<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 1996
REGISTRATION NO. 33-64467
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VIACOM INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 04-2980402
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PHILIPPE P. DAUMAN, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL,
CHIEF ADMINISTRATIVE OFFICER AND SECRETARY
VIACOM INTERNATIONAL INC.
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
STEPHEN T. GIOVE, ESQ.
CREIGHTON O'M. CONDON, ESQ.
SHEARMAN & STERLING
599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective and the
other conditions to the commencement of the Exchange Offer described herein
have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
VIACOM INTERNATIONAL INC.
Cross Reference Sheet pursuant to Rule 404(a) of the Securities Act of 1933
and Item 501(b) of Regulation S-K, showing the location or heading in the
Offering Circular-Prospectus of the information required by Part I of Form S-4.
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
--------------------------- ---------------------------------
<S> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front Cover Page of Prospectus; Available
Information; Incorporation of Certain Documents by
Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.... Summary; Unaudited Pro Forma Condensed
Combined Financial Statements of VII Cable;
Selected Combined Historical Financial Data of
VII Cable; Market Prices, Trading and Dividend
Information; Risk Factors
4. Terms of the Transaction............... Summary; The Transaction; The Exchange Offer;
Arrangements among Viacom, Viacom International,
TCI and TCI Cable; Description of VII Cable Capital
Stock; Comparison of Rights of Stockholders of
Viacom and VII Cable; Relationship between Viacom
and VII Cable; Relationship between VII Cable and
TCI after the Exchange Offer; Certain Federal Income
Tax Consequences
5. Pro Forma Financial Information........ Unaudited Pro Forma Condensed Combined
Financial Statements of VII Cable
6. Material Contacts with the Company
Being Acquired......................... Management; Arrangements among Viacom,
Viacom International, TCI and TCI Cable;
Relationship between Viacom and VII Cable;
Relationship between VII Cable and TCI after the
Exchange Offer
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters.............. Not Applicable
8. Interests of Named Experts and
Counsel................................ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
--------------------------- ---------------------------------
<S> <C>
B. Information About the Registrant
10. Information with Respect to S-3
Registrants.............................. Not Applicable
11. Incorporation of Certain Information by
Reference................................ Not Applicable
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information with Respect to Registrants
Other than S-2 or S-3 Registrants........ Summary; Market Prices, Trading and
Dividend Information; Selected Combined
Historical Financial Data of VII Cable;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of VII Cable; Business of VII
Cable; Description of Certain Indebtedness
of VII Cable; Financial Statements of VII
Cable
C. Information About the Company Being Acquired
15. Information with Respect to S-3
Companies................................ Available Information; Incorporation of
Certain Documents by Reference; Summary
16. Information with Respect to S-2 or S-3
Companies................................ Not Applicable
17. Information with Respect to Companies
Other than S-2 or S-3 Companies.......... Not Applicable
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited in
an Exchange Offer........................ Risk Factors; The Transaction; Business of
VII Cable; Management; Security
Ownership of VII Cable Common Stock;
Security Ownership of Certain Beneficial
Owners and Management of Viacom
Common Stock; Arrangements among
Viacom, Viacom International, TCI and TCI
Cable; Description of Certain Indebtedness
of VII Cable; Relationship between Viacom
and VII Cable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
OFFERING CIRCULAR - PROSPECTUS
(SUBJECT TO COMPLETION, DATED JANUARY 18, 1996)
VIACOM INC.
OFFERING CIRCULAR
VIACOM INTERNATIONAL INC.
(TO BE RENAMED TCI PACIFIC COMMUNICATIONS, INC.)
PROSPECTUS
OFFER TO EXCHANGE NOT MORE THAN NOR LESS THAN OF A SHARE
OF CLASS A COMMON STOCK, $100.00 PAR VALUE PER SHARE, OF VIACOM
INTERNATIONAL INC. FOR EACH SHARE OF CLASS A COMMON STOCK, $0.01 PAR
VALUE PER SHARE, OR CLASS B COMMON STOCK, $0.01 PAR VALUE PER SHARE,
OF VIACOM INC.
----------
EACH SHARE OF CLASS A COMMON STOCK OF VIACOM INTERNATIONAL INC. WILL
AUTOMATICALLY CONVERT INTO ONE SHARE OF CLASS A SENIOR CUMULATIVE
EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE PER SHARE, OF VIACOM
INTERNATIONAL INC. UPON THE PURCHASE OF 100 SHARES OF CLASS B COMMON
STOCK, $0.01 PAR VALUE PER SHARE, OF VIACOM INTERNATIONAL INC. BY A
SUBSIDIARY OF TELE-COMMUNICATIONS, INC.
----------
UNLESS PREVIOUSLY REDEEMED, EACH SHARE OF CLASS A SENIOR CUMULATIVE
EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE PER SHARE, OF VIACOM
INTERNATIONAL INC. IS EXCHANGEABLE AT THE OPTION OF THE HOLDER AFTER THE FIFTH
ANNIVERSARY OF THE DATE OF ISSUANCE FOR A NUMBER OF SHARES OF SERIES A TCI
GROUP COMMON STOCK, $1.00 PAR VALUE PER SHARE, OF TELE-COMMUNICATIONS, INC. AT
THE EXCHANGE RATE DESCRIBED HEREIN, WHICH WILL BE ANNOUNCED ON THE SECOND
BUSINESS DAY PRIOR TO THE EXPIRATION OF THE EXCHANGE OFFER. DIVIDENDS AND
PAYMENTS UPON OPTIONAL OR MANDATORY REDEMPTION OF SHARES OF CLASS A SENIOR
CUMULATIVE EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE PER SHARE, MAY BE
PAID IN SHARES OF SERIES A TCI GROUP COMMON STOCK, $1.00 PAR VALUE PER SHARE,
OF TELE-COMMUNICATIONS INC. AS PROVIDED HEREIN.
----------
THE EXCHANGE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME ON , 1996, UNLESS THE EXCHANGE OFFER IS
EXTENDED.
----------
Viacom Inc., a Delaware corporation ("Viacom"), is offering hereby to the
holders of shares of (i) Class A Common Stock, $0.01 par value per share of
Viacom ("Viacom Class A Common Stock"), and/or (ii) Class B Common Stock, $0.01
par value per share of Viacom ("Viacom Class B Common Stock," and collectively
with Viacom Class A Common Stock, "Viacom Common Stock"), the opportunity to
exchange all or a portion of their shares of Viacom Common Stock for shares of
Class A Common Stock of VII Cable (as defined herein), $100.00 par value per
share ("VII Cable Class A Common Stock"), at an exchange ratio (the "Exchange
Ratio"), specified by tendering stockholders, not greater than (the
"Maximum Exchange Ratio") nor less than (the "Minimum Exchange Ratio") of a
share of VII Cable Class A Common Stock for each share of Viacom Class A Common
Stock or Viacom Class B Common Stock tendered and exchanged, upon the terms and
subject to the conditions set forth herein and in the related Letter of
Transmittal (which together constitute the "Exchange Offer"). (The range of
Exchange Ratios between the Minimum Exchange Ratio and the Maximum Exchange
Ratio is referred to hereinafter as the "Exchange Ratio Range.") Each share of
Viacom Common Stock accepted by Viacom in accordance with the Exchange Offer
shall be exchanged for that number of fully paid and nonassessable shares of
VII Cable Class A Common Stock equal to the smallest Exchange Ratio sufficient
to reach the Trigger Amount (as defined herein). The final Exchange Ratio
(i.e., the amount of VII Cable Class A Common Stock that Viacom will exchange
for each share of Viacom Common Stock accepted for exchange) (the "Final
Exchange Ratio"), will be calculated by Viacom as follows: at the expiration of
the Exchange Offer, Viacom will calculate the number of shares of Viacom Common
Stock validly tendered at Exchange Ratios within the Exchange Ratio Range,
beginning with shares tendered at the Minimum Exchange Ratio and ending, if
necessary, at the Maximum Exchange Ratio. When the aggregate dollar value of
the tenders made (calculated as described in the immediately following
sentence) in ascending order of Exchange Ratios is equal to or greater than
$[ ] million (i.e., the Trigger Amount), Viacom will become obligated,
subject to the terms and conditions of the Exchange Offer, to accept, on a
(continued on following page)
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS OFFERING CIRCULAR - PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------
The Dealer Manager for the Exchange Offer is:
WASSERSTEIN PERELLA & CO., INC.
The date of this Offering Circular - Prospectus is , 1996.
<PAGE>
(Cover continued from previous page)
pro rata basis, the shares of all stockholders who tendered at or below the
highest Exchange Ratio required to reach the Trigger Amount. Whether such
aggregate dollar value amount is reached is determined by multiplying (i) the
total number of shares of Viacom Common Stock tendered at or below such
Exchange Ratio by (ii) the product of such Exchange Ratio times 100. The
highest Exchange Ratio required to reach the Trigger Amount will be the Final
Exchange Ratio, at which Exchange Ratio all [ ] million shares of VII Cable
Class A Stock will be issued to holders of shares of Viacom Common Stock whose
shares are accepted for exchange pursuant to the Exchange Offer. At the
Minimum Exchange Ratio, Viacom would accept for exchange [ ] shares of
Viacom Common Stock (or % of the total number of shares of Viacom Common
Stock outstanding). At the Maximum Exchange Ratio, Viacom would accept for
exchange [ ] shares of Viacom Common Stock (or % of the total number
of shares of Viacom Common Stock outstanding).
Based on the Estimated Asset Value (as defined herein) of $[ ] and Loan
Proceeds (as defined herein) of $1.7 billion, in calculating the number of
shares of Viacom Common Stock to be accepted for exchange in the Exchange
Offer, Viacom: (i) subtracted the Loan Proceeds ($1.7 billion) from the
Estimated Asset Value ($[ ]), thereby fixing the aggregate par value of
VII Cable Class A Common Stock to be distributed to Viacom stockholders (such
dollar amount is referred to herein as the "Trigger Amount") at $[ ]
million; (ii) divided the Trigger Amount by the par value per share of VII
Cable Class A Common Stock ($100) in order to determine the number of shares
of VII Cable Class A Stock ([ ] million) to be received by stockholders of
Viacom Common Stock upon consummation of the Transaction; and (iii) will
divide such number of shares of VII Cable Class A Common Stock by the Final
Exchange Ratio.
