UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission File Number: 000-23883
PRIMESTAR, INC.
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(Exact name of Registrant as specified in its charter)
State of Delaware 84-1441684
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8085 South Chester Street, Suite 300
Englewood, Colorado 80112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 712-4600
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days [_] Yes [X] No
None of PRIMESTAR, Inc.'s shares of common stock are publicly traded as of
April 30, 1998. The number of shares outstanding of PRIMESTAR, Inc.'s common
stock as of April 30, 1998 was:
Class A common stock 179,143,933 shares;
Class B common stock 8,465,324 shares; and
Class C common stock 13,332,365 shares.
PRIMESTAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1998
(unaudited)
Assets
- ------
Cash $10
===
Stockholder's Equity
- --------------------
Common stock, $1 par value
Authorized 1,000 shares; issued and outstanding 10 shares $10
===
Commitments and contingencies (note 5)
See accompanying notes to consolidated balance sheet.
I-1
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
March 31, 1998
(unaudited)
(1) Organization
------------
PRIMESTAR, Inc. ("PRIMESTAR" or the "Company") and certain of its
subsidiaries were incorporated on August 27, 1997, and subsequently, ten
shares of the Company's common stock were issued to TCI Satellite
Entertainment, Inc. ("TSAT") for a capital contribution of $10. Through
March 31, 1998, the Company has not conducted any significant activities
other than those incident to its formation and the Roll-up Plan (defined
below).
(2) The Restructuring
-----------------
Effective April 1, 1998 (the "Closing Date") and pursuant to (i) a Merger
and Contribution Agreement dated as of February 6, 1998 (the "Restructuring
Agreement"), among TSAT, 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"), US WEST Media Group, Inc. and GE American
Communications, Inc. ("GE Americom"), and (ii) an Asset Transfer Agreement
dated as of February 6, 1998, (the "TSAT Asset Transfer Agreement") between
TSAT and 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 of TSAT under agreements with the Company and others and
(b) (I) the business of PRIMESTAR Partners L.P. (the "Partnership"), (II)
the business of distributing the PRIMESTAR(R) programming service
("PRIMESTAR(R)"), including certain related assets (collectively, the
"PRIMESTAR Assets") and related liabilities (collectively the "PRIMESTAR
Liabilities") of each of TWE, Newhouse, Comcast, Cox and affiliates of
MediaOne, and (III) the interest in the Partnership (the "Partnership
Interest") of each of TWE, Newhouse, Comcast, Cox, affiliates of MediaOne
and GE Americom (collectively, the "Non-TSAT Parties") were consolidated
into the Company.
(continued)
I-2
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
As a result of the Restructuring, the Company owns and operates the
PRIMESTAR(R) digital satellite business, which is the second largest
digital satellite business and the eighth largest multichannel video
programming distribution business in the United States, measured by the
number of subscribers as of March 31, 1998. The Company currently offers a
medium power satellite service with over 160 channels of digital video and
audio programming throughout the continental U.S. The PRIMESTAR(R) medium
power service is transmitted via a satellite ("GE-2") owned by GE Americom
and located at the 85 West Longitude ("W.L.") orbital position. Prior to
the Closing Date, the PRIMESTAR(R) service was owned and operated by the
Partnership and separately distributed and serviced by the authorized
distributors, all of whom were affiliated with one or more of the partners
of the Partnership (collectively, the "Distributors"). As a result of the
Restructuring, the entire PRIMESTAR(R) digital satellite business has been
consolidated into the Company.
In connection with the Restructuring, each of TSAT, Comcast, Cox, MediaOne,
Newhouse, TWE and GE Americom received from the Company (i) in the case of
Cox and MediaOne, an amount of cash and in the case of TSAT, Newhouse, TWE,
Comcast and GE Americom, an assumption of indebtedness by the Company, (ii)
shares of Class A Common Stock, $.01 par value per share, of the Company,
("PRIMESTAR Class A Common Stock"), (iii) in the case of TSAT only, shares
of Class B Common Stock, $.01 par value per share, of the Company
("PRIMESTAR Class B Common Stock"), and (iv) except in the case of TSAT and
GE Americom, shares of Class C Common Stock, $.01 per value per share, of
the Company ("PRIMESTAR Class C Common Stock"), in each case in an amount
determined pursuant to the Restructuring Agreement.
Holders of PRIMESTAR Class A Common Stock are entitled to one vote for each
share of such stock held, holders of PRIMESTAR Class B Common Stock are
entitled to ten votes for each share of such stock held and holders of
PRIMESTAR Class C Common Stock are entitled to ten votes for each share of
such stock held, on all matters presented to such stockholders.
As of the Closing Date, the approximate ownership of PRIMESTAR's common
stock was as follows:
Name of Beneficial Owner Ownership Percentage Voting Power
------------------------ -------------------- ------------
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%
(continued)
I-3
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
The TSAT Asset Transfer will be recorded at TSAT's historical cost, and
TSAT has been identified as the acquiror for accounting purposes and the
predecessor for financial reporting purposes due to the fact that TSAT owns
the largest interest in the Company immediately following the consummation
of the Restructuring. The remaining elements of the Restructuring, as set
forth above, will be accounted for using the purchase method of accounting.
The fair value of the consideration issued to the Non-TSAT Parties will be
allocated to the assets and liabilities acquired based upon the estimated
fair values of such assets and liabilities.
(3) The TSAT Merger
---------------
Pursuant to an Agreement and Plan of Merger dated as of February 6, 1998
(the "TSAT Merger Agreement"), between TSAT and the Company, it is
contemplated that TSAT will be merged with and into the Company, with the
Company as the surviving corporation (the "TSAT Merger"). In connection
therewith (i) each outstanding share of Series A Common Stock of TSAT will
be converted into the right to receive one share of PRIMESTAR Class A
Common Stock, and (ii) each outstanding share of Series B Common Stock of
TSAT will be converted into the right to receive one share of PRIMESTAR
Class B Common Stock, subject to adjustment. Each share of PRIMESTAR's
common stock then held by TSAT will be canceled.
The Restructuring (including the TSAT Asset Transfer) and the TSAT Merger
are collectively referred to herein as the Roll-up Plan. As described
below, consummation of the TSAT Merger is subject to regulatory approval
and other conditions to closing set forth in the TSAT Merger Agreement and,
accordingly, there can be no assurance that the TSAT Merger will be
consummated.
