $33,271,000, and $25,435,000 and
$17,728,000 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
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
expenditures and general corporate purposes as needed. Amounts paid by
MediaOne on behalf of the Company are reflected in 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 $576,000, $109,000, $766,000 and $412,000 for the year ended
December 31, 1997 and the periods November 15, 1996 to December 31, 1996
and January 1, 1996 to November 14, 1996 and the year ended December 31,
1995, respectively. Certain 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, 1999 and to providing additional intercompany financing through
January 1, 1999.
(8)COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have entered into various operating lease
agreements, with total commitments of $987,000 as of December 31, 1997.
Commitments under such agreements for the years 1998-2002 approximate
$425,000, $368,000, $117,000, $40,000 and $19,000, respectively. Lease and
rental costs charged to operations for the year ended December 31, 1997 and
for the periods November 15, 1996 to December 31, 1996 and January 1, 1996
to November 14, 1996 and the year ended December 31, 1995 were
approximately $632,000, $63,000, $440,000 and $381,000, respectively.
As of December 31, 1997, the Company's future minimum commitments to
purchase satellite reception equipment aggregated approximately $8,200,000.
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 year
ended December 31, 1995, expense recorded by the Company related to
participation in this plan aggregated $3,046, $21,325 and $11,173,
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 year ended December 31, 1997 and the periods November 15, 1996 to
December 31, 1996 and January 1, 1996 to November 14, 1996 and the year
ended December 31, 1995, expense recorded by the Company related to
participation in this plan aggregated $34,000, $3,100, $22,400 and $11,100,
respectively.
<PAGE>
MEDIAONE OF DELAWARE, INC.
DIRECT BROADCAST SATELLITE BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(10)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly results of operations for 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1997
Revenues........................... $ 23,177 $ 26,241 $ 28,537 $ 31,329
Depreciation and amortization...... 5,324 6,062 7,489 6,207
Operating loss..................... (1,469) (2,077) (2,965) (3,662)
-------- -------- -------- --------
Net loss......................... (2,355) (4,215) (3,494) (5,589)
======== ======== ======== ========
</TABLE>
<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)
======= ======= ======= ======
</TABLE>
<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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, 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 1998 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 September 1998. 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.
Price Waterhouse LLP
Philadelphia, Pennsylvania
March 6, 1998
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 14,784 $ 12,145
Restricted cash......................................... 992 803
Accounts receivable--related parties, net............... 137,389 91,024
Prepaid and other current assets........................ 3,541 33,076
--------- ---------
Total current assets.................................. 156,706 137,048
Property and equipment, net............................... 21,221 18,131
Costs of satellites under construction.................... 547,627 525,746
Other assets, net......................................... 96 7,348
--------- ---------
$ 725,650 $ 688,273
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Borrowings under credit facility........................ $ 565,000 $ 521,000
Current portion of satellite obligation................. 275 255
Accounts payable and other accrued expenses............. 87,092 47,623
Accounts payable--related party......................... 4,697 7,501
Accrued payroll......................................... 11,477 3,990
Accrued interest........................................ 4,538
--------- ---------
Total current liabilities............................. 668,541 584,907
Long-term obligation--satellite........................... 3,952 4,227
--------- ---------
Total liabilities..................................... 672,493 589,134
--------- ---------
Commitments and contingencies
Partners' capital:
Contributed capital..................................... 343,403 314,968
Accumulated loss........................................ (290,246) (215,829)
--------- ---------
Total partners' capital............................... 53,157 99,139
--------- ---------
$ 725,650 $ 688,273
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRIMESTAR PARTNERS L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Subscriber revenues--related parties........... $626,104 $412,999 $180,595
Interest....................................... 2,378 1,845 1,252
-------- -------- --------
628,482 414,844 181,847
-------- -------- --------
Expenses:
Operating...................................... 511,447 316,763 147,948
Selling, general and administrative............ 169,429 109,798 68,152
Depreciation and amortization.................. 3,882 3,261 2,890
Interest expense............................... 17,836 737 8
Loss on deferred option payments............... -- 4,886
(Gain) loss on disposal of property and
equipment..................................... 305 (13) --
-------- -------- --------
702,899 430,546 223,884
-------- -------- --------
Net loss......................................... $(74,417) $(15,702) $(42,037)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL LOSS TOTAL
----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
Capital contributions......................... 28,435 -- 28,435
Net loss...................................... -- (74,417) (74,417)
-------- --------- --------
Balance at December 31, 1997.................. $343,403 $(290,246) $ 53,157
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(74,417) $ (15,702) $ (42,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 7,548 4,178 2,890
Loss on deferred option payments............. 4,886
Loss (gain) on disposal of property and
equipment................................... 305 (13)
Change in assets and liabilities:
Accounts receivable, related parties........ (46,365) (30,580) (48,245)
Deposits.................................... 4 (28) 757
Prepaid and other assets.................... 33,009 (23,637) (13,024)
Accounts payable, accrued expenses, and
accrued interest........................... 42,418 22,930 18,984
Accounts payable--related party............. (2,804) 2,811 1,846
Deferred rent............................... (7,210) (3,968)
-------- --------- ---------
Net cash used in operating activities...... (40,302) (47,251) (77,911)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment and
payments on satellite construction........... (29,050) (116,345) (133,867)
-------- --------- ---------
Cash flows from financing activities:
Capital contributions......................... 28,435 63,000 68,062
Borrowings under credit facility.............. 44,000 102,000 129,000
Principal payments of long-term satellite
obligation................................... (255) (101)
Increase in restricted cash................... (189) (114) (298)
-------- --------- ---------
Net cash provided by financing activities.. 71,991 164,785 196,764
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 2,639 1,189 (15,014)
Cash and cash equivalents at beginning of
year.......................................... 12,145 10,956 25,970
-------- --------- ---------
Cash and cash equivalents at end of year....... $ 14,784 $ 12,145 $ 10,956
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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, 1997, 1996 and 1995 were
approximately $245,380, $174,304 and $66,091, 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 7). Tempo DBS-
1 is expected to be available for commercial operation during the second
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.