Once the Trigger Amount is reached, and subject to certain other conditions,
Viacom will become obligated to consummate the Exchange Offer. See
"Arrangements Among Viacom, Viacom International, TCI and TCI Cable--Terms of
the Parents Agreement--Conditions Precedent."
HOLDERS OF SHARES OF VIACOM COMMON STOCK ELECTING TO TENDER SUCH SHARES IN
THE EXCHANGE OFFER SHOULD NOT EXPECT TO TAKE PHYSICAL DELIVERY OF SHARES OF
VII CABLE CLASS A COMMON STOCK WHICH THEY WILL HAVE THE RIGHT TO RECEIVE IN
EXCHANGE FOR SHARES OF VIACOM COMMON STOCK AFTER THE CONSUMMATION OF THE STOCK
ISSUANCE (AS DEFINED HEREIN).
NONE OF VIACOM, VIACOM INTERNATIONAL INC. ("VIACOM INTERNATIONAL"), THE
BOARD OF DIRECTORS OF VIACOM NOR THE BOARD OF DIRECTORS OF VIACOM
INTERNATIONAL MAKES ANY RECOMMENDATION TO ANY STOCKHOLDER OF VIACOM WHETHER TO
TENDER OR REFRAIN FROM TENDERING SHARES OF VIACOM COMMON STOCK PURSUANT TO THE
EXCHANGE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER
SHARES OF VIACOM COMMON STOCK PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW
MANY SHARES TO TENDER AND AT WHAT EXCHANGE RATIO TO TENDER SUCH SHARES AFTER
READING THIS OFFERING CIRCULAR - PROSPECTUS AND CONSULTING WITH ITS ADVISORS
BASED ON ITS OWN FINANCIAL POSITION AND REQUIREMENTS. THIS OFFERING CIRCULAR -
PROSPECTUS RELATES TO ALL SHARES OF VII CABLE CLASS A COMMON STOCK TO BE
DISTRIBUTED PURSUANT TO THE EXCHANGE OFFER AND TO ALL SHARES OF CLASS A SENIOR
CUMULATIVE EXCHANGEABLE PREFERRED STOCK, $100.00 PAR VALUE PER SHARE, OF VII
CABLE ("VII CABLE PREFERRED STOCK") TO BE ISSUED UPON CONVERSION OF THE VII
CABLE CLASS A COMMON STOCK.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
On , 1996, VII Cable Preferred Stock was approved for quotation on the
Nasdaq National Market System ("Nasdaq") under the symbol "TPACP." On July 24,
1995, the last trading day prior to the announcement of the Transaction (as
defined herein), the closing sale prices per share of Viacom Class A Common
Stock and Viacom Class B Common Stock on the American Stock Exchange, Inc.
("AMEX") were $50 and $50 1/4, respectively. Effective August 3, 1995, Tele-
Communications, Inc. ("TCI") amended its Restated Certificate of Incorporation
to, among other things, redesignate its Class A Common Stock, par value $1.00
per share ("TCI Class A Common Stock"), as Tele-Communications, Inc. Series A
TCI Group Common Stock, par value $1.00 per share ("TCI Stock"). On July 24,
1995, the closing sale price per share of the TCI Class A Common Stock on
Nasdaq was $23 13/16. On January 16, 1996, the closing sale prices per share
of Viacom Class A Common Stock and Viacom Class B Common Stock on AMEX were
$39 7/8 and $40 1/4, respectively, and the closing sale price per share of TCI
Stock on Nasdaq was $22 per share.
In those jurisdictions where securities, blue sky or other laws require the
Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer
shall be deemed to be made on behalf of Viacom by Wasserstein Perella & Co.,
Inc., as Dealer Manager, or one or more registered brokers or dealers licensed
under the laws of such jurisdiction.
(End of Cover Page)
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR -
PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES MADE BY THIS OFFERING
CIRCULAR - PROSPECTUS OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIACOM OR VIACOM INTERNATIONAL. THIS OFFERING CIRCULAR -
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES HEREBY OR THEREBY OFFERED IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR - PROSPECTUS NOR
THE EXCHANGE OF SECURITIES PURSUANT TO THIS OFFERING CIRCULAR - PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF VIACOM OR VIACOM INTERNATIONAL SINCE SUCH
DATE OR, IN THE CASE OF INFORMATION INCORPORATED HEREIN BY REFERENCE, THE DATE
OF FILING OF SUCH INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION").
UNTIL 40 DAYS AFTER THE DATE OF THIS OFFERING CIRCULAR - PROSPECTUS, ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
----------------
AVAILABLE INFORMATION
Viacom International has filed a Registration Statement on Form S-4 under
the Securities Act of 1933, as amended (the "Securities Act"), with the
Commission with respect to the VII Cable Class A Common Stock and VII Cable
Preferred Stock offered hereby (together with any amendments thereto, the
"Registration Statement"). Viacom has filed a Schedule 13E-4 Issuer Tender
Offer Statement (together with any amendments thereto, the "Schedule 13E-4")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
with the Commission with respect to the Exchange Offer. This Offering Circular
- - Prospectus does not contain all the information set forth or incorporated by
reference in the Registration Statement, the Schedule 13E-4 and their
respective exhibits, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement and the Schedule 13E-4 and the
exhibits filed or incorporated as a part thereof, which are on file at the
offices of the Commission and may be inspected and copied as set forth below.
Viacom is currently subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. The Registration Statement, Schedule
13E-4, reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
should be available at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549,
at prescribed rates. In addition, material filed by Viacom can be inspected at
the offices of the AMEX, 86 Trinity Place, New York, New York 10006. As of
March 1, 1995, Viacom International was no longer required to file reports,
proxy statements or other information with the Commission pursuant to the
requirements of the Exchange Act. Instead, information with respect to Viacom
International since such date has been provided, to the extent required, in
filings made by Viacom. Absent an available exemption, following consummation
of the Transaction, VII Cable will be required to file reports, proxy
statements and other information with the Commission pursuant to the
requirements of the Exchange Act.
i
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Viacom (File No. 1-
9553) and Viacom International (File No. 1-9554) pursuant to the Exchange Act
are incorporated by reference in this Offering Circular - Prospectus:
1. Viacom's Annual Report on Form 10-K for the year ended December 31,
1994;
2. Viacom's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1995, June 30, 1995 and September 30, 1995; and
3. Viacom's Current Reports on Form 8-K filed January 24, 1995, March 15,
1995, April 14, 1995, May 8, 1995, May 25, 1995, June 29, 1995, July 26,
1995, September 29, 1995 and December 15, 1995.
All documents and reports filed by Viacom, if any, pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Offering
Circular - Prospectus and prior to the termination of the Exchange Offer shall
be deemed to be incorporated herein by reference and made a part of this
Offering Circular - Prospectus from the dates of filing of such documents or
reports. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Offering Circular - Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified and superseded, to
constitute a part of this Offering Circular - Prospectus.
THIS OFFERING CIRCULAR - PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER OF SHARES OF VIACOM COMMON STOCK, TO WHOM A
COPY OF THIS OFFERING CIRCULAR - PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO VIACOM INC., 1515 BROADWAY, NEW YORK, NEW YORK 10036, ATTENTION:
JOHN H. BURKE (TELEPHONE NUMBER (212) 258-6000). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE FIVE BUSINESS DAYS PRIOR
TO THE EXPIRATION DATE (AS DEFINED HEREIN). REQUESTS MAY ALSO BE MADE TO THE
INFORMATION AGENT, GEORGESON & COMPANY INC., TELEPHONE NUMBER (800) 223-6064.
ii
<PAGE>
TCI PROSPECTUS - EXPLANATORY NOTE
TCI has filed with the Commission a registration statement (the "TCI
Registration Statement"), together with a related prospectus (the "TCI
Prospectus"), with respect to the TCI Common Stock which may be issued as
dividends on, or upon exchange or optional or mandatory redemption of, the VII
Cable Preferred Stock. For the convenience of holders of Viacom Common Stock,
a copy of the TCI Prospectus has been mailed to each registered holder of
Viacom Common Stock together with this Offering Circular - Prospectus.
THIS OFFERING CIRCULAR - PROSPECTUS RELATES ONLY TO THE VII CABLE CLASS A
COMMON STOCK OFFERED HEREBY AND THE UNDERLYING VII CABLE PREFERRED STOCK AND
DOES NOT RELATE TO THE TCI COMMON STOCK OR OTHER SECURITIES OF TCI. TCI FILES
PERIODIC AND OTHER REPORTS AND PROXY STATEMENTS WITH THE COMMISSION. VIACOM
STOCKHOLDERS ARE DIRECTED TO SUCH PUBLICLY AVAILABLE DOCUMENTS AS WELL AS TO
THE TCI PROSPECTUS FOR INFORMATION CONCERNING TCI AND THE TCI STOCK (AS
DEFINED HEREIN). NEITHER VIACOM NOR VIACOM INTERNATIONAL HAS PARTICIPATED IN
THE PREPARATION OF SUCH DOCUMENT OR MADE ANY DUE DILIGENCE INQUIRY WITH
RESPECT TO TCI. NEITHER VIACOM NOR VIACOM INTERNATIONAL MAKES ANY
REPRESENTATION THAT SUCH TCI PROSPECTUS IS ACCURATE OR COMPLETE. VIACOM AND
VIACOM INTERNATIONAL DISCLAIM ANY AND ALL LIABILITY FOR ANY UNTRUE STATEMENT
OF A MATERIAL FACT IN THE TCI PROSPECTUS OR OMISSION TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS THEREIN NOT MISLEADING, IN LIGHT OF
THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE.