The respective obligations of the parties to the TSAT Merger Agreement to
consummate the TSAT Merger are subject to the satisfaction or waiver of a
number of conditions, including, among others, (a) occurrence of one of the
following: (i) FCC approval of TSAT's pending application to transfer
control of Tempo to the Company, (ii) divestiture by TSAT of the
construction permit issued by the FCC to Tempo authorizing construction of
a high-power DBS system (together with related authorizations, the "FCC
Permit"), or (iii) FCC permission to consummate the TSAT Merger without
divestiture of the FCC Permit; (b) the absence of any legal restraint or
prohibition preventing consummation of the TSAT Merger and (c) receipt of
approval for listing on the National Market tier of the Nasdaq Stock Market
of the shares of PRIMESTAR Class A Common Stock and PRIMESTAR Class B
Common Stock issuable to the stockholders of TSAT pursuant to the TSAT
Merger Agreement, subject to official notice of issuance. In addition, the
Company has the right to terminate the TSAT Merger Agreement and abandon
the TSAT Merger, under certain circumstances. In light of the foregoing
conditions, there can be no assurance that the TSAT Merger will be
consummated as currently contemplated by the TSAT Merger Agreement.
(continued)
I-4
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
The TSAT Merger will be treated as the acquisition of TSAT by the Company.
Such acquisition will be accounted for at TSAT's historical cost since (i)
the percentage of the Company owned by TSAT prior to the consummation of
the TSAT Merger will be approximately equal to the percentage of the
Company to be owned by TSAT stockholders following consummation of the TSAT
Merger and (ii) the TSAT Merger and the Restructuring are both a part of
the Roll-up Plan.
(4) The ASkyB Transaction
----------------------
In a separate transaction (the "ASkyB Transaction"), pursuant to an asset
acquisition agreement dated as of June 11, 1997 among the Partnership, The
News Corporation Limited ("News Corp."), MCI Telecommunications
Corporation, the principal domestic operating subsidiary of MCI
Communications Corporation ("MCI"), American Sky Broadcasting LLC, a
wholly-owned subsidiary of News Corp. ("ASkyB"), and for certain purposes
only, each of the partners of the Partnership, the Company agreed to
acquire from MCI two high power communications satellites currently under
construction, certain authorizations granted to MCI by the FCC to operate a
direct broadcast satellite business at the 110 W.L. orbital location using
28 transponder channels, and certain related contracts. In consideration,
ASkyB would receive non-voting convertible securities of PRIMESTAR,
comprising, subject to closing adjustments, approximately $600 million
liquidation value of non-voting convertible preferred stock, $.01 par value
per share, of the Company (the "PRIMESTAR Convertible Preferred Stock")
(convertible into approximately 52 million shares of non-voting Series D
Common Stock, $.01 par value per share, of the Company (the "PRIMESTAR
Class D Common Stock"), subject to adjustment) and approximately $516
million principal amount of convertible subordinated notes of the Company
(the "PRIMESTAR Convertible Subordinated Notes") (convertible into
approximately 45 million shares of PRIMESTAR Class D Common Stock).
The PRIMESTAR Convertible Subordinated Notes will be due and payable, and
the PRIMESTAR Convertible Preferred Stock will be mandatorily redeemable,
on the tenth anniversary of the date of issuance. The PRIMESTAR
Convertible Preferred Stock will accrue cumulative dividends at the annual
rate of 5% of the liquidation value of such shares and the PRIMESTAR
Convertible Subordinated Notes will have an interest rate of 5%. Dividends
on the PRIMESTAR Convertible Preferred Stock and interest on the PRIMESTAR
Convertible Subordinated Notes will be payable in cash or, at the option of
PRIMESTAR, in shares of the non-voting PRIMESTAR Class D Common Stock, for
a period of four years. Thereafter, all dividend and interest payments
will be made solely in cash. Such convertible securities, and the shares
of PRIMESTAR Class D Common Stock 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.
(continued)
I-5
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
As described below, consummation of the ASkyB Transaction is contingent on,
among other things, receipt of all necessary government and regulatory
approvals, and accordingly, no assurance can be given that the ASkyB
Transaction will be consummated.
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), the ASkyB Transaction may not be consummated until (i) applicable
Notification and Report Forms have been submitted and certain information
has been furnished to the FTC and the Antitrust Division of the Department
of Justice (the "Antitrust Division"), and (ii) required waiting periods
have expired or terminated. Each of the Partnership, on behalf of the
Company, Rupert Murdoch, News Corp. and MCI have filed Notification and
Report Forms with the FTC and the Antitrust Division. All of such filings
were made on July 18 1997. On August 15, 1997, the Antitrust Division
asked for further information about the ASkyB Transaction. Until all
recipients of the Antitrust Division's request for additional information
substantially comply with the request, the waiting period under the HSR Act
is suspended. The Company has been advised that all recipients of such
request for additional information have certified to the FTC and the
Antitrust Division that they are in substantial compliance with such
request. Each of News Corp., MCI, ASkyB and the Partnership has agreed,
pursuant to the ASkyB Agreement, to use its commercially reasonable efforts
to obtain all approvals from regulatory authorities, including, without
limitation, the FCC, the Department of Justice ("DOJ") and the FTC,
necessary to consummate the transactions contemplated by the ASkyB
Agreement.
On May 12, 1998, the DOJ filed a civil antitrust action opposing the ASkyB
Transaction (the "DOJ Action"). The action seeks to prevent the Company
from acquiring the direct broadcast satellite assets of News Corp. and MCI
or, in the alternative, to allow such acquisition to go forward and require
the Company's stockholders affiliated with the cable industry to divest
their ownership interests in the Company.
The Company intends to take all appropriate action to pursue its rights,
including vigorously contesting this matter in the courts. However, no
assurance can be given as to the outcome of this matter, and an unfavorable
decision could have a material adverse effect on the Company's current
plans with respect to a high power digital satellite business. Moreover,
any protracted litigation with the DOJ could result in significant legal
expenses to the Company. The Company does not believe, however, that the
DOJ action and any resulting litigation will have a significant impact on
the operation or operating results of the Company's existing medium power
satellite television business.
The Company also intends to pursue further discussions with the DOJ
regarding a potential consent decree to permit the ASkyB Transaction to go
forward. However, no assurance can be given that a negotiated resolution of
this matter is possible on terms acceptable to the Company and its
stockholders, or on any terms, and the terms of any such consent decree
could have a material adverse effect on the Company's high power strategy.