A satellite is 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
$298,700 in cash as of December 31, 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.
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
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 first quarter 1998 operating
budget reflects cash requirements which are in excess of the current
aggregate capital commitment of its partners. In addition, the
Partnership's satellite construction credit facility becomes due on
September 30, 1998 (see Note 10), and the working capital credit facility
will mature on the earlier of the closing date of the restructuring or
December 7, 1998 (see Note 9). 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 March 1998. Presently, the
partners determine the amount of additional capital commitments on an as
needed basis. There have been no capital contributions from the partners
since February 1997. The Partnership plans to utilize its working capital
line of credit to meet the cash requirements for the first quarter of 1998.
It is expected that refinancing of the Partnership's satellite construction
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
satellite construction 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, 1997 and 1996 are $59,213 and $39,489, 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 satellite construction
credit facility which must be used for the satellite construction project
and for interest and fees associated with this 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.
Satellite construction costs:
Upon placing constructed satellites in service, the costs related to such
satellites are to be amortized over the estimated useful lives of the
satellites (10 to 12 years).
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred financing fees:
Deferred financing fees associated with the satellite construction credit
facility were fully amortized as of December 31, 1997. Fees were amortized
over the life of the credit facility, which originally was scheduled to
mature on June 30, 1997 (see Note 10). Amortization expense was $107 for
the year ending December 31, 1997 and $577 for the years ended December 31,
1996 and 1995. See Note 8 regarding capitalization of deferred financing
fees.
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:
Long-lived assets and certain identifiable intangible assets held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. If the sum of the future cash flows expected to result from
the use of the assets and their eventual disposition is less than the
carrying amount of the assets, an impairment loss is recognized.
Measurement of an impairment loss is based on the fair value of the assets.
Management believes there are no impairments of long-lived assets at
December 31, 1997.
3.PRIMESTAR PARTNERS RESTRUCTURING
The partners of the Partnership have entered into an agreement dated
February 6, 1998 (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.
The Restructuring Agreement itself is binding and although definitive
agreements are contemplated, they are not a condition to the consummation
of the restructuring. TCI Satellite Entertainment, Inc. ("TSAT") and
PRIMESTAR, Inc. have entered into an Agreement and Plan of Merger (the
"TSAT Merger Agreement") providing for the merger of TSAT and PRIMESTAR,
Inc. As a result of this transaction (the
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
"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.
In conjunction with the Partnership restructuring, 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 move to Denver is expected to begin early in
1998 after the Partnership's transition into PRIMESTAR, Inc. is completed.
At December 31, 1997, accrued severance, stay bonus and relocation costs
related to the move totaled $9,015.
On February 9, 1998, TSAT filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 on Form S-4 to
register the securities of PRIMESTAR, Inc.
On March 6, 1998, the stockholders of TSAT approved the Restructuring
Agreement and the TSAT Merger Agreement.
4.ASSET ACQUISITION AGREEMENT
On June 11, 1997, the Partnership entered into a binding Asset Acquisition
Agreement (the "Agreement") with MCIT (the principal domestic operating
subsidiary of MCI Communications Corporation ("MCI")), The News Corporation
Limited ("News Corp."), American Sky Broadcasting L.L.C. ("ASkyB")
(collectively, "The AskyB Transferors"), and for certain purposes only,
each of the general and limited partners of PRIMESTAR Partners L.P.
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, PRIMESTAR, Inc. will assume
certain obligations of the ASkyB Transferors and PRIMESTAR, Inc. will pay
to ASkyB, for its benefit and the benefit of each of the other ASkyB
Transferors, cash and 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 are both 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, News Corp., or an affiliate of
either.
This asset acquisition is subject to regulatory and other approvals,
including the prior approval of the FCC.
5.ACCOUNTS RECEIVABLE--RELATED PARTIES
Accounts receivable--related parties, primarily 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
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of providing television programming through cable and satellite to
subscribers. Sales to the 5 largest of these distributors represented
approximately 13%, 14% and 9% of the Partnership's subscriber revenues for
1997, 1996 and 1995, respectively. The allowance for doubtful accounts was
$3,685, $1,576 and $812 at December 31, 1997, 1996 and 1995, respectively.
6.PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 comprise the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Construction in progress--control center................... $ 2,471 $ 6,323
Control center, compression/lab equipment.................. 18,576 9,496
Other furniture and equipment.............................. 9,290 7,147
------- -------
30,337 22,966
Accumulated depreciation................................... (9,116) (4,835)
------- -------
$21,221 $18,131
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $3,828, $2,302 and $1,932, respectively.