iii
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION..................................................... i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... ii
TCI PROSPECTUS--EXPLANATORY NOTE.......................................... iii
OFFERING CIRCULAR -- PROSPECTUS SUMMARY................................... 1
RISK FACTORS.............................................................. 18
Total Indebtedness and Cash Flow of VII Cable........................... 18
Controlling Stockholder................................................. 18
Potential Conflicts of Interest......................................... 18
Dependence on Additional Capital........................................ 19
Rapid Technological Changes............................................. 19
Market Uncertainties with Respect to VII Cable Preferred Stock.......... 19
Regulation and Competition in the Cable Television Industry............. 19
Tax Treatment of the Transaction........................................ 21
THE TRANSACTION........................................................... 22
General................................................................. 22
Purpose and Effects of the Transaction.................................. 23
No Appraisal Rights..................................................... 24
Regulatory Approvals.................................................... 24
Anticipated Accounting Treatment........................................ 24
THE EXCHANGE OFFER........................................................ 25
Terms of the Exchange Offer............................................. 25
Exchange of Shares of Viacom Common Stock............................... 27
Procedures for Tendering Shares of Viacom Common Stock.................. 29
Guaranteed Delivery Procedure........................................... 31
Withdrawal Rights....................................................... 32
Extension of Tender Period; Termination; Amendment...................... 32
Conditions to Consummation of the Exchange Offer........................ 34
Fees and Expenses....................................................... 35
Miscellaneous........................................................... 36
MARKET PRICES, TRADING AND DIVIDEND INFORMATION........................... 37
Viacom Common Stock..................................................... 37
VII Cable Class A Common Stock and VII Cable Preferred Stock............ 37
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF VII CABLE.. 39
SELECTED COMBINED HISTORICAL FINANCIAL DATA OF VII CABLE.................. 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF VII CABLE.................................................. 45
BUSINESS OF VII CABLE..................................................... 52
The Company............................................................. 52
VII Cable's Systems..................................................... 52
</TABLE>
<TABLE>
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<S> <C>
Franchises.............................................................. 53
Subscriber Services and Rates........................................... 54
Programming............................................................. 55
Competition............................................................. 55
Regulation.............................................................. 58
Federal Regulation...................................................... 58
State and Local Regulation.............................................. 61
Properties.............................................................. 62
Employees............................................................... 62
Legal Proceedings....................................................... 62
MANAGEMENT................................................................ 63
Management Biographies.................................................. 63
Board of Directors...................................................... 64
Compensation of the Board of Directors.................................. 64
Indemnification......................................................... 64
Compensation of Executive Officers...................................... 65
SECURITY OWNERSHIP OF VII CABLE COMMON STOCK.............................. 65
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF VIACOM
COMMON STOCK............................................................. 65
ARRANGEMENTS AMONG VIACOM, VIACOM INTERNATIONAL, TCI AND TCI CABLE........ 67
Terms of the Parents Agreement.......................................... 67
Terms of the Implementation Agreement................................... 70
Terms of the Subscription Agreement..................................... 75
Terms of Certain Ancillary Agreements................................... 81
DESCRIPTION OF CERTAIN INDEBTEDNESS OF VII CABLE.......................... 82
DESCRIPTION OF VII CABLE CAPITAL STOCK.................................... 82
General................................................................. 82
Common Stock--General................................................... 82
VII Cable Class A Common Stock.......................................... 83
VII Cable Class B Common Stock.......................................... 83
VII Cable Preferred Stock............................................... 83
COMPARISON OF RIGHTS OF STOCKHOLDERS OF VIACOM AND VII CABLE.............. 93
RELATIONSHIP BETWEEN VIACOM AND VII CABLE................................. 95
RELATIONSHIP BETWEEN VII CABLE AND TCI AFTER THE EXCHANGE OFFER........... 95
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 96
The Transaction......................................................... 96
Ownership and Disposition of VII Cable Preferred Stock.................. 96
LEGAL MATTERS............................................................. 99
EXPERTS................................................................... 99
INDEX TO COMBINED FINANCIAL STATEMENTS.................................... F-1
</TABLE>
iv
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
"Adjustment Amounts"...................................................... 3
"affiliates".............................................................. 38
"Affiliate"............................................................... 94
"Agent's Message"......................................................... 30
"Aggregate Loan Amount"................................................... 34
"AMEX".................................................................... cover
"Ancillary Agreements".................................................... 81
"Anticipated Commencement Date"........................................... 75
"Applicable Period"....................................................... 81
"Approved Capital Expenditure Plan"....................................... 77
"ASCAP"................................................................... 60
"Asset Value"............................................................. 72
"Assumption of Liabilities"............................................... 70
"Average Market Price".................................................... 84
"Basic Subscriber Rate"................................................... 76
"Basic Subscribers"....................................................... 69
"benchmark"............................................................... 50
"Benchmark Regulations"................................................... 50
"Bill of Sale"............................................................ 70
"BMI"..................................................................... 60
"Book-Entry Transfer Facilities".......................................... 29
"Book Entry Transfer Facility"............................................ 29
"business day"............................................................ 33
"1984 Cable Act".......................................................... 50
"1992 Cable Act".......................................................... 47
"Cable Business".......................................................... 1
"Cable Division Subsidiary"............................................... 67
"Cable Division Subsidiaries"............................................. 70
"Capital Expenditure Amount".............................................. 3
"1996 Capital Expenditure Plan"........................................... 78
"Cash Collateral Account"................................................. 67
"Cash Equivalent Amount".................................................. 13
"change in control"....................................................... 64
"Channel Occupancy Rules"................................................. 59
"Class A Senior Cumulative Exchangeable Preferred Stock".................. 82
"Code".................................................................... 21
"Commission".............................................................. i
"Commitments to Lend"..................................................... 75
"Communications Act"...................................................... 50
"complete termination".................................................... 99
"Conference Report"....................................................... 57
"Consented Subscribers"................................................... 69
"Conversion".............................................................. 4
"Conveyance".............................................................. 4
"Conveyance of Assets".................................................... 70
"Copyright Act"........................................................... 55
"cost-of-service"......................................................... 50
"Credit Agreement"........................................................ 49
"Dayton".................................................................. 49
"DBS"..................................................................... 49
"Dealer Manager".......................................................... 35
"de minimis amount"....................................................... 98
"DGCL".................................................................... 95
"DirecTV"................................................................. 56
"Distributions"........................................................... 4
"Dividend Payment Date"................................................... 84
"drop cable".............................................................. 62
"DTC"..................................................................... 29
</TABLE>
<TABLE>
<S> <C>
"dutch auction"........................................................... 8
"EBITDA".................................................................. 45
"effective competition"................................................... 59
"Eligible Institution".................................................... 30
"enhanced"................................................................ 61
"Estimated Asset Value"................................................... 3
"Estimated Exchange Date Basic Subscribers"............................... 69
"Estimated Net Asset Value"............................................... 39
"Exchange Act"............................................................ i
"Exchange Agent".......................................................... 11
"Exchange Date"........................................................... 28
"Exchange Offer".......................................................... cover
"Exchange Rate"........................................................... 12
"Exchange Ratio".......................................................... cover
"Exchange Ratio Range".................................................... cover
"Exchange Time"........................................................... 28
"Expiration Date"......................................................... 9
"Expiration Time"......................................................... 9
"external"................................................................ 50
"Extraordinary Cash Dividends"............................................ 88
"FCC"..................................................................... 7
"Final Exchange Ratio".................................................... cover
"First Distribution"...................................................... 1
"Fixed Amount"............................................................ 3
"Franchise Area".......................................................... 73
"going forward"........................................................... 51
"House Bill".............................................................. 59
"HSR Act"................................................................. 6
"Implementation Agreement"................................................ 2
"Inconsistent Terms"...................................................... 67
"Information Agent"....................................................... 11
"initial permitted rate".................................................. 50
"Initial Redemption Date"................................................. 90
"Inventory Amount"........................................................ 3
"IRS"..................................................................... 7
"Issue Date".............................................................. 84
"Junior Stock"............................................................ 85
"Lenders"................................................................. 75
"Letter Agreement"........................................................ 81
"LIBOR"................................................................... 3
"Limited Service"......................................................... 54
"Liquidation Preference".................................................. 83
"Loan".................................................................... 4
"Loan Documentation"...................................................... 75
"Loan Proceeds"........................................................... 3
"local"................................................................... 60
"Mandatory Redemption Date"............................................... 90
"Mandatory Redemption Price".............................................. 90
"Maximum Exchange Ratio".................................................. cover
"Minimum Exchange Ratio".................................................. cover
"MLDS".................................................................... 55
"MMDS".................................................................... 49
"MSTC".................................................................... 29
"NAI"..................................................................... 3
"Nasdaq".................................................................. cover
"Negotiation Period"...................................................... 68
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
"Net Asset Value"........................................................... 39
"Non-Cable Businesses"...................................................... 1
"not essentially equivalent"................................................ 99
"November 1994 Regulations"................................................. 51
"NPTs"...................................................................... 51
"NVOD"...................................................................... 56