Consummation of the ASkyB Transaction is also subject to certain other
conditions, including, among others, either (i) the receipt of an order
adopted by the FCC and the expiration of the 30 day period for any such
action on the FCC's own motion with respect to the grant of the license to
MCI for the authorization to construct, launch and operate satellites in
the DBS orbital locations at 110 W.L. providing 28 transponder channels of
service and assignment of such license to the Company or its designee or
(ii) the implementation of an Acceptable Alternative Arrangement (as
defined). On August 15, 1997, the Partnership (on behalf of the Company)
and MCI filed an application with the FCC for consent to the assignment to
the Company of the high power DBS authorizations and certain other assets
owned by MCI (the "Assignment Application"). The Assignment Application
must be approved by the FCC before the consummation of the ASkyB
Transaction. The FCC placed the Assignment Application on Public Notice
for comments. While MCI has a contractual obligation to maintain its due
diligence at the FCC with respect to its DBS authorizations that are
subject to the Assignment Application, there can be no assurance that MCI
will do so.
(continued)
I-6
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
Numerous parties have filed comments and petitions to deny with regard to
the Assignment Application. The petitions and comments urge the FCC to
either deny the Assignment Application or to condition its approval. The
Partnership, MCI and News Corp. filed separate oppositions to these
petitions. Replies were filed on October 20. 1997. The issues raised in
these petitions, comments and replies include the following: (1) opposition
to the Partnership or the Company holding the 110 W.L. authorization; (2)
opposition to the Partnership or the Company simultaneously holding
authorizations for both the 110 W.L. orbital position (28 transponders) and
the 119 W.L. orbital position (11 transponders), which together represent
approximately 40% of the total transponder capacity in the three orbital
positions allocated to the U.S. for DBS service that provide full CONUS
visibility; (3) requests for extension of the FCC's rules governing access
to satellite delivered programming to News Corp. and expansion of those
rules to programming not delivered by satellite (such as broadcast
television stations) and (4) issues relating to the possible applicability
of the foreign ownership restrictions of Section 310(b) of the
Communications Act of 1934, as amended. There can be no assurance that the
FCC's review of these and other documents or the Assignment Application
will be favorable, or that the FCC will not impose conditions unacceptable
to the Company, MCI, ASkyB or News Corp. in connection with its review.
(5) Commitments and Contingencies
-----------------------------
In connection with (i) the Restructuring, and (ii) the prior arrangement by
each holder of PRIMESTAR Class C Common Stock (collectively the "Class C
Stockholders") for the issuance of an irrevocable transferable letter of
credit (collectively, the "GE-2 Letters of Credit") for the benefit of GE
Americom to provide collateral security for certain obligations of the
Partnership to GE Americom, and each Class C Stockholder's related
obligation to reimburse the issuing bank for any drawings made under such
GE-2 Letter of Credit pursuant to an existing reimbursement agreement
and/or other existing documentation between such Class C Stockholder and
the issuing bank (collectively, the "Reimbursement Documentation"), the
Company entered into a reimbursement agreement with each Class C
Stockholder (collectively, the "Reimbursement Agreements"). The
Reimbursement Agreements provide for, among other things, the assumption by
PRIMESTAR of all the obligations of the Class C Stockholders under the
Reimbursement Documentation and the GE-2 Letters of Credit, including all
existing and future payment obligations of the Class C Stockholders
thereunder, and the indemnification by the Company of the Class C
Stockholders for any and all losses, claims, damages, liabilities,
deficiencies, obligations, costs and expenses of the Class C Stockholders
relating thereto.
(continued)
I-7
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
In addition, pursuant to the TSAT Asset Transfer Agreement, the Company
assumed the rights and obligations of TSAT under certain indemnification
agreements (as amended) between TSAT and the affiliates of Tele-
Communications, Inc. ("TCI") that issued PRIMESTAR Letters of Credit, which
include reimbursement obligations in favor of such TCI affiliates with
respect to such PRIMESTAR Letters of Credit on substantially the same terms
as the Reimbursement Agreements. Each of TWE, Comcast, Cox, MediaOne and
TCI (or their respective affiliates) will be paid a fee in consideration of
their agreements to maintain such PRIMESTAR Letters of Credit outstanding
for a period of time following the Closing Date. The obligations of the
Company under the Reimbursement Agreements and such indemnification
agreements are subordinated in right of payment to all other indebtedness
of the Company for borrowed money.
Pursuant to the Restructuring Agreement, the Company and its subsidiaries,
jointly and severally, are required to indemnify each Class C Stockholder,
GE Americom, each affiliate of a Class C Stockholder or GE Americom, and
each of their respective officers, directors, employees and agents against
and hold them harmless from (i) any and all losses, liabilities, claims,
damages, costs and expenses suffered or incurred by any such indemnified
party arising out of or resulting from any liabilities of such Class C
Stockholder or GE Americom assumed by the Company in the Restructuring,
(ii) any and all losses, liabilities, claims, damages, costs and expenses
arising out of or resulting from the operation by the Company, its
subsidiaries, or any of their respective predecessors of the digital
satellite business or the ownership by the Company, its subsidiaries or any
of their respective predecessors of any assets used primarily therein,
whether before, on or after the Closing Date and (iii) any and all losses,
liabilities, claims, damages, costs and expenses arising out of or
resulting from the business, affairs, assets or liabilities of the Company
and its subsidiaries, whether arising before, on or after the Closing Date.
The Restructuring Agreement also provides for each of Comcast, Cox,
MediaOne, TWE, Newhouse and GE Americom, severally and not jointly, to
indemnify the Company, its subsidiaries and agents against and hold them
harmless from any and all losses, liabilities, claims, damages, costs and
expenses arising out of or resulting from (A) (i) the operation by such
indemnitor, its subsidiaries or any of their respective predecessors of any
business other than the PRIMESTAR(R) distribution business or the digital
satellite business or (ii) the ownership by such indemnitor, its
subsidiaries or any of their respective predecessors of any assets other
than PRIMESTAR Assets or assets used primarily in the digital satellite
business, in any such case whether before, on or after the Closing Date or
(B) the business, affairs, or liabilities, other than PRIMESTAR
Liabilities, of such indemnitor after the Closing Date.