7.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, 1997, 1996 and 1995, the Partnership
reimbursed the Related Party $463,160, $457,685 and $382,840, 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. In February 1997, the Partnership reimbursed 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. Included in the reimbursement was the
amount of the accounts payable--related party as of December 31, 1996.
The total amount of interest costs (including amortization of deferred
financing fees and commitment fees) capitalized as costs of satellites
under construction for the years ended December 31, 1997, 1996 and 1995 was
$16,859, $30,448 and $25,521, respectively. The Partnership determined that
construction activities had
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
been suspended on one of the high power satellites which was in storage as
of January 1, 1997. Accordingly, interest costs related to the financing of
construction activities for this satellite totaling $16,955 for the year
ended December 31, 1997 were expensed.
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 (Tempo DBS-1) into the 119 degree
orbital location (the only full conus location available to the
Partnership) and ordered Tempo DBS-2 to be used either as a spare or back-
up for Tempo DBS-1 or deployed or disposed of as determined by the
Partnership. In addition, the Related Party and its affiliates confirmed in
writing that Tempo DBS-2 would be used as a spare or backup for Tempo DBS-1
or otherwise deployed or disposed of as determined by the Partnership.
Tempo DBS-1 was launched on March 8, 1997 and is currently undergoing
extended in-orbit testing.
Since the launch of Tempo DBS-1, the Partnership has been notified of
separate occurrences of power reduction on Tempo DBS-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.
No assurance can be given that further power reductions will not occur in
the future. Tempo DBS-1 is expected to be available for commercial
operation during the second quarter of 1998 assuming that such in-orbit
testing is completed successfully. The implementation of any high power
strategy is subject to regulatory approval.
8.OTHER ASSETS
Other assets at December 31, 1997 and 1996 comprise the following:
<TABLE>
<CAPTION>
1997 1996
---- --------
<S> <C> <C>
Prepaid transponder space (see Note 12)....................... $-- $ 28,560
Less: current portion......................................... -- (21,420)
---- --------
-- 7,140
---- --------
Deposits...................................................... $ 96 101
Deferred financing fees, net.................................. 107
---- --------
$ 96 $ 7,348
==== ========
</TABLE>
9.LINE OF CREDIT
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 (see Note 3) 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 (the
higher of (a) the Federal Funds Rate plus one-half of one percent ( 1/2%)
or (b) the prime 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. At December 31, 1997 the Partnership maintained no
outstanding balance on the credit facility.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10.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 7. 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, and 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%;
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, depending on the interest
period chosen.
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 LIBOR or CD 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.
Outstanding at December 31, 1997 is an Alternate Base Rate borrowing
bearing interest at 8.50%, which was converted to a one month LIBOR
borrowing on January 6, 1998. 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 its expiration or extend the due date of the current facility
until refinancing occurs.
11.LONG-TERM OBLIGATION--SATELLITE
Effective November 1996, the Partnership entered into an agreement which
provided 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 was amortized over the expected service life
from mid-November 1996 through June 1997. Amortization expense for the
years ended December 31, 1997 and 1996 totaled $3,666 and $917,
respectively.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum payments under this agreement are as follows:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1998................................................................ $ 575
1999................................................................ 575
2000................................................................ 575
2001................................................................ 575
2002................................................................ 575
Thereafter.......................................................... 3,210
-------
Total minimum payments.............................................. 6,085
Less: amounts representing interest................................. (1,858)
-------
4,227
Less: current portion............................................... (275)
-------
Long-term obligation--satellite..................................... $ 3,952
=======
</TABLE>
12.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, 1997, future minimum lease payment commitments under these
leases are as follows:
<TABLE>
<CAPTION>
GE-2
YEAR TRANSPONDER OTHER
---- ----------- ------
<S> <C> <C>
1998...................................................... $ 69,840 $1,549
1999...................................................... 69,840 911
2000...................................................... 69,840 385
2001...................................................... 69,840 303
2002...................................................... 69,840 --
Thereafter................................................ 11,640 --
-------- ------
Total minimum rentals..................................... $360,840 $3,148
======== ======
</TABLE>
In 1995, the Partnership entered into a satellite transponder service
agreement with an affiliate of a Partner for satellite service on 14
transponders on a medium power satellite (GE-2) which became commercially
operational in March 1997 at the 85 degree orbital location. This medium
power satellite replaced the K-2 satellite used on a transitional basis by
the Partnership between November 1996 and March 1997. 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. Under the agreement, payments of $16,198 were made to the
affiliate in 1996.
In 1996, the Partnership amended this agreement to provide the Partnership
with service on up to 24 transponders on the satellite. The agreement was
also amended to extend 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 extendible 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) which was successfully launched on September 4, 1997.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On February 19, 1997, the Partnership amended its four year unprotected
satellite service agreement for service on GE-2. This amendment revised the
unprotected agreement to a six-year arrangement, along with orbital
protection afforded by GE-3, with an option to extend the agreement until
the end of life of GE-2, if the option was 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.
A subsidiary of a partner provides satellite uplink services to the
Partnership. Total payments for such services were approximately $11,377,
$10,721 and $10,581 in 1997, 1996 and 1995, 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, 1997, 1996 and 1995 were approximately $14,729, $11,613 and
$5,550, respectively.