"Offer Period".............................................................. 68
"Offered Business".......................................................... 68
"Optional Redemption Date".................................................. 90
"Optional Redemption Price"................................................. 90
"Paramount"................................................................. 100
"Parents Agreement"......................................................... 2
"Parity Stock".............................................................. 14
"Par Value"................................................................. 83
"passed by cable"........................................................... 52
"PCI Group"................................................................. 67
"PCI Subsidiaries".......................................................... 67
"PEG"....................................................................... 54
"Permitted Subsidiary Equity Interest"...................................... 86
"PHILADEP".................................................................. 29
"1995 Plan"................................................................. 78
"Preferred Stock"........................................................... 82
"Preferred Stock Directors"................................................. 93
"Price Notice".............................................................. 68
"Prime Sports".............................................................. 48
"PrimeStar"................................................................. 56
"Prospectus Condition"...................................................... 12
"PVIT/PVI Participants"..................................................... 30
"PVIT/PVI Plan"............................................................. 30
"PVIT/PVI Plan Viacom Stock Fund Account"................................... 30
"Recapitalization".......................................................... 4
"Record Date"............................................................... 84
"Redeemable Capital Stock".................................................. 88
"Redemption Date"........................................................... 90
"Redemption Event".......................................................... 89
"Redemption Notice"......................................................... 91
"Redemption Price".......................................................... 90
"Redemption Securities"..................................................... 88
"Registration Statement".................................................... i
"Refund".................................................................... 81
"Refund Amount"............................................................. 81
"Retransmission Consent".................................................... 55
"Reviewing Party"........................................................... 64
"Ruling Letter"............................................................. 7
"Satellite Value Package"................................................... 54
"Schedule 13E-4"............................................................ i
"Second Distribution"....................................................... 4
"section 306 stock"......................................................... 7
"Securities Act"............................................................ i
"Senate Bill"............................................................... 58
"Senior Stock".............................................................. 14
"Services Agreement"........................................................ 97
"Settlement Agreements"..................................................... 81
"SFAS"...................................................................... 47
"SMATV"..................................................................... 49
"SNI"....................................................................... 82
"Soliciting Dealers"........................................................ 35
"Special Delivery Instructions"............................................. 30
"Special Issuance Instructions"............................................. 30
"Specified Party"........................................................... 73
"Spelling".................................................................. 1
</TABLE>
<TABLE>
<S> <C>
"SSI"..................................................................... 82
"Stock Dividend Amount"................................................... 84
"Stock Issuance".......................................................... 4
"Stock Portion"........................................................... 13
"Subscription Agreement".................................................. 2
"Subscription Payment".................................................... 4
"Subsidiary".............................................................. 86
"Subsidiary Borrowers".................................................... 49
"Subsidiary Equity Interest".............................................. 86
"substantially disproportionate".......................................... 99
"Tax Indemnity Agreement"................................................. 81
"Tax Indemnity Letter".................................................... 81
"TCGSF"................................................................... 48
"TCGS".................................................................... 48
"TCI"..................................................................... cover
"TCI Cable"............................................................... 2
"TCI Class A Common Stock"................................................ cover
"TCI Pacific Communications, Inc."........................................ 2
"TCI Prospectus".......................................................... iii
"TCI Registration Statement".............................................. iii
"TCI Stock"............................................................... cover
"TCI Stock Exchange Date"................................................. 87
"TCOMA"................................................................... 14
"telcos".................................................................. 55
"Telecom Amount".......................................................... 3
"Telecom Partnership Agreements".......................................... 77
"Telecom Partnerships".................................................... 47
"through to the viewer"................................................... 60
"Trading Date"............................................................ 84
"Transaction"............................................................. 4
"Transaction Agreements".................................................. 2
"Transfer Agent".......................................................... 94
"transitional rate"....................................................... 50
"Trigger Amount".......................................................... cover
"TVRO".................................................................... 49
"USSB".................................................................... 56
"VDT"..................................................................... 57
"VIA"..................................................................... 37
"VIA B"................................................................... 37
"Viacom".................................................................. cover
"Viacom Class A Common Stock"............................................. cover
"Viacom Class B Common Stock"............................................. cover
"Viacom Common Stock"..................................................... cover
"Viacom Form 8-K"......................................................... 100
"Viacom International".................................................... cover
"Viacom Market Value"..................................................... 25
"Viacom Services"......................................................... 1
"Video Programming Ban"................................................... 60
"VII Cable"............................................................... 2
"VII Cable Board"......................................................... 64
"VII Cable Carve-Out Financial Statements"................................ 15
"VII Cable Class A Common Stock".......................................... cover
"VII Cable Class B Common Stock".......................................... 4
"VII Cable Preferred Stock"............................................... cover
"VII Cable Pro Forma Events".............................................. 16
"VIP"..................................................................... 30
"VIP participants"........................................................ 30
"VIP Viacom Stock Fund Account"........................................... 30
"Wisconsin cable system".................................................. 47
"Withdrawal Rights"....................................................... 10
"Working Capital Amount".................................................. 3
</TABLE>
vi
<PAGE>
OFFERING CIRCULAR - PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Offering Circular - Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information included or
incorporated by reference in this Offering Circular - Prospectus and in the
exhibits to the Registration Statement. Capitalized terms used but not defined
in this summary have the meanings assigned to them elsewhere in this Offering
Circular - Prospectus. See "Index of Defined Terms." Stockholders are urged to
read this Offering Circular - Prospectus. For information concerning TCI and
TCI Common Stock, stockholders are directed to the accompanying TCI Prospectus.
See "Explanatory Note--TCI Prospectus."
VIACOM INC.
Viacom Inc. (together with its subsidiaries and divisions, unless the context
otherwise requires, "Viacom") is a diversified entertainment and publishing
company with operations in five segments: (i) Networks and Broadcasting, (ii)
Entertainment, (iii) Video and Music/Theme Parks, (iv) Publishing and (v) Cable
Television. Through the Networks and Broadcasting segment, Viacom operates MTV:
MUSIC TELEVISION(R), SHOWTIME(R), NICKELODEON(R)/NICK AT NITE(R) and VH1 MUSIC
FIRST(TM), among other program services, and 12 broadcast television and 12
radio stations. Through the Entertainment segment, which includes PARAMOUNT
PICTURES(TM), Viacom produces and distributes theatrical motion pictures and
television programming. Through the Video and Music/Theme Parks segment, which
includes the BLOCKBUSTER(R) family of businesses and PARAMOUNT PARKS(TM),
Viacom is the leading worldwide owner, operator and franchisor of videocassette
rental and sales stores and a leading owner and operator of music stores in the
U.S. In addition, PARAMOUNT PARKS(TM) owns and operates six theme parks located
in the U.S. and Canada. Through the Publishing segment, which includes SIMON &
SCHUSTER(R), MACMILLAN PUBLISHING USA(TM) and PRENTICE HALL(R), Viacom
publishes and distributes educational, consumer, business, technical and
professional books, and audio-video software products. Through the Cable
Television segment, Viacom operates cable television systems serving
approximately 1.2 million customers. Upon completion of the Transaction, Viacom
will no longer own the operations which comprise its Cable Television segment.
Viacom is currently exploring a sale of Spelling Entertainment Group Inc.
("Spelling") and the related purchase of Spelling's subsidiary, Virgin
Interactive Entertainment Ltd. Viacom's principal offices are located at 1515
Broadway, New York, New York 10036 and its telephone number is (212) 258-6000.
VIACOM INTERNATIONAL INC. (PRIOR TO THE FIRST DISTRIBUTION)
As of the date of this Offering Circular - Prospectus, Viacom International
is a wholly owned subsidiary of Viacom through which Viacom conducts its
Networks and Broadcasting, Entertainment, Theme Parks, Publishing and Cable
Television operations. The Cable Television operations and the operations other
than Cable Television are hereinafter referred to as the "Cable Business" and
the "Non-Cable Businesses," respectively. Prior to the consummation of the
Exchange Offer, Viacom International will transfer the Non-Cable Businesses to
Viacom International Services Inc. ("Viacom Services"), a wholly owned
subsidiary of Viacom International, and thereafter distribute the stock of
Viacom Services to Viacom (the "First Distribution"). After giving effect to
the First Distribution, Viacom Services will own and operate all of the Non-
Cable Businesses and Viacom International will be solely engaged in the Cable
Business. Viacom International's principal offices are at 1515 Broadway, New
York, New York 10036 and its telephone number is (212) 258-6000.
VII CABLE
VII Cable currently owns and operates cable television systems in five
geographic regions, including the San Francisco and Northern California area,
Salem, Oregon, the Seattle, Washington and the Greater Puget
1
<PAGE>
Sound area, Nashville, Tennessee and Dayton, Ohio. As of September 30, 1995,
VII Cable was approximately the tenth largest multiple cable television system
operator in the United States, with approximately 1.2 million basic
subscribers. VII Cable's principal offices are currently located at 5924
Stoneridge Drive, Pleasanton, California 94566 and its telephone number is
(510) 463-0870. For a further description of VII Cable, see "Business of VII
Cable." Upon the consummation of the Transaction, VII Cable will be renamed as
"TCI Pacific Communications, Inc."
As used in this Offering Circular - Prospectus, all references to "Viacom
International" are to the assets and operations of the Cable Business and Non-
Cable Businesses of Viacom International for all periods ending on or before
the First Distribution, and all references to "VII Cable" are (i) to the
assets, operations and management of the Cable Business of Viacom International
for all periods ending on or before the First Distribution and (ii) to the
assets and operations of Viacom International (renamed "TCI Pacific
Communications, Inc.") immediately following the completion of the Transaction,
which at that time will consist almost entirely of the assets and liabilities
of the Cable Business (as discussed with greater detail below) and the
liability represented by the Loan. See "The Transaction--General."
THE TRANSACTION
General..................... Viacom has determined to implement the steps
summarized below in order to offer to holders of
shares of Viacom Common Stock the opportunity to
acquire direct ownership of the Cable Business.
All such steps are being undertaken pursuant to
the terms and conditions of (i) a Parents
Agreement among Viacom, TCI and TCI
Communications, Inc. ("TCI Cable"), dated as of
July 24, 1995 (the "Parents Agreement"), (ii) an
Implementation Agreement between Viacom
International and Viacom Services, dated as of
July 24, 1995 (the "Implementation Agreement"),
(iii) a Subscription Agreement among Viacom
International, TCI and TCI Cable dated as of July
24, 1995 (the "Subscription Agreement") and (iv)
certain Ancillary Agreements (as defined herein)
(collectively, the "Transaction Agreements"). For
a description of the Transaction Agreements, see
"Arrangements Among Viacom, Viacom International,
TCI and TCI Cable."