(continued)
I-8
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
In addition, the Restructuring Agreement provides for each of Comcast, Cox,
MediaOne and GE Americom, severally and not jointly, to indemnify the
Company, its subsidiaries and each of their respective officers, directors,
employees and agents against and hold them harmless from, any and all
losses, liabilities, claims, damages, costs and expenses arising out of or
resulting from the breach of such indemnitor's representation and warranty
relating to the assets and liabilities of its respective subsidiary or
subsidiaries which, prior to the Restructuring, provided PRIMESTAR(R)
service ("PRIMESTAR Subs").
Pursuant to the Restructuring Agreement, each of Comcast, Cox and GE (each,
in such capacity, a "Merger Indemnitor") is required to indemnify the
Company, its affiliates and each of their respective officers, directors,
employees, stockholders, agents and representatives against and hold them
harmless from (i) all liability for all taxes, other than transfer taxes,
applicable to the conveyance and transfer of PRIMESTAR Assets and PRIMESTAR
Liabilities pursuant to any Asset Transfers attributable to the operation
or ownership of such party's PRIMESTAR Assets and Partnership Interest
("Covered Taxes") during the taxable period ending on or before the Closing
Date or the portion that ends on the Closing Date of any taxable period
that begins before and ends after the Closing Date (the "Pre-Closing Tax
Period"), (ii) all liability for Covered Taxes of any corporation which,
prior to the Closing, was affiliated with the Merger Indemnitor's PRIMESTAR
Sub or with which the Merger Indemnitor's PRIMESTAR Sub, prior to the
Closing, filed a consolidated, combined, unitary or aggregate tax return,
(iii) all liability for Covered Taxes resulting from the merger of the
Merger Indemnitor's PRIMESTAR Sub with and into the Company failing to
qualify under either (I) Section 351(a) of the Internal Revenue code of
1986, as amended (the "Code"), coupled with a deemed liquidation of the
Merger Indemnitor's PRIMESTAR Sub under Section 332 of the Code or (II)
Section 368(a) of the Code (except, in either such case, for any failure to
so qualify attributable to any action taken after the Closing by PRIMESTAR
or any of its subsidiaries, other than any such action expressly required
or contemplated by the Restructuring Agreement), and (iv) all liability for
any reasonable legal, accounting, appraisal, consulting or similar fees and
expenses relating to the foregoing.
(continued)
I-9
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
The Restructuring Agreement also provides for each of MediaOne, Newhouse
and TWE (each, in such capacity, a "Contribution Indemnitor") to indemnify
the Company, its affiliates and each of their respective officers,
directors, employees, stockholders, agents and representatives against and
hold them harmless from (i) in the case of a transfer of assets (other than
stock of a corporation ) to PRIMESTAR by such Contribution Indemnitor, all
liability for Covered Taxes attributable to the operation or ownership of
such assets during the Pre-Closing Tax Period, (ii) in the case of a
transfer of stock of a corporation (a "Contributed Corporation") to the
Company by such Contribution Indemnitor, all liability for Covered Taxes of
the Contributed Corporation for the Pre-Closing Tax Period, (iii) in the
case of a Contributed Corporation, all liability for Covered Taxes of any
corporation which, prior to the Closing as affiliated with the Contributed
Corporation or with which the Contributed Corporation, prior to the
Closing, was affiliated with the Contributed Corporation or with which the
Contributed Corporation, prior to the Closing, filed a consolidated,
combined, unitary or aggregate tax return, and (iv) all liability for any
reasonable legal, accounting, appraisal, consulting or similar fees and
expenses relating to the foregoing.
Notwithstanding the foregoing, each Merger Indemnitor and Contribution
Indemnitor is not required to indemnify and hold harmless the Company and
its affiliates and each of their respective officers, directors, employees,
stockholders, agents and representatives, and the Company is required to
indemnify each such indemnitor, its affiliates and each of their respective
officers, directors, employees, stockholders, agents and representatives
against and hold them harmless from, (i) all liability for Covered Taxes of
PRIMESTAR for the taxable period that begins after the Closing Date or the
portion that begins after the Closing Date of any taxable period that
begins before and ends after the Closing Date, (ii) all liability for
Covered Taxes resulting from the merger of the Merger Indemnitor's
PRIMESTAR Sub with and into the Company failing to qualify under Section
368(a) of the Code if such failure is attributable to any action taken
after the Closing by the Company or any of its subsidiaries (other than any
such action expressly required or contemplated by the Restructuring
Agreement), and (iii) all liability for any reasonable legal, accounting,
appraisal, consulting or similar fees and expenses relating to the
foregoing.
In connection with the ASkyB Transaction, the Company will also assume
certain obligations under certain specified contracts and other
arrangements binding upon ASkyB, New Corp. and/or MCI, which will require
the Company to make payments, subject to the terms and conditions of such
contracts and arrangements. At March 31, 1998, the remaining commitments
under such obligations to be assumed aggregated approximately $180 million.
(continued)
I-10
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
The International Bureau of the FCC has granted a subsidiary of EchoStar
Communications Corporation ("EchoStar") a conditional authorization to
construct, launch and operate a Ku-band domestic fixed satellite into the
orbital position at 83 degrees W.L., immediately adjacent to that occupied
by GE-2, the medium power satellite now used to provide the PRIMESTAR(R)
service. Contrary to previous FCC policy, which would have permitted
operation of a satellite at the 83 degrees W.L. orbital position at a power
level of only 60 to 90 watts (subject to coordination requirements)
EchoStar has been authorized to operate at a power level of 130 watts. If
EchoStar were to launch its high power satellite authorized to 83 degrees
W.L. and commence operations at that location at a power level of 130
watts, it would likely cause harmful interference to the reception of the
PRIMESTAR(R) signal from GE-2 by subscribers to the PRIMESTAR(R) medium
power service.
GE Americom and the Partnership have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83 degrees
W.L. These requests, which were opposed by EchoStar and others, currently
are pending at the International Bureau. There can be no assurance that the
International Bureau will change slot assignments, or power levels, in a
fashion that eliminates the potential for harmful interference.
Accordingly, the ultimate outcome of this matter cannot presently be
predicted.
GE Americom and the Partnership have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
agreement in respect of such coordination between the Partnership and
EchoStar will be reached, or that if such agreement is reached that
coordination will resolve such interference.
