-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D068h0jSlQ1/WcHX2hMTPjfqWb4mS1qicaOPNgTUpIjDILfPO4BOxtFRlMP6wqyV jO7d3eKJRiyAfsMCCelK+g== 0000927356-98-000870.txt : 19980518 0000927356-98-000870.hdr.sgml : 19980518 ACCESSION NUMBER: 0000927356-98-000870 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980415 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIMESTAR INC CENTRAL INDEX KEY: 0001054666 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 841441684 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-23883 FILM NUMBER: 98625885 BUSINESS ADDRESS: STREET 1: 8085 S CHESTER STREET 2: STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037124600 MAIL ADDRESS: STREET 1: 8085 S CHESTER STREET 2: STE 300 CITY: ENGLEWOOD STATE: CO ZIP: 80112 8-K/A 1 FORM 8-K-AMENDMENT #1 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 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 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 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:
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%
4 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 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 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 TIME WARNER SATELLITE SERVICES GROUP COMBINED BALANCE SHEET DECEMBER 31, (THOUSANDS)
1997 1996 -------- -------- 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 ======== ========
LIABILITIES AND GROUP DEFICIT 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 ======== ========
See accompanying notes. TIME WARNER SATELLITE SERVICES GROUP COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, (THOUSANDS)
1997 1996 1995 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. TIME WARNER SATELLITE SERVICES GROUP COMBINED STATEMENT OF GROUP DEFICIT (THOUSANDS)
GROUP DEFICIT ------------- 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) =========
See accompanying notes. TIME WARNER SATELLITE SERVICES GROUP COMBINED STATEMENT OF CASH FLOWS DECEMBER 31, (THOUSANDS)
1997 1996 1995 -------- -------- -------- 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 ======== ======== ========
See accompanying notes. 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. 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: Buildings and improvements.................................... 5--20 years Distribution equipment........................................ 7--15 years Furniture and other equipment................................. 3--10 years
Property, plant and equipment consists of:
DECEMBER 31, ------------------- 1997 1996 --------- -------- (THOUSANDS) 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 ========= ========
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. 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. TIME WARNER SATELLITE SERVICES GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Summarized financial information as reported by PrimeStar is set forth below (in thousands):
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- -------- -------- Revenue........................................ $626,104 $412,999 $180,595 Operating loss................................. 58,654 16,823 38,395 Net loss....................................... 74,417 15,702 42,037
DECEMBER 31, ----------------- 1997 1996 -------- -------- 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
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. 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:
DECEMBER 31 ------------------ 1997 1996 -------- -------- (THOUSANDS) 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............................... $ -- $ -- ======== ========
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. 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:
TOTAL RENTAL COMMITMENT ------------ (THOUSANDS) Year Ending December 31: 1998....................................................... $1,322 1999....................................................... 1,102 2000....................................................... 881 2001....................................................... 220 2002 and thereafter........................................ -- ------ $3,525 ======
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. TIME WARNER SATELLITE SERVICES GROUP NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 10.OTHER CURRENT LIABILITIES Other current liabilities consist of the following:
DECEMBER 31, --------------- 1997 1996 ------- ------- (THOUSANDS) 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 ======= =======
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 COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS BALANCE SHEETS
DECEMBER 31 ------------------------ 1997 1996 ----------- ----------- (THOUSANDS OF DOLLARS) 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 =========== ===========
See notes to financial statements. COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 --------- --------- -------- (THOUSANDS OF DOLLARS) 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) ========= ========= ========
See notes to financial statements. COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS STATEMENTS OF DEFICIENCY IN NET ASSETS
DEFICIENCY IN NET ASSETS ------------- (THOUSANDS OF DOLLARS) 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) =========
See notes to financial statements. COX COMMUNICATIONS, INC. DIRECT BROADCAST SATELLITE BUSINESS STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 --------- --------- -------- (THOUSANDS OF DOLLARS) 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)
See notes to financial statements. 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. 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. 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:
YEAR ENDED DECEMBER 31 ---------------------------------- 1997 1996 1995 -------- ----------- ----------- (THOUSANDS OF DOLLARS) Revenues............................ $626,104 $ 412,999 $ 180,595 Operating loss...................... (58,654) (16,823) (38,395) Net loss............................ (74,417) (15,702) (42,037) DECEMBER 31 ------------------------ 1997 1996 ----------- ----------- (THOUSANDS OF DOLLARS) 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
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. 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:
YEAR ENDED DECEMBER 31 --------------------------- 1997 1996 1995 -------- -------- ------- (THOUSANDS OF DOLLARS) 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% -------- -------- -------