Rent expense under operating leases for the years ended December 31, 1997,
1996 and 1995 was approximately $53,137, $25,536 and $23,500, respectively.
13.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, 1997, 1996 and 1995 totaled approximately $146, $179 and $80,
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, 1997 and 1996, 5,024 and 3,535 units
had been awarded with values of $5,024 and $3,535, respectively.
Compensation expense for the years ended December 31, 1997 and 1996 totaled
$1,048 and $755, respectively. Through December 31, 1997 and 1996, 592
units with a value of $592 and 323 units with a value of $323 have vested,
respectively. 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.
14.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
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 of 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 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. Although a final written 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. 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 $250,000 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 this claim 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 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.
<PAGE>
PRIMESTAR PARTNERS, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 this matter on the Partnership's results of operations, financial
position or cash flows.
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.
On March 5, 1998, the Partnership received written notification of a claim
from a third party for alleged patent infringement in an unspecified amount
arising out of the Partnership's (and its distributors'), planned
utilization of certain aspects of its DigiCipher II Equipment for the
provision of the Partnership's service to its distributors (and their
customers). The Partnership has notified and made a claim for
indemnification against the supplier of the DigiCipher II Equipment to the
Partnership. Management is unable at this time to assess the impact, if
any, of this claim on the Partnership's results of operations, financial
position or cash flows.
<PAGE>
PRIMESTAR, INC.
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
Effective April 1, 1998 and pursuant to (i) a Merger and Contribution
Agreement dated as of February 6, 1998 (the "Restructuring Agreement"), among
TCI Satellite Entertainment, Inc. ("TSAT"), PRIMESTAR, Inc. (the "Company"),
Time Warner Entertainment Company, L.P. ("TWE"), Advance/Newhouse Partnership
("Newhouse"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox"), MediaOne of Delaware, Inc. ("MediaOne"), and GE American
Communications, Inc. ("GE Americom"), and (ii) the Asset Transfer Agreement
dated as of February 6, 1998 (the "TSAT Asset Transfer Agreement"), between TSAT
and the Company, a business combination (the "Restructuring") was consummated
whereby (a) TSAT contributed and transferred to the Company 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 received by TSAT in the
Restructuring and (III) the rights and obligations under certain agreements with
the Company (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 was consolidated into the Company. See note 2.
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998 (the
"TSAT Merger Agreement"), between TSAT and the Company, it is contemplated that,
subsequent to the consummation of the Restructuring, TSAT will be merged with
and into the Company, with the Company as the surviving corporation (the "TSAT
Merger"). See note 3.
The Restructuring (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 (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, the Company 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 4.
The following unaudited condensed pro forma combined balance sheet of the
Company, dated as of December 31, 1997, assumes that the Restructuring, the TSAT
Merger and the ASkyB Transaction had occurred as of such date. The following
unaudited condensed pro forma combined statement of operations of the Company
for the year ended December 31, 1997 assumes that the Restructuring, the TSAT
Merger and the ASkyB Transaction had occurred as of January 1, 1997.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Restructuring, the
TSAT Merger and the ASkyB Transaction had occurred as of January 1, 1997.
<PAGE>
PRIMESTAR, INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA FOR
PRO FORMA FOR ASKYB RESTRUCTURING,
RESTRUCTURING TSAT MERGER RESTRUCTURING TRANSACTION TSAT MERGER
HISTORICAL PRO FORMA PRO FORMA FOR PRO FORMA AND TSAT PRO FORMA AND ASKYB
COMBINED(1) ADJUSTMENTS(2) RESTRUCTURING ADJUSTMENTS(3) MERGER ADJUSTMENTS(4) TRANSACTION
----------- -------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash, receivables
and prepaids.. $ 286,758 (34,657)(8) 114,712 -- 114,712 -- 114,712
(137,389)(9)
Investment in,
and related
advances to, the
Partnership..... 77,983 (11,093)(5) -- -- -- -- --
(66,890)(7)
Property and
equipment, net
of accumulated
depreciation:
Satellites..... 1,010,760 (463,133)(6) 463,133 -- 463,133 381,930(19) 845,063
(84,494)(7)
Satellite