ResNet Communications, LLC ("ResNet LLC"), a limited liability corporation
owned 95.01% by ResNet Communications, Inc. and 4.99% by a subsidiary of
the Company, has agreed to purchase from the Company, at a price that
approximates the Company's cost, up to $40,000,000 in satellite reception
equipment over a five-year period (subject to a one-year extension at the
option of ResNet LLC if ResNet LLC has not purchased the full $40,000,000
in equipment during the five-year initial term). The Company also agreed
to make a subordinated convertible term loan to ResNet LLC, in the
principal amount of $34,604,000, the proceeds of which can be used only to
purchase such equipment from the Company. The term of the loan is five
years with an option by ResNet LLC to extend the term for one additional
year. The total principal and accrued and unpaid interest under the loan
is convertible over a four-year period into ownership interests in ResNet
LLC, representing 32% of the total ownership interests in ResNet LLC. The
Company's only recourse with respect to repayment of the loan is conversion
into ownership interests in ResNet LLC stock or warrants. Under current
interpretations of the FCC rules and regulations related to restrictions on
the provision of cable and satellite master antenna television services
(ResNet LLC's business) in certain areas, the Company could be prohibited
from holding 5% or more of the ownership interests in ResNet LLC and
consequently could not exercise the conversion rights under the convertible
loan agreement. The Company is required to convert the convertible loan at
such time as conversion would not violate such currently applicable
regulatory restrictions. As of March 31, 1998, ResNet had purchased
$5,319,000 in equipment under this arrangement.
(continued)
I-11
PRIMESTAR, INC. AND SUBSIDIARIES
Notes to Consolidated Balance Sheet
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying financial statements.
I-12
PRIMESTAR, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
- ---------------------------------------------------------------------------
Operations
----------
General
- -------
As discussed in note 2 to the accompanying consolidated balance sheet, the
Restructuring was consummated on April 1, 1998 (the "Closing Date"). Prior to
the Closing Date, the Company did not conduct any significant activities other
than those incident to its formation and the Roll-up Plan.
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of PRIMESTAR, or industry results,
to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, among others: general economic and
business conditions and industry trends; the continued strength of the
multichannel video programming distribution industry and the satellite services
industry and the growth of satellite delivered television programming;
uncertainties inherent in proposed business strategies, new product launches and
development plans, including uncertainties regarding the Roll-up Plan; the ASkyB
Transaction; PRIMESTAR's high-power strategy; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or the failure or the inability to comply with,
government regulations, including, without limitation, regulations of the FCC,
and adverse outcomes from regulatory proceedings; changes in the nature of key
strategic relationships with partners and joint venturers; competitor responses
to PRIMESTAR's products and services, and the overall market acceptance of such
products and services, including acceptance of the pricing of such products and
services; possible interference by satellites in adjacent orbital positions with
the satellite currently being used for PRIMESTAR Partners' existing medium power
satellite television business; and other factors referenced in this Report.
These forward-looking statements speak only as of the date of this Report.
PRIMESTAR expressly disclaims any obligation or undertaking to disseminate any
updates or revisions to any forward-looking statement contained herein to
reflect any change in PRIMESTAR's expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.
Summary of Operations
- ---------------------
As a result of the Restructuring, the Company owns and operates the
PRIMESTAR(R) digital satellite business, which is the second largest digital
satellite business and the eighth largest multichannel video programming
distribution business in the United States, measured by the number of
subscribers as of March 31, 1998.
I-13
PRIMESTAR, INC. AND SUBSIDIARIES
Summary of Operations, continued
- --------------------------------
The Company currently offers a medium power satellite service with over 160
channels of digital video and audio programming throughout the continental U.S.
The PRIMESTAR(R) medium power service is transmitted via GE-2. Prior to the
Closing Date, the PRIMESTAR(R) service was owned and operated by the Partnership
and separately distributed and serviced by the Distributors. As a result of the
Restructuring, the entire PRIMESTAR(R) digital satellite business has been
consolidated into the Company, and the Company intends to pursue a national
sales strategy for the PRIMESTAR(R) medium power service with consistent
programming, packaging and pricing. The PRIMESTAR(R) medium power service
served over 2.0 million subscribers as of March 31, 1998.
The Company also intends to participate in the high power segment of the
digital satellite industry. Through various agreements with TSAT's wholly-owned
subsidiary, Tempo, the Company currently has rights to the capacity of a DBS
system being constructed by Tempo at the 119 W.L. orbital location, which would
enable the Company to offer a high power service with approximately 120 channels
of digital video and audio programming. The Company plans to market this service
both on a retail basis to individual subscribers and on a wholesale basis to
smaller cable systems, wireless cable, private cable and other channel-
constrained analog services, which would resell such programming to their own
customers under the Company's DigiPixSM brand name. If the ASkyB Transaction is
ultimately approved, of which there is no assurance, the Company would be
positioned to construct a DBS system at the 110 W.L. orbital location that would
enable the Company to offer a high power service with approximately 225 channels
of video and audio programming.
Liquidity and Capital Resources
- -------------------------------
In connection with the consummation of the Restructuring, the Company paid
cash to, or assumed debt of, the Non-TSAT Parties in the aggregate amount of
approximately $479 million. The Company financed such cash payments and debt
assumption with the proceeds from a $350 million unsecured senior subordinated
interim loan (the "Interim Loan") and through borrowings under the Company's
senior secured credit facility, which amended and restated TSAT's senior secured
reducing revolving credit facility (as amended and restated, the "Senior Credit
Facility"). In addition, the Company assumed indebtedness of TSAT and the
Partnership aggregating approximately $1,046 million, including (i) $571 million
outstanding under a bank credit facility which was obtained by the Partnership
to finance advances to Tempo for payments due in respect of the construction of
the Tempo Satellites, and which in turn is supported by letters of credit
arranged for by affiliates of all but one of the Partners (the "Partnership
Credit Facility"), (ii) $373 million under TSAT's 10 7/8% Senior Subordinated
Notes and 12 1/4% Senior Subordinated Discount Notes (collectively, the
"Existing Notes"), (iii) $100 million outstanding prior to the closing of the
Restructuring under the Senior Credit Facility and (iv) $2 million of capital
lease obligations.
On the Closing Date, the Company entered into a senior subordinated credit
agreement (the "Interim Loan Agreement") with certain financial institutions
(the "Lenders") with respect to the Interim Loan. The Interim Loan Agreement
provided for commitments of $350 million. The commitments were fully funded to
the Company on the Closing Date through an advance of approximately $115
million, together with assumption of indebtedness by the Company pursuant to two
assumption agreements, which advance and assumptions equaled an aggregate amount
of $350 million.