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:
DECEMBER 31 ------------------------ 1997 1996 ----------- ----------- (THOUSANDS OF DOLLARS) Plant and equipment............................... $ (3,253) $ (2,541) Other............................................. 32 18 ----------- ----------- Net deferred tax liability...................... $ (3,221) $ (2,523) =========== ===========
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 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:
(THOUSANDS OF DOLLARS) ---------------------- 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 ========
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:
(THOUSANDS OF DOLLARS) ---------------------- 1998.................................................. $127 1999.................................................. 120 2000.................................................. 80 2001.................................................. 65 2002.................................................. 14 Thereafter............................................ 0 ---- Total............................................... $406 ====
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 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.
1997 ------------------------------------------- 1ST 2ND 3RD 4TH QUARTER(a) QUARTER(a) QUARTER QUARTER ------- ------- ------- ------- (THOUSANDS OF DOLLARS) 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) 1996 ------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (THOUSANDS OF DOLLARS) 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)
(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. 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 COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC. COMBINED BALANCE SHEET
DECEMBER 31, ------------------ 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) 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 ======== ========
See notes to combined financial statements. COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC. COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) 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) ======== ======== ========
See notes to combined financial statements. COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC. COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) 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 $ -- ======== ======== ========
See notes to combined financial statements. COMCAST SATELLITE COMMUNICATIONS, INC. AND COMCAST DBS, INC. COMBINED STATEMENT OF STOCKHOLDER'S DEFICIENCY
COMMON ADDITIONAL ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- -------- (DOLLARS IN THOUSANDS) 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) ==== ======= ========= ========
See notes to combined financial statements. 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. 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: Satellite reception equipment.................................. 6 years Other equipment................................................ 4 - 8 years
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. 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. 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).
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- 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)
DECEMBER 31, ----------------- 1997 1996 -------- -------- 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
-------- (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. 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):
DECEMBER 31, ----------------- 1997 1996 -------- -------- 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 ======== ========
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 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):
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- ------- ------- 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............................... $ -- $ -- $ -- ======== ======= =======
Significant components of Comcast Satellite's and Comcast DBS' net deferred tax assets are as follows (dollars in thousands):
DECEMBER 31, ------------------ 1997 1996 -------- -------- Deferred tax assets, principally net operating loss carryforwards........................................ $ 37,516 $ 24,320 Less valuation allowance.............................. (37,516) (24,320) -------- -------- Net deferred tax assets............................... $ -- $ -- ======== ========
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): 1998.................................................................... $350 1999.................................................................... 301 2000.................................................................... 16
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. 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 MEDIAONE OF DELAWARE, INC. DIRECT BROADCAST SATELLITE BUSINESS COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------ 1997 1996 -------- -------- 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 ======== ========
See notes to combined financial statements. MEDIAONE OF DELAWARE, INC. DIRECT BROADCAST SATELLITE BUSINESS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
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) 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) ======== ======= ======== =======
See notes to combined financial statements. MEDIAONE OF DELAWARE, INC. DIRECT BROADCAST SATELLITE BUSINESS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
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) 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 ======== ======== ======== ========
See notes to combined financial statements. MEDIAONE OF DELAWARE, INC. DIRECT BROADCAST SATELLITE BUSINESS COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (DEFICIENCY) (SUCCESSOR, IN THOUSANDS)
GROUP EQUITY (DEFICIENCY) ------------ Balance, November 15, 1996......................................... $ -- Net Loss......................................................... (2,200) -------- Balance, December 31, 1996......................................... (2,200) Net Loss......................................................... (15,653) -------- Balance, December 31, 1997......................................... $(17,853) ========
See notes to combined financial statements. MEDIAONE OF DELAWARE, INC. DIRECT BROADCAST SATELLITE BUSINESS COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (DEFICIENCY) (PREDECESSOR, IN THOUSANDS)