reception and
other.......... 1,516,114 (293,485)(7) 1,247,765 -- 1,247,765 -- 1,247,765
25,136 (10)
---------- ---------- --------- ------ --------- ---------- ---------
2,526,874 (815,976) 1,710,898 -- 1,710,898 381,930 2,092,828
---------- ---------- --------- ------ --------- ---------- ---------
Intangible
assets.......... 31,601 2,294,091 (7) 1,184,954 -- 1,184,954 734,370(19) 1,919,324
(1,140,738)(8)
Other assets.... 67,141 (25,136)(10) 30,789 -- 30,789 -- 30,789
(11,216)(8)
---------- ---------- --------- ------ --------- ---------- ---------
$2,990,357 50,996 3,041,353 -- 3,041,353 1,116,300 4,157,653
========== ========== ========= ====== ========= ========== =========
Payables,
accruals and
other operating
liabilities..... $ 424,123 (137,389)(9) 284,220 -- 284,220 -- 284,220
(2,514)(8)
Due to the
Partnership..... 463,133 (463,133)(6) -- -- -- -- --
Debt:
Due to parent.. 1,184,097 (1,184,097)(8) -- -- -- -- --
Other.......... 983,729 458,784 (7) 1,442,513 -- 1,442,513 516,300(19) 1,958,813
Deferred income
taxes........... 22,257 223,713 (7) 245,970 -- 245,970 -- 245,970
---------- ---------- --------- ------ --------- ---------- ---------
Total
liabilities.... 3,077,339 (1,104,636) 1,972,703 -- 1,972,703 516,300 2,489,003
---------- ---------- --------- ------ --------- ---------- ---------
Mandatorily redeemable -- -- -- -- -- 600,000(19) 600,000
preferred stock
Equity:
Class A Common
Stock.......... -- 664 (5) 1,806 82 (18) 1,724 -- 1,724
1,142 (7)
Class B Common
Stock.......... -- 85 (5) 85 -- 85 -- 85
Class C Common
Stock.......... -- 135 (7) 135 -- 135 -- 135
Additional
paid-in
capital........ 678,427 (11,842)(5) 1,520,744 82 (18) 1,520,826 -- 1,520,826
(88,038)(7)
942,197 (7)
Accumulated
deficit........ (818,566) 364,446 (7) (454,120) -- (454,120) -- (454,120)
Partners'
capital........ 53,157 (53,157)(7) -- -- -- -- --
---------- ---------- --------- ------ --------- ---------- ---------
(86,982) 1,155,632 1,068,650 -- 1,068,650 -- 1,068,650
---------- ---------- --------- ------ --------- ---------- ---------
$2,990,357 50,996 3,041,353 -- 3,041,353 1,116,300 4,157,653
========== ========== ========= ====== ========= ========== =========
</TABLE>
<PAGE>
PRIMESTAR, INC.
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA FOR
TSAT PRO FORMA FOR ASKY B RESTRUCTURING,
RESTRUCTURING MERGER RESTRUCTURING TRANSACTION TSAT MERGER
HISTORICAL PRO FORMA PRO FORMA FOR PRO FORMA AND TSAT PRO FORMA AND ASKY B
COMBINED(1) ADJUSTMENTS(2) RESTRUCTURING ADJUSTMENTS(3) MERGER ADJUSTMENTS(4) TRANSACTION
----------- -------------- --------------- -------------- ------------- -------------- -------------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.......... $ 1,898,378 (626,104)(11) 1,272,274 -- 1,272,274 -- 1,272,274
Operating,
selling, general
and
administrative
expenses......... (1,772,176) 626,104 (11) (1,137,422) -- (1,137,422) -- (1,137,422)
8,650 (12)
Depreciation and
amortization..... (404,420) (70,196)(12) (593,639) -- (593,639) -- (593,639)
(119,023)(13)
----------- -------- ---------- ----- ---------- ------- -----------
Operating loss.. (278,218) (180,569) (458,787) -- (458,787) -- (458,787)
Interest
expense.......... (126,814) (45,878)(14) (111,706) -- (111,706) (25,815)(20) (137,521)
60,986 (15)
Share of losses
of the
Partnership...... (79,544) 79,544 (16) -- -- -- -- --
Other, net....... 1,768 -- 1,768 -- 1,768 -- 1,768
----------- -------- ---------- ----- ---------- ------- -----------
Loss before
income taxes.... (482,808) (85,917) (568,725) -- (568,725) (25,815) (594,540)
Income tax
benefit.......... 24,738 34,367 (17) 59,105 -- 59,105 10,326(17) 69,431
----------- -------- ---------- ----- ---------- ------- -----------
Net loss........ (458,070) (51,550) (509,620) -- (509,620) (15,489) (525,109)
Dividend
requirement on
preferred stock.. -- -- -- -- -- (30,000)(21) (30,000)
----------- -------- ---------- ----- ---------- ------- -----------
Net loss
attributable to
common
stockholders..... $ (458,070) (51,550) (509,620) -- (509,620) (45,489) (555,109)
=========== ======== ========== ===== ========== ======= ===========
Pro forma net
loss per share.. $ (2.86)(22)
===========
</TABLE>
3
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED
PRO FORMA COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(1) Represents the combined historical financial position and results of
operations for TSAT, TWSSI, Cox Satellite, Comcast Satellite, MediaOne
Satellite, GE Americom Services, Inc., a subsidiary of GE Americom
("GEAS"), and the Partnership as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------------------------------------
COX COMCAST MEDIAONE HISTORICAL
TSAT TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED
---------- -------- --------- --------- --------- ------- ----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash, receivables and
prepaids............... $ 42,425 15,407 9,177 18,348 44,695 -- 156,706 286,758
Investment in, and
related advances to,
the Partnership........ 11,093 17,270 7,685 5,544 28,178 8,213 -- 77,983
Property and equipment,
net of accumulated
depreciation:
Satellites............. 463,133 -- -- -- -- -- 547,627 1,010,760
Satellite reception and
other................. 658,804 447,438 116,618 108,858 163,175 -- 21,221 1,516,114
---------- -------- ------- -------- ------- ------- ------- ---------
1,121,937 447,438 116,618 108,858 163,175 -- 568,848 2,526,874
---------- -------- ------- -------- ------- ------- ------- ---------
Intangible assets....... -- -- -- -- 31,601 -- -- 31,601
Other assets............ 29,401 96 11,770 25,136 642 -- 96 67,141
---------- -------- ------- -------- ------- ------- ------- ---------
$1,204,856 480,211 145,250 157,886 268,291 8,213 725,650 2,990,357
========== ======== ======= ======== ======= ======= ======= =========
LIABILITIES AND EQUITY
Payables, accruals and
other operating
liabilities............ $ 186,725 73,188 15,257 24,789 16,671 -- 107,493 424,123
Due to the Partnership.. 463,133 -- -- -- -- -- -- 463,133
Debt:
Due to parent.......... -- 518,910 204,314 210,436 250,437 -- -- 1,184,097
Other.................. 418,729 -- -- -- -- -- 565,000 983,729
Deferred income taxes... -- -- 3,221 -- 19,036 -- -- 22,257
---------- -------- ------- -------- ------- ------- ------- ---------
Total liabilities...... 1,068,587 592,098 222,792 235,225 286,144 -- 672,493 3,077,339
---------- -------- ------- -------- ------- ------- ------- ---------
Equity:
Additional paid-in
capital............... 590,389 -- -- 31,855 -- 56,183 -- 678,427
Accumulated deficit.... (454,120) (111,887) (77,542) (109,194) (17,853) (47,970) -- (818,566)
Partners' capital...... -- -- -- -- -- -- 53,157 53,157
---------- -------- ------- -------- ------- ------- ------- ---------
136,269 (111,887) (77,542) (77,339) (17,853) 8,213 53,157 (86,982)
---------- -------- ------- -------- ------- ------- ------- ---------
$1,204,856 480,211 145,250 157,886 268,291 8,213 725,650 2,990,357
========== ======== ======= ======== ======= ======= ======= =========
</TABLE>
4
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
COX COMCAST MEDIAONE HISTORICAL
TSAT TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED
--------- -------- --------- --------- --------- ------- ----------- ----------
AMOUNTS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 561,990 377,226 109,646 114,128 109,284 -- 626,104 1,898,378
Operating, selling,
general and
administrative
expenses............... (489,947) (308,180) (98,911) (99,887) (94,375) -- (680,876) (1,772,176)
Depreciation and
amortization........... (243,642) (67,472) (36,385) (27,957) (25,082) -- (3,882) (404,420)
--------- -------- ------- ------- ------- ------- -------- ----------
Operating income
(loss)................ (171,599) 1,574 (25,650) (13,716) (10,173) -- (58,654) (278,218)
Interest expense........ (47,992) (27,921) (10,659) (16,285) (6,121) -- (17,836) (126,814)
Share of losses of the
Partnership............ (20,473) (23,284) (6,788) (7,984) (8,691) (12,324) -- (79,544)
Other, net.............. 1,723 (1,657) (497) 281 (155) -- 2,073 1,768
--------- -------- ------- ------- ------- ------- -------- ----------
Loss before income
taxes................. (238,341) (51,288) (43,594) (37,704) (25,140) (12,324) (74,417) (482,808)
Income tax benefit...... -- -- 15,251 -- 9,487 -- -- 24,738
--------- -------- ------- ------- ------- ------- -------- ----------
Net loss................ $(238,341) (51,288) (28,343) (37,704) (15,653) (12,324) (74,417) (458,070)
========= ======== ======= ======= ======= ======= ======== ==========
</TABLE>
(2) Pursuant to the Restructuring Agreement, the following transactions
occurred on April 1, 1998:
(x) TSAT contributed and transferred to PRIMESTAR Satellite the TSAT
Business, comprising all the assets and liabilities of TSAT except (i) the
capital stock of Tempo, a wholly-owned subsidiary of TSAT that holds the
FCC Permit and other assets and liabilities relating to a proposed DBS
system being constructed by Tempo, (ii) the consideration received by TSAT
in the Restructuring and (iii) the rights and obligations of TSAT under
certain agreements with the Company and others (the "TSAT Asset
Transfer");
(y) Each of (i) Comcast DBS, Inc., a subsidiary of Comcast whose sole
asset was Comcast's 10.43% interest in the Partnership, (ii) Comcast
Satellite Communications, Inc., a subsidiary of Comcast that held
Comcast's PRIMESTAR(R) distribution business, (iii) Cox Satellite, Inc., a
subsidiary of Cox that held Cox's 10.43% interest in the Partnership and
Cox's PRIMESTAR(R) distribution business, and (iv) GEAS, a subsidiary of
GE Americom that held GE Americom's 16.56% interest in the Partnership,
respectively, merged with and into PRIMESTAR Satellite, and PRIMESTAR
Satellite was the surviving corporation of each such merger (collectively,
the "Mergers"); and
(z) Each of TWE, Newhouse and MediaOne (and its subsidiaries)
contributed and transferred to PRIMESTAR Satellite its respective
Partnership Interests, PRIMESTAR Assets, including its PRIMESTAR(R)
subscribers, inventory and other PRIMESTAR(R)-related assets, and
PRIMESTAR Liabilities (collectively, and together with the TSAT Asset
Transfer, the "Asset Transfers").