The obligations under the Interim Loan Agreement are due in full one year
from Closing Date. However, the Company has the option to convert any
outstanding principal amount of the Interim Loan to a term loan on such date
(the "Conversion Date"). If converted to a term loan, the term loan would mature
on April, 2008.
The outstanding principal under the Interim Loan Agreement bears interest
at a rate per annum equal to the greater of 10% or, at the election of the
Lenders, (i) a rate per annum that is equal to the corporate base rate, as
provided for in the Interim Loan Agreement, (ii) the Federal Funds effective
rate, plus 0.50%, or (iii) the London interbank offered rate for such period,
plus in each case the Applicable Spread (as defined in the Interim Loan
Agreement). The Applicable Spread is 475 basis points until June 30, 1998 and
increases periodically thereafter, with a final increase to 750 basis points
from and after April 1, 1999.
At any time after the Conversion Date, at the request of any lender, the
interest rate on all or any portion of the term loan owing to such lender will
be converted to a fixed rate equal to the rate in effect as of the date such
lender gave notice to the Company.
Interest is payable monthly in arrears on the last day of each month until
the Conversion Date. Thereafter, interest is payable quarterly in arrears,
except for any term loan converted to a fixed rate loan, in which event interest
is payable on March 31 and September 30 of each year. If interest payable by the
Company exceeds 15%, the Company may elect to pay all or a portion of the
interest in excess of 15% by issuance of notes in an aggregate principal amount
equal to the amount of the interest being so paid.
Prior to the Conversion Date, the Company may prepay the Interim Loan
without penalty. After the Conversion Date, certain limited prepayments are
permitted until April 1, 2001 out of the proceeds of certain equity offerings
or upon consummation of the ASkyB Transaction. Otherwise, prepayment is not
permitted until on or after April 1, 2003. Prepayment penalties apply to any
prepayment prior to April 1, 2006, which penalties are calculated with reference
to the interest rate in effect at the time of prepayment.
The Interim Loan Agreement provides for mandatory prepayments of the
Interim Loan upon the occurrence of certain asset sales, dispositions of Tempo
Satellites, capital contributions, securities issuances and change of control
(as defined in the Interim Loan Agreement) of the Company.
The Company currently intends to refinance the Interim Loan and is
evaluating alternatives with respect to such refinancing. There can be no
assurance that the Company will be able to secure such refinancing on terms that
are acceptable to the Company or at all, and if secured, as to the timing of
such refinancing.
I-14
PRIMESTAR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources, continued
- ------------------------------------------
In connection with the Restructuring, the Company entered into the Senior
Credit Facility, which amended and restated TSAT's bank credit facility, and
assumed all rights and obligations of TSAT thereunder. As of the date of the
Restructuring, $280 million in loans were outstanding under the Senior Credit
Facility. Two letters of credit with an aggregate drawable amount of $30
million have been issued for the account of the Company pursuant to the Senior
Credit Facility, consisting of a $5 million letter of credit issued in
connection with the Partnership Credit Facility and a $25 million letter of
credit issued in connection with the GE-2 Agreement.
The Senior Credit Facility, which is guaranteed by all direct and indirect
subsidiaries of the Company, provides for maximum commitments of up to $700
million, comprising $550 million of revolving loan commitments and $150 million
of term commitments, subject to the Company's compliance with operating and
financial covenants and other customary conditions. After giving effect to the
Restructuring, $420 million of such maximum commitments were unused. Commencing
March 31, 2001, the revolving loan commitments will be reduced quarterly, and
outstanding borrowing under the term loan commitments will be payable in
quarterly installments, in each case in accordance with a schedule, until final
maturity at June 30, 2005.
At the option of the Company, borrowings under the Senior Credit Facility
bear interest at a rate per annum equal to (i) the London interbank offered rate
("LIBOR"), (ii) the CD Rate, or (iii) the Base Rate, as defined in the Senior
Credit Facility, plus in each case an Applicable Margin (as defined in the
Senior Credit Facility). In addition, the Company must pay a commitment fee
equal to 0.375% on the average daily unused portion of the available
commitments, payable quarterly in arrears and at maturity.
Borrowings under the Senior Credit Facility are guaranteed by all
restricted subsidiaries of the Company (defined under the Senior Credit Facility
to mean each of the Company's domestic subsidiaries of which the Company owns
directly or indirectly at least 80% of the outstanding capital stock), and
secured by collateral assignments or other security interests in (i) all
material contracts to which the Company and/or the Partnership are parties, (ii)
all equipment and other tangible assets of the Company (including, without
limitation, satellite dishes and related reception and decoding equipment),
(iii) all receivables of the Company and the Partnership and (iv) all
intellectual property and other general intangible assets of the Company and the
Partnership. In addition, borrowings under the Senior Credit Facility will be
secured by security interests in all capital stock or other equity interests of
each of the Company's restricted subsidiaries.
The Senior Credit Facility contains covenants regarding debt service
coverage and leverage, as well as negative covenants restricting, among other
things indebtedness, liens and other encumbrances, mergers or consolidation
transactions, transactions with affiliates, investments, capital expenditures,
and payment of dividends and other distributions.
I-15
PRIMESTAR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources, continued
- ------------------------------------------
The Partnership obtained the Partnership Credit Facility, which currently
allows for borrowings up to $585 million, to finance advances to Tempo for
payments due in respect of the construction and launch of two high power
communications satellites, and borrowings thereunder are collateralized by the
GE-2 Letters of Credit, which were arranged for by affiliates of the Partners
(or, in the case of TSAT, affiliates of TCI) other than GEAS. In connection
with the Restructuring, the Partnership became an indirect, wholly-owned
subsidiary of the Company. In addition, the Partners and TCI agreed to maintain
their respective GE-2 Letters of Credit through June 1999, and the Company
entered into Reimbursement Agreements with respect to such letters of credit,
whereby the Company agreed to indemnify the parties arranging for such letters
of credit from and against all obligations thereunder and under the existing
reimbursement agreements and/or other existing documentation relating thereto,
including all existing and future payment obligations. The obligations of the
Company under such Reimbursement Agreements are subordinated in right of payment
to all other indebtedness of the Company for borrowed money. At March 31, 1998,
the balance due under the Partnership Credit Facility was $571 million,
including amounts borrowed to pay interest charges.