Viacom is offering hereby to the holders of
shares of Viacom Common Stock the opportunity to
exchange all or a portion of their shares of
Viacom Common Stock for shares of VII Cable Class
A Common Stock. The total number of shares of VII
Cable Class A Common Stock exchangeable in the
Exchange Offer ( shares) has been determined as
the quotient obtained by dividing (x) the excess
of the Estimated Asset Value of VII Cable over
the Loan Proceeds by (y) $100 (the par value per
share of VII Cable Class A Common Stock). At the
Minimum Exchange Ratio, Viacom would accept for
exchange [ ] shares of Viacom Common Stock
(or % of the total number of shares of Viacom
Common Stock outstanding). At the Maximum
Exchange Ratio, Viacom would accept for exchange
[ ] shares of Viacom Common Stock (or %
of the total number of shares of Viacom Common
Stock outstanding). The total number of shares of
Viacom Common Stock to be accepted for exchange
in the Exchange Offer will be equal to
2
<PAGE>
(i) the total number of shares of VII Cable Class
A Common Stock exchangeable in the Exchange Offer
( shares) divided by (ii) the Final Exchange
Ratio.
In accordance with the provisions of the
Implementation Agreement, prior to the
commencement of the Exchange Offer, Viacom
International estimated various asset and
liability amounts related to the Cable Business
to determine an estimated asset value at the
Exchange Date (the "Estimated Asset Value"),
including: (i) a capital expenditure amount based
on certain capital expenditures by VII Cable
during the period from January 1, 1995 through
the Exchange Date for system upgrades and
rebuilds, during the period from February 23,
1995 through the Exchange Date for line
extensions and during the period from January 20,
1995 through the Exchange Date for other
specified items (the "Capital Expenditure
Amount"), (ii) an inventory amount derived from
the book value of all inventory as of the
Exchange Date (the "Inventory Amount"), (iii) the
aggregate amount of all capital contributions
(less distributions) and capital expenditures
made with respect to the Telecom Partnerships (as
such term is defined herein) (the "Telecom
Amount"), (iv) an amount of working capital (the
"Working Capital Amount"), and (v) a fixed
amount, which decreases proportionally from $2
billion to the extent that the number of Basic
Subscribers (as defined herein) to Viacom
International's cable systems is expected to fall
below 1,122,660 on the Exchange Date (the "Fixed
Amount" and, collectively with the foregoing
amounts, the "Adjustment Amounts"). The Estimated
Asset Value was determined to be $ , and
is equal to (i) the Fixed Amount, plus (ii) the
Capital Expenditure Amount, plus (iii) the
Inventory Amount, plus (iv) the Telecom Amount,
plus (v) an amount equal to Working Capital, if
Working Capital is a positive number, minus (vi)
an amount, if any, equal to the amount by which
Working Capital is a negative number, minus (vii)
the amount of certain front-end loaded
programming payments specified in the
Implementation Agreement, plus (viii) an amount
equal to interest on the sum of the foregoing
amounts at the one-month London Interbank Offered
Rate ("LIBOR") plus 1 1/4% for the period from
September 1, 1995 to the Exchange Date. The
foregoing Adjustment Amounts are subject to
change as a result of adjustments from estimated
to actual values. See "Arrangements among Viacom,
Viacom International, TCI and TCI Cable--Terms of
the Implementation Agreement--Post-Closing
Adjustments."
Once the Trigger Amount is reached, and subject
to certain other conditions, Viacom will become
obligated to consummate the Exchange Offer.
National Amusements, Inc. ("NAI"), a closely held
corporation that owns approximately 61% of the
outstanding Viacom Class A Common Stock and
approximately 25% of the outstanding Viacom
Common Stock, has advised Viacom that it will not
participate in the Exchange Offer.
Prior to expiration of the Exchange Offer, Viacom
International will borrow $1.7 billion (the "Loan
Proceeds"). The facilities pursuant to which
Viacom International will borrow the Loan
Proceeds are
3
<PAGE>
hereinafter referred to as the "Loan." See
"Arrangements Among Viacom, Viacom International,
TCI and TCI Cable--The Subscription Agreement--
Certain Borrowings" and "Description of Certain
Indebtedness of VII Cable."
On the date the Exchange Offer is consummated,
Viacom International will convey to Viacom
Services ownership of the assets relating to the
Non-Cable Businesses, the Loan Proceeds and
certain nonmaterial assets (as described herein)
and Viacom Services will assume substantially all
of Viacom International's liabilities (including
its existing public debt, bank debt and the
existing intercompany debt owed by Viacom
International to Viacom), other than Viacom
International's repayment and other obligations
under the Loan and liabilities relating to the
Cable Business other than certain nonmaterial
specified liabilities (the "Conveyance"). Viacom
International will then distribute 100% of the
stock of Viacom Services to Viacom in the First
Distribution, and Viacom International will be
recapitalized, with all of the existing common
stock being reclassified into new VII Cable Class
A Common Stock (the "Recapitalization"). VII
Cable will then be renamed as "TCI Pacific
Communications, Inc." Upon consummation of the
Exchange Offer, 100% of the outstanding shares of
VII Cable Class A Common Stock will be exchanged
for the shares of Viacom Common Stock properly
tendered at or below the Final Exchange Ratio and
not withdrawn or deemed withdrawn in the Exchange
Offer (the "Second Distribution" and,
collectively with the First Distribution, the
"Distributions"). VII Cable will thereupon cease
to be a subsidiary of Viacom.
Immediately following the consummation of the
Exchange Offer, VII Cable has agreed to issue and
TCI Cable has agreed to acquire (the "Stock
Issuance") 100 shares of Class B Common Stock,
$.01 par value per share, of VII Cable ("VII
Cable Class B Common Stock"), in exchange for a
capital contribution of $350 million (the
"Subscription Payment"). Under the anticipated
terms and conditions of the Loan, VII Cable will
be obligated to use such capital contribution to
reduce the amount outstanding under the Loan.
Furthermore, as a result of such issuance, each
share of VII Cable Class A Common Stock
distributed to Viacom stockholders pursuant to
the Exchange Offer will automatically convert
into one share of VII Cable Preferred Stock (the
"Conversion," and, together with the Conveyance,
the Distributions and the Stock Issuance, the
"Transaction"). See "Description of VII Cable
Capital Stock--VII Cable Preferred Stock." Upon
consummation of the Stock Issuance, TCI Cable
will own all of the Common Stock of VII Cable.
If insufficient tenders are made by Viacom
stockholders in the Exchange Offer to permit the
Trigger Amount to be reached, Viacom has the
right to extend the Exchange Offer for not less
than 10 nor more than 15 business days and,
during such extension, TCI
4
<PAGE>
and Viacom have agreed to negotiate in good faith
to determine mutually acceptable changes to the
terms and conditions for the VII Cable Preferred
Stock (including without limitation the Exchange
Rate (as defined herein) and the dividend yield
on the VII Cable Preferred Stock) and the
Exchange Offer (including without limitation the
duration of any extension and the maximum
Exchange Ratio) described herein that each
believes in good faith will cause the Trigger
Amount to be reached and that would cause the VII
Cable Preferred Stock to trade at a price equal
to its $100 par value per share immediately
following the consummation of the Exchange Offer
and the Stock Issuance. If Viacom materially
changes the terms and conditions of the VII Cable
Preferred Stock or the Exchange Offer, Viacom
will extend the Exchange Offer to the extent
required by the Exchange Act. See "The Exchange
Offer--Extension of Tender Period; Termination;
Amendment." In the event the Trigger Amount is
not thereafter reached, TCI and Viacom will each
have the right to terminate the Transaction.
Upon the closing of the Transaction, assuming the
partial repayment of the Loan with the proceeds
of the Subscription Payment, VII Cable will have
an aggregate capitalization consisting of (i)
approximately $1.35 billion of borrowings under
the Loan, (ii) VII Cable Preferred Stock with an
estimated aggregate par value of approximately
$500 million and (iii) $350 million of paid-in
capital for the VII Cable Class B Common Stock
(representing the Subscription Payment), and will
have no shares of VII Cable Class A Common Stock
outstanding (such shares having been converted
into the VII Cable Preferred Stock). See
"Unaudited Pro Forma Condensed Combined Financial
Statements of VII Cable."
Purpose and Effects of the
Transaction................. The Transaction will reduce Viacom's overall
level of indebtedness, which will enhance
Viacom's prospects for an increase in the rating
of its long-term senior unsecured debt to
investment grade, thereby lowering Viacom's
financing costs and enhancing the terms on which
Viacom can access the capital markets. The
Transaction will enable Viacom to utilize its
investment capital to invest in the growth of its
core, content-driven entertainment and publishing
businesses rather than in the further development
of its cable television business. The Transaction
will eliminate perceived conflicts and permit
Viacom to further its position on regulatory
matters consistent with Viacom's focus on its
programming businesses. Upon the consummation of
the Transaction, certain rules under current
federal telecommunications law which impose
restrictions on cable programmers affiliated with
cable system operators would no longer apply to
Viacom. Viacom believes that all of the foregoing
will result in improved deployment of its assets
that will enhance value for its stockholders.
Viacom believes that this enhanced value may have
been a factor in the increased market price of
shares of Viacom Class B Common Stock in the
period preceding the September 1995 maturity date
of Viacom's Variable Common Rights (which were
issued in connection with the
5
<PAGE>
acquisition of Blockbuster Entertainment
Corporation and which represented the right to
receive shares of Viacom Class B Common Stock
depending on market prices of Viacom Class B
Common Stock). The magnitude of the obligation of
Viacom to deliver shares of Viacom Class B Common
Stock upon the maturity of the Variable Common
Rights was inversely related to such market
prices during such period.
The Exchange Offer will also provide Viacom
stockholders with an opportunity to adjust, on a
tax-free basis, their investment between the
Cable Business and Viacom's Non-Cable Businesses.
See "Certain Federal Income Tax Consequences." To
the extent that a holder exchanges its Viacom
Common Stock pursuant to the Exchange Offer, such
holder will no longer participate in any increase
in the value of such Viacom Common Stock.