In connection with the Mergers and Asset Transfers, each of TSAT,
Comcast, Cox, MediaOne, TWE, Newhouse and GE Americom, directly or
indirectly, received from PRIMESTAR Satellite (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 PRIMESTAR
Satellite, (ii) shares of Class A Common Stock, $.01 par value per share,
of PRIMESTAR Satellite (which in the Holding Company Formation became the
Class A Common Stock, $.01 par value per share, of PRIMESTAR Holdings
("PRIMESTAR Class A Common Stock")), (iii) in the case of TSAT only,
shares of Class B Common Stock, $.01 par value per share, of PRIMESTAR
Satellite (which in the Holding Company Formation became the Class B
Common Stock, $.01 par value per share, of PRIMESTAR Holdings ("PRIMESTAR
Class B Common Stock")), and (iii) except in the case of TSAT and GE
Americom, shares of Class C Common Stock, $.01 par value per share, of
PRIMESTAR Satellite (which in the Holding Company Formation became the
5
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Class C Common Stock, $.01 par value per share, of PRIMESTAR Holdings
("PRIMESTAR Class C Common Stock")), in each case in an amount determined
pursuant to the Restructuring Agreement.
The TSAT Asset Transfer was recorded at TSAT's historical cost due to the
fact that PRIMESTAR Satellite was a wholly-owned subsidiary of TSAT prior
to the Restructuring. The remaining elements of the Restructuring, as set
forth above, were treated as the acquisition by PRIMESTAR Satellite of the
Partnership Interests and PRIMESTAR Assets, and the assumption by
PRIMESTAR Satellite of the PRIMESTAR Liabilities, of the Restructuring
Parties other than TSAT (the "Non-TSAT Parties"), and such acquisition was
accounted for using the purchase method of accounting. TSAT has been
identified as the acquiror for accounting purposes and the predecessor for
financial reporting purposes due to the fact that TSAT owned the largest
interest in the Company immediately following consummation of the
Restructuring. The fair value of the consideration issued to the Non-TSAT
Parties was 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 issued to the Non-TSAT Parties and the
estimated fair values of the assets and liabilities acquired, as reflected
in the accompanying condensed pro forma combined financial statements, are
based upon information available at the date of the preparation of these
condensed pro forma combined financial statements, and will be adjusted
upon the final determination of such fair values. Management is not aware
of any circumstances which would cause the final purchase price allocation
to be significantly different from that which is reflected in the
accompanying 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.
(3) Pursuant to the TSAT Merger Agreement, (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
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" and, together with the TSAT Series A Common Stock, the "TSAT
Common Stock") will be converted into the right to receive one share of
PRIMESTAR Class B Common Stock subject to adjustment. Each share of
PRIMESTAR Common Stock then held by TSAT will be canceled. Upon the
closing of the TSAT Merger, the then existing stockholders of TSAT will
become the direct owners of TSAT's ownership interest in the Company. The
respective obligations of the parties to the TSAT Merger Agreement to
consummate the TSAT Merger are subject to the satisfaction or waiver of a
number of conditions, including, among others, (a) occurrence of one of
the following: (i) FCC approval of TSAT's pending application to transfer
control of Tempo to the Company, (ii) divestiture 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
effectiveness of the TSAT Merger); (b) the absence of any legal restraint
or prohibition preventing consummation of the TSAT Merger; and (c)
receipt of approval for listing on the National Market tier of The Nasdaq
Stock Market of the shares of PRIMESTAR Class A Common Stock and
PRIMESTAR Class B Common Stock issuable to the stockholders of TSAT
pursuant to the TSAT Merger Agreement, subject to official notice of
issuance. In addition, the Company has the right to terminate the TSAT
Merger Agreement, and abandon the TSAT Merger, under certain
circumstances. In light of the foregoing conditions, there can be no
assurance that the TSAT Merger will be consummated as currently
contemplated by the TSAT Merger Agreement.
The TSAT Merger will be treated as the acquisition of TSAT by the Company.
Such acquisition will be accounted for at TSAT's historical cost since (i)
the percentage of the Company to be owned by TSAT stockholders following
consummation of the TSAT Merger will be approximately equal to the
percentage
6
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of the Company owned by TSAT prior thereto and (ii) the TSAT Merger and
the Restructuring were both part of the same reorganization plan.
(4) Pursuant to the ASkyB Agreement, it is contemplated that the ASkyB
Transaction will be consummated whereby the Company will acquire from MCI
the MCI Satellites and MCI's FCC licenses. In consideration, ASkyB will
receive non-voting convertible securities of the Company, comprising,
subject to closing adjustments, approximately $600 million liquidation
value of PRIMESTAR Convertible Preferred Stock (convertible into
approximately 52 million shares of non-voting Class D Common Stock, $.01
par value per share, of PRIMESTAR Holdings (the "PRIMESTAR Class D Common
Stock), subject to adjustment) and approximately $516 million principal
amount of PRIMESTAR Convertible Subordinated Notes (convertible into
approximately 45 million shares of PRIMESTAR Class D Common Stock). The
PRIMESTAR Convertible Subordinated Notes will be due and payable, and the
PRIMESTAR Convertible Preferred Stock will be mandatorily redeemable, on
the tenth anniversary of the date of issuance. The PRIMESTAR Convertible
Preferred Stock will accrue cumulative dividends at the annual rate of 5%
of the liquidation value of such share and the PRIMESTAR Convertible
Subordinated Notes will have an interest rate of 5%. Dividends on the
PRIMESTAR Convertible Preferred Stock and interest on the PRIMESTAR
Convertible Subordinated Notes will be payable in cash or, at the option
of PRIMESTAR Holdings, in shares of the non-voting PRIMESTAR Class D
Common Stock, for a period of four years. Thereafter, all dividend and
interest payments will be made solely in cash. Such convertible
securities, and the shares of PRIMESTAR Class D Common Stock issued to
ASkyB or any of its affiliates upon conversion of such PRIMESTAR
Convertible Preferred Stock and PRIMESTAR Convertible Subordinated Notes,
or in payment of dividend or interest obligations thereunder, will be
non-voting; however, shares of PRIMESTAR Class D Common Stock will in
turn automatically convert into shares of PRIMESTAR Class A Common Stock,
on a one-to-one basis, upon transfer to any person other than ASkyB, News
Corp. or any of their respective affiliates. The accompanying condensed
pro forma combined financial statements assume that Tempo will not divest
the Tempo 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 the Tempo Satellites in connection with
the ASkyB Transaction.