At the option of the Partnership, borrowings under the Partnership Credit
Facility bear interest at a rate per annum equal to (i) the Alternate Base Rate,
as defined in the Partnership Credit Facility; (ii) the sum of (a) 7/16% plus
(b) LIBOR; or (iii) the sum of (a) 9/16% plus (b) CD Rate. Interest is payable,
to the extent bearing interest based on the Alternate Base Rae, 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 loans 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). In addition, the Partnership must pay
quarterly, in arrears, a commitment fee of 3/16% per annum on the daily unused
portion of the facility.
The maturity date of the Partnership Credit Facility is September 30, 1998,
and long-term financing alternatives with respect to the Tempo Satellites are
currently being evaluated. No assurance can be given that any such long-term
financing will be available on acceptable terms.
On February 20, 1997, TSAT completed the offering related to the Existing
Notes, consisting of $200 million aggregate principal amount of 10 7/8% Senior
Subordinated Notes and $275 million aggregate principal amount at maturity of 12
1/4% Senior Subordinated Discount Notes. In connection with the Restructuring,
the Company assumed all obligations of TSAT under the Existing Notes and the
indentures relating thereto (the "Existing Indentures").
I-16
PRIMESTAR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources, continued
- ------------------------------------------
Cash interest on the Senior Subordinated Notes accrues at a rate of 10 7/8%
per annum and is payable semi-annually in arrears each February 15 and August
15. Cash interest will not accrue or be payable on the Senior Subordinated
Discount Notes prior to February 15, 2002. Thereafter, cash interest on the
Senior Subordinated Discount Notes will accrue at a rate of 12 1/4% per annum
and will be payable semi-annually in arrears on each February 15 and August 15,
commencing August 15, 2002; provided, however, that at any time prior to
February 15, 2002, the Company may make a Cash Interest Election (as defined in
the applicable Existing Indenture) on any interest payment date to commence the
accrual of cash interest from and after the Cash Interest Date (as defined in
the applicable Existing Indenture), in which case the outstanding principal
amount at maturity of each Senior Subordinated Discount Note will on such
interest payment date be reduced to the Accreted Value (as defined in the
applicable Existing Indenture) of such Senior Subordinated Discount Note as of
such interest payment date, and cash interest (accruing at a rate of 12 1/4% per
annum from the Cash Interest Election Date) shall be payable with respect to
such Senior Subordinated Discount Note on each interest payment date thereafter.
The Existing Notes mature on February 15, 2007.
The Existing Notes rank junior to, and are subordinated in right of payment
to, all existing and future senior indebtedness of the Company, pari passu in
right of payment with all senior subordinated indebtedness of the Company,
including the 1998 Notes, and senior in right of payment to all subordinated
indebtedness of the Company. The Senior Credit Facility is guaranteed by all
the direct and indirect Subsidiaries of the Company, and, therefore, the
Existing Notes are structurally subordinated to all obligations under the Senior
Credit Facility.
In April 1998, the Company announced the terms of a proposed business
combination (the "Superstar Acquisition") with Superstar/Netlink group LLC
("Superstar"). Superstar is the nation's largest provider of satellite
entertainment programming to C-band direct-to-home satellite customers, serving
approximately 1.2 million subscribers. Superstar is currently owned
approximately 40% by United Video Satellite Group, Inc. ("UVSG"), a public
company the majority of the voting power and common stock of which is owned by
TCI; 40% by Liberty Media Corporation, a subsidiary of TCI ("Liberty"); and 20%
by Turner-Vision, Inc. ("Turner-Vision"). Under the terms of the Superstar
Acquisition, as currently proposed, UVSG, Liberty and Turner-Vision
(collectively, the "Superstar Transferors") will receive convertible preferred
stock of the Company, in an amount determined by formula, based in part on the
number of C-band subscribers acquired by the Company. The Company will also
assume certain liabilities of Superstar.
The Company believes that the parties to the Superstar Acquisition remain
committed in principle to the consummation of the Superstar Acquisition.
However, in light of the DOJ Action, which could be perceived as having an
adverse effect on the value of the Company's common stock, no assurance can be
given that the terms of the Superstar Acquisition will not be renegotiated
prior to execution of definitive binding documentation relating thereto.
Consummation of the Superstar Acquisition is subject to certain conditions,
including receipt of applicable regulatory approvals. It is expected that the
Superstar Acquisition will close during the second quarter of 1998, although no
assurance thereof can be given.
I-17
PRIMESTAR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources, continued
- ------------------------------------------
The International Bureau of the FCC has granted a subsidiary of EchoStar
Communications Corporation ("EchoStar") a conditional authorization to
construct, launch and operate a Ku-band domestic fixed satellite into the
orbital position at 83 degrees W.L., immediately adjacent to that occupied by
GE-2, the medium power satellite now used to provide the PRIMESTAR(R) service.
Contrary to previous FCC policy, which would have permitted operation of a
satellite at the 83 degrees W.L. orbital position at a power level of only 60 to
90 watts (subject to coordination requirements) EchoStar has been authorized to
operate at a power level of 130 watts. If EchoStar were to launch its high power
satellite authorized to 83 degrees W.L. and commence operations at that location
at a power level of 130 watts, it would likely cause harmful interference to the
reception of the PRIMESTAR(R) signal from GE-2 by subscribers to the
PRIMESTAR(R) medium power service.
GE Americom and the Partnership have each requested reconsideration of the
International Bureau's authorization for EchoStar to operate at 83 degrees W.L.
These requests, which were opposed by EchoStar and others, currently are pending
at the International Bureau. There can be no assurance that the International
Bureau will change slot assignments, or power levels, in a fashion that
eliminates the potential for harmful interference. Accordingly, the ultimate
outcome of this matter cannot presently be predicted.
GE Americom and the Partnership have attempted to resolve potential
coordination problems directly with EchoStar. It is uncertain whether any
agreement in respect of such coordination between the Partnership and EchoStar
will be reached, or that if such agreement is reached that coordination will
resolve such interference.