Holders of shares of Viacom Common Stock will be
affected by the Transaction regardless of whether
such holders tender their shares of Viacom Common
Stock for exchange pursuant to the Exchange
Offer. Holders of shares of Viacom Common Stock
who tender all of their shares for exchange
pursuant to the Exchange Offer will, if all such
shares are accepted for exchange, no longer have
an ownership interest in Viacom. Holders of
shares of Viacom Common Stock who tender all of
their shares for exchange pursuant to the
Exchange Offer and who become subject to
proration because more shares of Viacom Common
Stock are tendered for exchange than are
necessary to reach the Trigger Amount will have a
diminished ownership interest in Viacom. Holders
of shares of Viacom Common Stock who do not
tender any of their shares for exchange pursuant
to the Exchange Offer will not receive shares of
VII Cable Class A Common Stock as a result of the
Exchange Offer and will continue to have an
ownership interest in Viacom, which ownership
interest will have increased on a percentage
basis as a result of the Exchange Offer, but will
no longer have any interest in the Cable
Business.
NONE OF VIACOM, VIACOM INTERNATIONAL, THE BOARD
OF DIRECTORS OF VIACOM NOR THE BOARD OF DIRECTORS
OF VIACOM INTERNATIONAL MAKES ANY RECOMMENDATION
TO ANY STOCKHOLDER OF VIACOM WHETHER TO TENDER OR
REFRAIN FROM TENDERING SHARES OF VIACOM COMMON
STOCK PURSUANT TO THE EXCHANGE OFFER. EACH
STOCKHOLDER OF VIACOM MUST MAKE ITS OWN DECISION
WHETHER TO TENDER SHARES OF VIACOM COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW
MANY SHARES TO TENDER AND AT WHAT EXCHANGE RATIO
TO TENDER SUCH SHARES AFTER READING THIS OFFERING
CIRCULAR - PROSPECTUS AND CONSULTING WITH ITS
ADVISORS BASED ON ITS OWN FINANCIAL POSITION AND
REQUIREMENTS.
No Appraisal Rights......... No appraisal rights are available to Viacom
stockholders in connection with the Transaction.
Regulatory Approvals........ No filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") are
required in connection with the
6
<PAGE>
Exchange Offer generally. Viacom and TCI have to
date made filings under the HSR Act with respect
to the Stock Issuance. The waiting period with
respect to each of these filings terminated in
September 1995. To the extent that certain
stockholders of Viacom decide to participate in
the Exchange Offer and thereby acquire a number
of shares of VII Cable Class A Common Stock that
exceeds any threshold stated in the regulations
under the HSR Act, and if an exemption under
those regulations does not apply, such
stockholders and Viacom would be required to make
filings under the HSR Act, and the waiting period
under the HSR Act would have to expire or be
terminated before any exchange of shares with
those particular stockholders could be effected.
Approvals must be obtained from certain local
franchise authorities having rights of approval
over changes of control with respect to the
change of control of the VII Cable subsidiaries
operating cable systems in such authorities'
jurisdictions. As of December 31, 1995 all but
four local franchise authorities having such
rights approved the change of control. The number
of subscribers to VII Cable in these
jurisdictions together with subscribers in other
jurisdictions which have no right of approval is
1,073,928 or 91.7% of VII Cable's total
subscribers as of September 30, 1995. In
addition, the Federal Communications Commission
("FCC") must approve the change of control of the
(i) entities licensed to operate the wireless
communications systems used in VII Cable's
business and (ii) entities licensed to operate
the wireless communications systems used in the
Non-Cable Businesses. The FCC approvals are
obtained on an individual basis for each
separately licensed transmission facility. As of
December 31, 1995, 79 approvals were obtained of
the total 111 required. The remaining approvals
are expected to be granted. See "Arrangements
Among Viacom, Viacom International, TCI and TCI
Cable--Terms of the Implementation Agreement--
Consents and Approvals."
Viacom and Viacom International do not believe
that any other material federal or state
regulatory approvals will be necessary to
consummate the Transaction.
Certain Federal Income Tax
Consequences of the
Transaction................ On , 1996, Viacom received an advance
private letter ruling (the "Ruling Letter") from
the Internal Revenue Service (the "IRS") to the
effect that the Transaction will qualify as a
distribution that is tax-free to Viacom's
stockholders (except with respect to cash
received in lieu of fractional shares) and, in
general, is tax-free to Viacom. The VII Cable
Preferred Stock may be "section 306 stock" for
federal income tax purposes, with the result that
all or a portion of the proceeds received by a
stockholder from the sale, exchange or redemption
of such shares will be taxable as ordinary
income, and a stockholder may not recognize any
loss from such sale, exchange or redemption. For
a more complete discussion of the U.S. federal
income tax consequences of the
7
<PAGE>
Transaction to holders of Viacom Common Stock,
see "Certain Federal Income Tax Consequences."
Each stockholder should consult its tax advisor
as to the particular consequences of the
Transaction to such stockholder.
THE EXCHANGE OFFER
Terms of the Exchange
Offer....................... Upon the terms and subject to the conditions of
the Exchange Offer, Viacom is offering hereby to
exchange all of the outstanding shares of VII
Cable Class A Common Stock for shares of Viacom
Common Stock at an Exchange Ratio not greater
than (the Maximum Exchange Ratio) nor less
than (the Minimum Exchange Ratio) of a share
of VII Cable Class A Common Stock for each share
of Viacom Common Stock tendered. The Exchange
Offer will be conducted as a modified "dutch
auction" in which each holder of Viacom Common
Stock will be able to specify a fraction of a
share of VII Cable Class A Common Stock (or
Exchange Ratio) that such holder is willing to
receive in exchange for a share of Viacom Common
Stock. The Exchange Ratio specified by each
tendering Viacom stockholder must be within the
Exchange Ratio Range. The Final Exchange Ratio
will be the smallest Exchange Ratio that will
enable Viacom to exchange all of the outstanding
shares of VII Cable Class A Common Stock for
Viacom Common Stock pursuant to the Exchange
Offer. The Final Exchange Ratio (i.e., the amount
of VII Cable Class A Common Stock that Viacom
will exchange for each share of Viacom Common
Stock accepted for exchange) will be calculated
by Viacom as follows: at the expiration of the
Exchange Offer, Viacom will calculate the number
of shares of Viacom Common Stock validly tendered
at Exchange Ratios within the Exchange Ratio
Range, beginning with shares tendered at the
Minimum Exchange Ratio and ending, if necessary,
at the Maximum Exchange Ratio. When the aggregate
dollar value of the tenders made (calculated as
described in the immediately following sentence)
in ascending order of Exchange Ratios is equal to
or greater than $[ ] million (i.e., the Trigger
Amount), Viacom will become obligated to accept,
on a pro rata basis, the shares of all
stockholders who tendered at or below the highest
Exchange Ratio required to reach the Trigger
Amount. Whether such aggregate dollar value
amount is reached is determined by multiplying
(i) the total number of shares of Viacom Common
Stock tendered at or below such Exchange Ratio by
(ii) the product of such Exchange Ratio times
100. The highest Exchange Ratio required to reach
the Trigger Amount will be the Final Exchange
Ratio, at which Exchange Ratio all [ ] million
shares of VII Cable Class A Stock will be issued
to holders of shares of Viacom Common Stock whose
shares are accepted for exchange pursuant to the
Exchange Offer. At the Minimum Exchange Ratio,
Viacom would accept for exchange [ ] shares
of Viacom Common Stock (or % of the total
number of shares of Viacom Common Stock
outstanding). At the Maximum Exchange Ratio,
Viacom would accept for exchange
8
<PAGE>
[ ] shares of Viacom Common Stock (or %
of the total number of shares of Viacom Common
Stock outstanding). The total number of shares of
Viacom Common Stock to be accepted for exchange
in the Exchange Offer will be equal to (i) the
total number of shares of VII Cable Class A
Common Stock exchangeable in the Exchange Offer
( shares) divided by (ii) the Final Exchange
Ratio.
All shares of Viacom Common Stock properly
tendered and not withdrawn or deemed withdrawn at
Exchange Ratios at or below the Final Exchange
Ratio will be exchanged at the Final Exchange
Ratio, on the terms and subject to the conditions
of the Exchange Offer, including the proration
provisions described herein. If more shares of
Viacom Common Stock are validly tendered at or
below the Final Exchange Ratio, and not properly
withdrawn, than are necessary to reach the
Trigger Amount, then Viacom will accept all of
such shares on a pro rata basis as described
herein in exchange for the shares of VII Cable
Class A Common Stock. In the event that the
number of shares tendered at any combination of
Exchange Ratios within the Exchange Ratio Range
is insufficient to reach the Trigger Amount,
Viacom will not acquire any of the shares
tendered in the Exchange Offer. All shares which
are tendered but not acquired pursuant to the
Exchange Offer, including shares tendered at
Exchange Ratios greater than the Final Exchange
Ratio and shares not acquired because of
proration, will be returned to tendering
stockholders promptly following the Expiration
Date. The Exchange Offer, proration period and
withdrawal rights will expire at the Expiration
Time on the Expiration Date (as such terms are
defined herein). To be eligible to receive VII
Cable Class A Common Stock pursuant to the
Exchange Offer, a holder of Viacom Common Stock
must validly tender and not properly withdraw
Viacom Common Stock on or prior to the Expiration
Time on the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Based on the Estimated Asset Value of $[ ]
and Loan Proceeds of $1.7 billion, in calculating
the number of shares of Viacom Common Stock to be
accepted for exchange in the Exchange Offer,
Viacom: (i) subtracted the Loan Proceeds ($1.7
billion) from the Estimated Asset Value
($[ ]), thereby fixing the aggregate par
value of VII Cable Class A Common Stock to be
distributed to Viacom stockholders (i.e. the
Trigger Amount) at $[ ] million; (ii) divided
the Trigger Amount by the par value per share of
VII Cable Class A Common Stock ($100) in order to
determine the number of shares of VII Cable Class
A Stock ([ ] million) to be received by
stockholders of Viacom Common Stock upon
consummation of the Transaction; and (iii) will
divide such number of shares of VII Cable Class A
Common Stock by the Final Exchange Ratio.
Expiration Date............. The Exchange Offer will expire at 12:00 Midnight,
New York City time (the "Expiration Time"), on
, 1996 (the "Expiration
9
<PAGE>
Date"), unless extended, in which case the terms
"Expiration Time" and "Expiration Date" shall
mean the last time and date to which the Exchange
Offer is extended. See "The Exchange Offer--
Extension of Tender Period; Termination;
Amendment."