(5) Represents the assumed issuance of 66,395,000 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 8,156,000 shares (the "TSAT Option Shares") to be issued to
TSAT in respect of shares of TSAT Common Stock ("Issuable TSAT Shares")
issuable in December 31, 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.
(6) Represents the elimination of Tempo's historical assets and liabilities.
Such assets and liabilities were not transferred to the Company in the
Restructuring.
7
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(7) Represents the consummation of the Mergers and Asset Transfers.
Information concerning the aggregate purchase price is set forth below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
AMOUNTS IN THOUSANDS
<S> <C>
PRIMESTAR Class A Common Stock (114,167,000 shares
valued at estimated fair value of $7.39 per share)... $ 843,694(a)
PRIMESTAR Class C Common Stock (13,502,000 shares
valued at estimated fair value of $7.39 per share)... 99,780(a)
Cash consideration (or assumption of debt in lieu of
cash consideration).................................. 438,784
Elimination of Non-TSAT Parties' investment in the
Partnership.......................................... 66,890
Deferred income tax effect of purchase price
allocation........................................... 223,713
Elimination of historical equity...................... 223,251
Write-down of satellite reception equipment to
estimated fair market value(b)....................... 293,485
Adjustment to reflect satellite capacity rights at
TSAT's historical cost............................... 84,494
Estimated direct costs of acquisition (funded by debt
of the Company)...................................... 20,000
----------
Increase to intangible assets....................... $2,294,091
==========
</TABLE>
--------
(a) For purposes of the accompanying condensed pro forma combined
financial statements, the PRIMESTAR Common Stock issued to the Non-
TSAT Parties has been valued at $7.39 per share based upon 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, which is the date that the amount of cash and number of
shares to be received by the Non-TSAT Parties became fixed.
(b) The adjustment to the property and equipment is based on the 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 purchase price over the estimated fair values of the
identifiable net assets of the Non-TSAT Parties. The Company's
intangible assets are 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.
(8) Represents the elimination of all amounts due to or from the respective
parents of the Non-TSAT Parties.
(9) 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.
(10) Represents the reclassification of the subscriber installation costs of
Comcast Satellite. Such subscriber installation costs were reclassified
to conform to the Company's classification of such costs as a component
of property and equipment.
(11) Represents the elimination of programming, satellite, national marketing
and distribution fees received by the Partnership from TSAT and the Non-
TSAT Parties.
(12) 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 the Company's accounting policies.
8
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA
COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(13) 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.
(14) Represents assumed interest expense on the debt to be incurred or assumed
by the Company in connection with the Restructuring. 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 $573,000 change to the Company's pro forma interest expense for the
year ended December 31, 1997.
(15) Represents the elimination of interest expense incurred on amounts owed
to the respective parents of the Non-TSAT Parties.
(16) Represents the elimination of each Partner's share of the losses of the
Partnership.
(17) Represents the assumed income tax effect of the pro forma adjustments.
(18) Represents the cancellation of the TSAT Option Shares. The adjustment
assumes that none of the Issuable TSAT Shares 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.
(19) Represents the issuance of the PRIMESTAR Convertible Preferred Stock and
the PRIMESTAR Convertible Subordinated Notes in consideration for the MCI
Satellites and MCI's FCC licenses. Such securities have been recorded at
their estimated fair value 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 value of
such consideration on the date of issuance may differ from the values
reflected herein. Once the MCI Satellites and MCI's 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.
(20) Represents assumed interest expense on the PRIMESTAR Convertible
Subordinated Notes. The pro forma adjustment is calculated using the
stated interest rate of 5% per annum.
9
<PAGE>
PRIMESTAR, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(21) Represents dividends on the PRIMESTAR Convertible Preferred Stock. The
pro forma adjustment is calculated using the stated dividend rate of 5%
per annum.
(22) Represents pro forma loss per share assuming 194.4 million weighted
average shares of PRIMESTAR Common Stock were outstanding during the year
ended December 31, 1997. Such weighted average share amount assumes that
the estimated number of shares of PRIMESTAR Common Stock that would have
been issued if the Restructuring and the TSAT Merger had occurred on
December 31, 1997 had been outstanding since January 1, 1997.
10