ResNet Communications, LLC ("ResNet LLC"), a limited liability corporation
owned 95.01% by ResNet Communications, Inc. and 4.99% by a subsidiary of the
Company, has agreed to purchase from the Company, at a price that approximates
the Company's cost, up to $40,000,000 in satellite reception equipment over a
five-year period (subject to a one-year extension at the option of ResNet LLC if
ResNet LLC has not purchased the full $40,000,000 in equipment during the five-
year initial term). The Company also agreed to make a subordinated convertible
term loan to ResNet LLC, in the principal amount of $34,604,000, the proceeds of
which can be used only to purchase such equipment from the Company. The term of
the loan is five years with an option by ResNet LLC to extend the term for one
additional year. The total principal and accrued and unpaid interest under the
loan is convertible over a four-year period into ownership interests in ResNet
LLC, representing 32% of the total ownership interests in ResNet LLC. The
Company's only recourse with respect to repayment of the loan is conversion into
ownership interests in ResNet LLC stock or warrants. Under current
interpretations of the FCC rules and regulations related to restrictions on the
provision of cable and satellite master antenna television services (ResNet
LLC's business) in certain areas, the Company could be prohibited from holding
5% or more of the ownership interests in ResNet LLC and consequently could not
exercise the conversion rights under the convertible loan agreement. The Company
is required to convert the convertible loan at such time as conversion would not
violate such currently applicable regulatory restrictions. As of March 31, 1998,
ResNet had purchased $5,319,000 in equipment under this arrangement.
I-18
PRIMESTAR, INC. AND SUBSIDIARIES
Liquidity and Capital Resources, continued
- ------------------------------------------
The Company believes that borrowing availability pursuant to the Senior
Credit Facility and any funds generated by the Company's operating activities
will be sufficient through December 31, 1998, to fund the Company's working
capital, debt service and currently projected capital expenditure requirements
associated with its medium power satellite distribution business. However, to
the extent that the Company (i) pursues a strategy with respect to the high
power segment of the digital satellite industry, (ii) completes any significant
acquisitions, (iii) enters into any other business activities, other than its
existing medium power satellite distribution business, (iv) is required to meet
other significant future liquidity requirements in addition to those described
above, the Company anticipates that it would be required to obtain additional
debt or equity financing. No assurance can be given, however, that the Company
would be able to obtain additional financing on terms acceptable to it, or at
all.
The Company is highly leveraged. The degree to which the Company is
leveraged may adversely affect the Company's ability to compete effectively
against better capitalized competitors and to withstand downturns in its
business or the economy generally, and could limit its ability to pursue
business opportunities that may be in the interests of the Company and its
stockholders. The Company's ability to repay or refinance its debt will require
the Company to increase its operating cash flow or to obtain additional debt or
equity financing. There can be no assurance that the Company will be successful
in increasing its operating cash flow by a sufficient magnitude or in a timely
manner or in raising sufficient additional debt or equity financing to enable it
to repay or refinance its debt.
The Company has commenced a process to identify and address issues
surrounding the Year 2000 and its impact on the Company's operations. The issue
surrounding the Year 2000 is whether the Company's operating and financial
systems or the systems used by companies with whom TSAT conducts business will
properly recognize date sensitive information when the year changes to 2000, or
"00." Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. As the Company has not completed its
initial assessment of the impact the Year 2000 may have on its computer
operations, management can not estimate the costs associated with ensuring the
Company's systems are Year 2000 compliant. Although the Company is in the
initial phases of determining the impact of the Year 2000, management
anticipates completion of the project by January 1999, allowing adequate time
for testing. However, there can be no assurance that the Company's systems nor
the computer systems of other companies with whom the Company conducts business
will be Year 2000 compliant prior to December 31, 1999. If such modifications
and conversions are not completed timely, the Year 2000 problem may have a
material impact on the operations of the Company.
I-19
PRIMESTAR, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------ -----------------
On May 12, 1998, the U.S. Department of Justice ("DOJ") filed in the
United States District Court for the District of Columbia a civil
antitrust action opposing the ASkyB Transaction. The action seeks to
prevent the Company from acquiring the direct broadcast satellite
assets of News Corp. and MCI or, in the alternative, to allow such
acquisition to go forward and require the Company's stockholders
affiliated with the cable industry to divest their ownership
interests in the Company. The DOJ's complaint alleges that the ASkyB
Transaction would result in a lessening of competition and an
enhancement of monopoly power in multichannel video distribution,
which includes cable, DBS and other types of video programming
distribution. The complaint also alleges that the ASkyB Transaction
constitutes an agreement that unreasonably restrains trade and
allows certain cable system operators to maintain their market power
in multichannel video program distribution markets. The DOJ's
complaint focuses largely on the allegation that the Company's
principal stockholders, as affiliates of the five largest U.S. cable
system operators, would have little incentive to use the assets
acquired in the ASkyB Transaction to compete aggressively against
cable television. The Company believes that such allegation is
groundless and that the ASkyB Transaction will both increase
competition and benefit American consumers. The Company is confident
of the merits of its legal position in this matter and intends to
take all appropriate action to pursue its rights, including
vigorously contesting this matter in the courts. However, no
assurance can be given as to the outcome of this matter, and an
unfavorable decision could have a material adverse effect on the
Company's current plans with respect to a high power digital
satellite business. The Company does not believe, however, that the
DOJ action and any resulting litigation will have a significant
impact on the operation or operating results of the Company's
existing medium power satellite television business. The Company
also intends to pursue further discussions with the DOJ regarding a
potential consent decree to permit the ASkyB Transaction to go
forward. However, no assurance can be given that a negotiated
resolution of this matter is possible on terms acceptable to the
Company and its stockholders, or on any terms, and the terms of any
such consent decree could have a material adverse effect on the
Company's current high power strategy.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
10 - Senior Subordinated Credit Agreement dated as of April 1,
1998 among PRIMESTAR, Inc., as Borrower, the Guarantors
party hereto, the Lenders party hereto, Merrill Lynch &
Co., as Arranger and Syndication Agent, Morgan Stanley
Senior Funding, Inc., as Administrative Agent, and
Donaldson, Lufkin & Jenrette Securities Corporation, as
Documentation Agent.
27 - Financial Data Schedule
(b) Reports on Form 8-K filed during quarter ended March 31, 1998 -
None.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMESTAR, INC.
Date: May 15, 1998 By: /s/ Daniel J. O'Brien
-------------------------------------------
Daniel J. O'Brien
President and Chief Operating Officer
Date: May 15, 1998 By: /s/ Kenneth G. Carroll
-------------------------------------------
Kenneth G. Carroll
Senior Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 1998 By: /s/ Scott D. Macdonald
-------------------------------------------
Scott D. Macdonald
Vice President and Controller
(Chief Accounting Officer)
II-2