Conditions of the Exchange
Offer....................... When the aggregate dollar value of tenders made
(calculated as described in the immediately
following sentence) in ascending order of
Exchange Ratios is equal to or greater than the
Trigger Amount, Viacom will become obligated,
subject to the terms and conditions of the
Exchange Offer, to accept, on a pro rata basis,
the shares of all stockholders which were validly
tendered and not properly withdrawn prior to the
expiration of the Exchange Offer at or below the
highest Exchange Ratio required to reach the
Trigger Amount. Whether such aggregate dollar
value amount is reached is determined by
multiplying (i) the total number of shares of
Viacom Common Stock tendered at or below such
Exchange Ratio by (ii) the product of such
Exchange Ratio times 100. Consummation of the
Exchange Offer is subject to certain other
conditions. See "The Exchange Offer--Certain
Conditions of the Exchange Offer."
Procedures for Tendering.... To be tendered properly, certificates for shares
of Viacom Common Stock, together with a properly
completed and duly executed Letter of Transmittal
(or manually signed facsimile thereof) or an
Agent's Message in the case of a book-entry
transfer of shares, and any other documents
required by the Letter of Transmittal must be
received by the Exchange Agent at one of the
addresses set forth on the back cover of this
Offering Circular - Prospectus prior to the
Expiration Time on the Expiration Date, or
stockholders must comply with the specific
procedures for guaranteed delivery described
herein. Certain financial institutions may also
effect tenders by book-entry transfer through a
Book-Entry Transfer Facility (as defined herein).
Holders of Viacom Common Stock having shares
registered in the name of a broker, dealer,
commercial bank, trust company or nominee are
urged to contact such person promptly if they
wish to tender any shares of Viacom Common Stock
pursuant to the Exchange Offer. See "The Exchange
Offer--Procedures for Tendering Shares of Viacom
Common Stock" and "--Guaranteed Delivery
Procedure."
Proration................... If more shares of Viacom Common Stock have been
validly tendered for exchange at or below the
Final Exchange Ratio, and not properly withdrawn,
on or prior to the Expiration Date than are
necessary to reach the Trigger Amount, subject to
the terms and conditions of the Exchange Offer,
Viacom will accept such shares on a pro rata
basis. See "The Exchange Offer--Terms of the
Exchange Offer."
Withdrawal Rights........... Subject to the conditions set forth herein,
tenders of shares of Viacom Common Stock may be
withdrawn, at any time on or prior to the
Expiration Time on the Expiration Date and,
unless theretofore accepted for exchange as
provided in this Offering Circular - Prospectus,
may also be withdrawn at any time after the
10
<PAGE>
expiration of 40 business days from the
commencement of the Exchange Offer. See "The
Exchange Offer--Withdrawal Rights."
No Fractional Shares........ No fractional shares of VII Cable Class A Common
Stock or VII Cable Preferred Stock, as the case
may be, will be distributed. The Exchange Agent,
acting as agent for Viacom stockholders otherwise
entitled to receive fractional shares, will
aggregate all fractional shares and sell them for
the accounts of such stockholders. Such proceeds
as may be realized by the Exchange Agent upon the
sale of such fractional shares will be
distributed, net of commissions, to such
stockholders on a pro rata basis. See "The
Exchange Offer-- Terms of the Exchange Offer."
Delivery of and Market for
VII Cable Preferred Stock.. Upon consummation of the Stock Issuance, each
share of VII Cable Class A Common Stock will
automatically convert into one share of VII Cable
Preferred Stock, and shares of VII Cable
Preferred Stock and cash in lieu of fractional
shares will be delivered as soon as practicable
after acceptance of Viacom Common Stock for
exchange. Accordingly, holders of shares of
Viacom Common Stock electing to tender such
shares in the Exchange Offer should not expect to
take physical delivery of shares of VII Cable
Class A Common Stock which they will have the
right to receive in exchange for shares of Viacom
Common Stock after the consummation of the Stock
Issuance. See "The Exchange Offer--Exchange of
Shares of Viacom Common Stock."
On , 1996, the VII Cable Preferred Stock was
approved for quotation on Nasdaq under the symbol
"TPACP." No current public trading market for VII
Cable Class A Common Stock or VII Cable Preferred
Stock exists and there can be no assurance that
an active trading market for the VII Cable
Preferred Stock will be established or maintained
after the consummation of the Exchange Offer. See
"Risk Factors--Market Uncertainties with respect
to VII Cable Preferred Stock"; and "Market
Prices, Trading and Dividend Information--VII
Cable Class A Common Stock and VII Cable
Preferred Stock."
Exchange Agent.............. is serving as the Exchange Agent in
connection with the Exchange Offer. Its telephone
number is .
Information Agent........... Georgeson & Company Inc. is serving as the
Information Agent in connection with the Exchange
Offer. Its telephone number is (800) 223-2064.
TERMS OF THE CLASS A SENIOR
CUMULATIVE EXCHANGEABLE
PREFERRED STOCK............. Each share of VII Cable Class A Common Stock will
automatically convert into one share of VII Cable
Preferred Stock upon the Stock Issuance, which is
expected to occur immediately after the
consummation of the Exchange Offer.
11
<PAGE>
Dividends................... Dividends on the VII Cable Preferred Stock will
accrue and be cumulative from the date of
issuance at a rate per annum of % of the $100
par value per share, payable quarterly when, as
and if declared by the VII Cable Board (as
defined herein). The dividend rate was determined
by two investment banking firms as the rate that,
in the opinion of such firms, will cause the VII
Cable Preferred Stock to trade initially at its
par value of $100 per share immediately after the
consummation of the Exchange Offer and the Stock
Issuance. If the VII Cable Board determines to
pay a dividend and VII Cable is prohibited from
paying cash dividends pursuant to the Loan or if
VII Cable otherwise decides to pay dividends in
TCI Stock, TCI Cable has agreed to make available
to VII Cable (i) funds in the form of an equity
contribution or a subordinated loan or (ii)
sufficient shares of TCI Stock, in each case to
pay such dividends in cash, TCI Stock or a
combination thereof, with respect to any dividend
payment. See "Description of VII Cable Preferred
Stock--Dividends."
Liquidation Preference...... Upon any voluntary or involuntary liquidation,
dissolution or winding up of VII Cable, holders
of VII Cable Preferred Stock will be entitled to
be paid $100 per share, plus accumulated and
unpaid dividends, out of VII Cable assets
available for distribution.
Exchange Privilege.......... Commencing after the fifth anniversary of the
date of issuance, the VII Cable Preferred Stock
will be exchangeable, in whole or in part, at the
option of the holders of VII Cable Preferred
Stock (unless earlier redeemed), into TCI Stock,
at the Exchange Rate, subject to adjustment in
certain events. The initial exchange rate (the
"Exchange Rate") will be obtained by dividing (i)
$80 by (ii) the weighted average of the sales
prices for all trades of shares of TCI Stock as
reported on Nasdaq on each of the twenty full
consecutive trading days ending on the second
business day prior to the Expiration Date,
including any extension thereof. Pursuant to the
Subscription Agreement, TCI is required to
reserve sufficient shares of TCI Stock to effect
such exchange of the VII Cable Preferred Stock.
See "Description of the VII Cable Preferred
Stock--Exchange Privilege."
Viacom will announce the initial Exchange Rate
for the exchange of shares of VII Cable Preferred
Stock into shares of TCI Stock by 5:00 p.m., New
York City time, on the second business day prior
to the expiration of the Exchange Offer. Viacom
will make such announcement by issuing a press
release to the Dow Jones News Service. After that
time, holders of shares of Viacom Common Stock
will also be able to obtain the initial Exchange
Rate from the Information Agent or the Dealer
Manager for the Exchange Offer at their
respective telephone numbers appearing on the
back cover of this Offering Circular -
Prospectus.
In connection with any exchange by a holder of
VII Cable Preferred Stock, TCI may be required
under the Securities Act to deliver to such
holder a current prospectus relating to the TCI
Stock. It is therefore a condition (the
"Prospectus Condition") to any exchange that TCI
be able to deliver a current prospectus if one is
required under the Securities Act or the rules
and regulations of the Securities
12
<PAGE>
and Exchange Commission promulgated thereunder,
and no exchanges of TCI Stock will be effected
during any period in which the Prospectus
Condition cannot be met. TCI has agreed that if
delivery of a current prospectus is so required,
for so long as the holders of shares VII Cable
Preferred Stock have the right to exchange such
shares of VII Cable Preferred Stock for shares of
TCI Stock, TCI will use all reasonable efforts to
ensure that it will be able to deliver a current
prospectus upon a requested exchange by a holder
of VII Cable Preferred Stock. The market value of
the TCI Stock may change during any period that a
holder is unable to effect an exchange due to the
Prospectus Condition not being met.
Optional Redemption......... The VII Cable Preferred Stock is not redeemable
prior to 15 days after the fifth anniversary of
the date of issuance. At any time and from time
to time on or after that date, VII Cable may
redeem any or all of the outstanding shares of
VII Cable Preferred Stock, initially at a
redemption price of $ per share and thereafter
at prices declining ratably annually to $100 per
share on and after the eighth anniversary of the
date of issuance, plus accrued and unpaid
dividends to the date of redemption. See
"Description of the VII Cable Preferred Stock--
Redemption--Optional Redemption."
Mandatory Redemption........ The VII Cable Preferred Stock is subject to
mandatory redemption by VII Cable on the tenth
anniversary of the date of issuance, at a
redemption price of $100 per share, plus accrued
and unpaid dividends to the date of redemption.
See "Description of the VII Cable Preferred
Stock--Redemption--Mandatory Redemption."