GROUP EQUITY (DEFICIENCY) ------------ 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) ========
See notes to combined financial statements. 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 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). 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. 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:
DECEMBER 31, ------------------ 1997 1996 -------- --------- (IN THOUSANDS) 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
DECEMBER 31, ---------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) 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)
(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 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:
YEARS ENDED DECEMBER 31, ------------------------- 1997 1996 ------------ ------------ (IN THOUSANDS) 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 ============ ============
(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:
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) 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) ======== ======== ======== ========
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:
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 ------------ ----------------- --------------- ------------ 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)% ===== ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ------------ ------------ (IN THOUSANDS) 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) ============ ============
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 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. 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:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS) 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) ======== ======== ======== ========
OCTOBER 1, 1996 THROUGH FIRST SECOND THIRD NOVEMBER 14, QUARTER QUARTER QUARTER 1996 ------- ------- ------- --------------- (IN THOUSANDS) 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) ======= ======= ======= ======
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 PRIMESTAR PARTNERS, L.P. (A LIMITED PARTNERSHIP) BALANCE SHEET DECEMBER 31, 1997 AND 1996
1997 1996 --------- --------- (IN THOUSANDS) 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 ========= =========
The accompanying notes are an integral part of these financial statements. PRIMESTAR PARTNERS L.P. (A LIMITED PARTNERSHIP) STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) 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) ======== ======== ========
The accompanying notes are an integral part of these financial statements. PRIMESTAR PARTNERS, L.P. (A LIMITED PARTNERSHIP) STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTRIBUTED ACCUMULATED CAPITAL LOSS TOTAL ----------- ----------- -------- (IN THOUSANDS) 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 ======== ========= ========
The accompanying notes are an integral part of these financial statements. PRIMESTAR PARTNERS, L.P. (A LIMITED PARTNERSHIP) STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- --------- --------- (IN THOUSANDS) 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 ======== ========= =========
The accompanying notes are an integral part of these financial statements. 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 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). 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 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 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:
1997 1996 ------- ------- 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 ======= =======
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 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:
1997 1996 ---- -------- 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 ==== ========
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. 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. PRIMESTAR PARTNERS, L.P. (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Future minimum payments under this agreement are as follows:
YEAR ---- 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 =======
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:
GE-2 YEAR TRANSPONDER OTHER ---- ----------- ------ 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 ======== ======
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. 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 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. 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. 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. PRIMESTAR, INC. CONDENSED PRO FORMA COMBINED BALANCE SHEET DECEMBER 31, 1997 (UNAUDITED)
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 ----------- -------------- ------------- -------------- ------------- -------------- ------------- 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 ========== ========== ========= ====== ========= ========== =========
PRIMESTAR, INC. CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
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 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) ===========
3 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:
DECEMBER 31, 1997 ------------------------------------------------------------------------------------ COX COMCAST MEDIAONE HISTORICAL TSAT TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED ---------- -------- --------- --------- --------- ------- ----------- ---------- AMOUNTS IN THOUSANDS 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 ========== ======== ======= ======== ======= ======= ======= =========
4 PRIMESTAR, INC. NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------------------- COX COMCAST MEDIAONE HISTORICAL TSAT TWSSI SATELLITE SATELLITE SATELLITE GEAS PARTNERSHIP COMBINED --------- -------- --------- --------- --------- ------- ----------- ---------- AMOUNTS IN THOUSANDS 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) ========= ======== ======= ======= ======= ======= ======== ==========
(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 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 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 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:
DECEMBER 31, 1997 -------------------- AMOUNTS IN THOUSANDS 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 ==========
-------- (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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----