VII Cable May Make Dividend
and Redemption Payments
with TCI Stock............. VII Cable may elect to make dividend payments and
redemption payments (optional or mandatory) to
holders of VII Cable Preferred Stock (i) in cash,
(ii) by delivery of TCI Stock or (iii) by any
combination of the foregoing forms of
consideration elected by the VII Cable board of
directors in its sole discretion. If VII Cable
elects to make any such payment, in whole or in
part, through the delivery of shares of TCI Stock
(the portion paid through the delivery of shares
being referred to herein as the "Stock Portion"),
each holder will receive a number of shares of
TCI Stock determined by dividing the dollar
amount of such Stock Portion by the Cash
Equivalent Amount. Any portion of a dividend or
redemption payment that is not paid through the
delivery of shares of TCI Stock will be paid in
cash. The "Cash Equivalent Amount" means an
amount equal to 95% of the Average Market Price
of a share of TCI Stock. The "Average Market
Price" is defined as the average of the closing
sale prices for a share of TCI Stock on Nasdaq
for the 10 consecutive trading days ending on the
third business day prior to (i) in the case of
dividends, the related record date and (ii) in
the case of a redemption, the date of such
redemption. The market price of the shares of TCI
Stock may vary between the date of such
determination of the Cash Equivalent Amount and
the subsequent delivery of shares.
In the case of a dividend or redemption payment
that is made through delivery of shares of TCI
Stock, if the market value of such
13
<PAGE>
shares on the dividend payment date or the
redemption date is more than 5% lower than the
Average Market Price upon which the Cash
Equivalent Amount is determined and the holder
sells such shares of TCI Stock at such lower
price, (x) in the case of such dividend, the
holder's actual dividend yield for the dividend
period in respect of which such dividend was paid
would be lower than the stated dividend yield on
the VII Cable Preferred Stock (for such period)
and (y) in the case of such redemption, the
actual sales proceeds received by such holder
would be lower than the stated redemption price
for the VII Cable Preferred Stock. In addition,
in connection with any such sale the holder is
likely to incur commissions and other transaction
costs.
Voting Rights............... If at any time accrued dividends on the VII Cable
Preferred Stock are in arrears and unpaid in an
amount equal to six or more quarterly dividend
periods (whether or not consecutive), holders of
the VII Cable Preferred Stock will have the right
to elect two additional directors to VII Cable's
Board of Directors, voting as a separate class
with the holders of any preferred stock other
than the VII Cable Preferred Stock, conferring
upon its holders substantially equivalent rights
and privileges to those conferred upon holders of
the VII Cable Preferred Stock (such stock being
referred to herein as "Parity Stock") upon which
like voting rights have been conferred and are
vested, until such dividend arrearage is
eliminated. The holders of VII Cable Preferred
Stock will have no other voting rights, except
that the affirmative vote of at least 66 2/3% of
the VII Cable Preferred Stock (voting separately
as a class) will be required, subject to certain
exceptions before (i) VII Cable may amend, alter
or repeal any provision of VII Cable's Restated
Certificate of Incorporation which would
adversely affect the powers, preferences or
rights of the holders of the VII Cable Preferred
Stock, (ii) VII Cable or the VII Cable Board may
authorize the creation of or issue any class or
series of preferred stock of VII Cable that ranks
senior to the VII Cable Preferred Stock as to
dividend payments, payments on redemption or
payments of amounts distributable upon the
dissolution, liquidation or winding up of the
Company ("Senior Stock") or (iii) VII Cable may
effect a reclassification of the VII Cable
Preferred Stock. See "Description of the VII
Cable Preferred Stock--Voting Rights."
Ranking..................... The VII Cable Preferred Stock will rank senior to
any class or series of common stock of VII Cable.
Immediately following the consummation of the
Transaction, the only class or series of
preferred stock outstanding of VII Cable will be
the VII Cable Preferred Stock, and all of the
authorized shares of the VII Cable Preferred
Stock will be issued in connection with the
Exchange Offer.
Registration and Listing of
TCI Stock................... The TCI Stock is listed on Nasdaq under the
symbol "TCOMA." Shares of TCI Stock delivered
upon the exchange of VII Cable Preferred Stock
will be, and the delivery of such shares as
dividend or redemption payments in respect of VII
Cable Preferred Stock will be conditioned upon
such shares being, eligible for trading on Nasdaq
and exempt from (or registered under) the
Securities Act and applicable state securities
laws. Trading in such shares by affiliates of VII
Cable and TCI will be subject to the restrictions
of Rule 144.
14
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION
VII CABLE
(IN MILLIONS)
The following table sets forth certain summary historical combined financial
data of VII Cable and has been derived from and should be read in conjunction
with the audited combined financial statements of VII Cable for the three years
ended December 31, 1994, including the notes thereto, and the unaudited interim
combined financial statements of VII Cable, including the notes thereto,
appearing elsewhere in this Offering Circular- Prospectus (collectively, the
"VII Cable Carve-Out Financial Statements"). Unaudited interim data for the
nine-month period ended September 30, 1995 and 1994 reflect, in the opinion of
management of VII Cable, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of such data. Results
of operations for the nine months ended September 30, 1995 are not necessarily
indicative of results which may be expected for any other interim or annual
period. The VII Cable Carve-Out Financial Statements reflect the carve-out
historical results of operations and financial position of the cable television
distribution business of Viacom International during the periods presented and
are not necessarily indicative of results of operations or financial position
that would have occurred if VII Cable had been a separate stand-alone entity
during the periods presented or of future results of operations or financial
position of VII Cable.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
DATA:
Revenues................ $328.6 $303.6 $404.5 $414.8 $410.1 $378.0 $330.5
Earnings from
operations............. 59.8 42.7 57.4 83.8 97.5 82.2 55.9
Earnings (loss) before
taxes.................. 54.1 20.2 26.4 128.1 53.1 15.0 (10.0)
Net earnings (loss)
before cumulative
effect of change in
accounting principle... 27.8 6.7 9.1 83.9 25.8 (.2) (15.3)
Net earnings (loss)..... 27.8 6.7 9.1 97.4 25.8 (.2) (15.3)
RATIO OF EARNINGS TO
FIXED CHARGES(A)....... 2.3x N/A 1.7x 4.6x 2.0x 1.2x (b)
</TABLE>
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, ------------------------------------
1995 1994 1993 1992 1991 1990
------------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................. $1,053.9 $1,040.4 $966.2 $964.7 $976.0 $992.7
Total debt................... 57.0 57.0 57.0 106.0 106.1 106.1
Viacom equity investment..... 842.7 823.9 765.5 753.9 767.7 788.1
</TABLE>
- --------
(a) For purposes of computing the ratio of earnings to fixed charges, earnings
represent earnings from operations before fixed charges and taxes, and
fixed charges represent interest on indebtedness, amortization of debt
discount and such portion of rental expense which is deemed to be
representative of the interest factor.
(b) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover fixed charges for the year ended December 31,
1990 would have been $8.7 million.
15
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
VII CABLE
(IN MILLIONS)
The following summary unaudited pro forma combined financial data of VII
Cable as of and for the nine months ended September 30, 1995 and as of and for
the twelve months ended December 31, 1994 give effect to (i) the Loan, (ii) the
Conveyance, (iii) the Recapitalization, (iv) the Exchange Offer, (v) the
Distributions, (vi) the Conversion, (vii) the Stock Issuance (collectively, the
"VII Cable Pro Forma Events") as if such events occurred at the beginning of
the earliest period presented for results of operations data. The summary
unaudited pro forma combined statement of operations data for the nine months
ended September 30, 1995 and the year ended December 31, 1994 were based upon
the statements of operations of VII Cable for the nine months ended September
30, 1995 and year ended December 31, 1994, respectively. The summary unaudited
pro forma combined balance sheet data give effect to the VII Cable Pro Forma
Events as if they had occurred on September 30, 1995. The summary unaudited pro
forma combined financial data of VII Cable were derived from, and should be
read in conjunction with, the unaudited pro forma condensed combined financial
statements of VII Cable and the notes thereto appearing elsewhere in this
Offering Circular - Prospectus. See "Unaudited Pro Forma Condensed Combined
Financial Statements of VII Cable." The unaudited pro forma data are not
necessarily indicative of the combined results of operations or financial
position that would have occurred if the VII Cable Pro Forma Events occurred at
the beginning of the earliest period presented nor are they necessarily
indicative of future results of operations or financial position.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 1995 31, 1994
------------------- -------------------
PRO PRO
HISTORICAL FORMA(A) HISTORICAL FORMA(A)
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Revenues.............................. $ 328.6 $ 326.7 $404.5 $407.6
Earnings from operations.............. 59.8 33.6 57.4 28.6
Earnings (loss) before taxes.......... 54.1 (39.6) 26.4 (70.7)
Net earnings (loss)................... 27.8 (41.0) 9.1 (65.5)
Net earnings (loss) attributable to
common stock......................... N/A (57.9) N/A (88.0)
Ratio of earnings to fixed charges.... 2.3x (b) 1.7x (b)
Ratio of earnings to combined fixed
charges and preferred stock
dividends............................ 2.3x (c) 1.7x (c)
<CAPTION>
AT SEPTEMBER 30,
1995
-------------------
PRO
HISTORICAL FORMA(A)
---------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.......................... $1,053.9 $2,311.1
Total debt............................ 57.0 1,350.0
Series A Preferred Stock.............. -- 500.0
Class B Common Stock.................. -- 350.0
Viacom equity investment.............. 842.7 --
</TABLE>
- --------
(a) Gives pro forma effect to the VII Cable Pro Forma Events as if such events
had occurred at the beginning of the earliest period presented for results
of operations data and on September 30, 1995 for balance sheet data.
(b) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover fixed charges on a pro forma combined basis for
the nine months ended September 30, 1995 and the year ended December 31,
1994 would have been $40.3 million and $67.9 million, respectively.
(c) Earnings were inadequate to cover fixed charges. The additional amount of
earnings required to cover combined fixed charges and preferred stock
dividends on a pro forma combined basis for the nine months ended September
30, 1995 and the year ended December 31, 1994 would have been $66.3 million
and $102.5 million, respectively.
16
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical and equivalent per share data for
Viacom giving effect to the consummation of the Exchange Offer assuming 10
million shares of Viacom Common Stock are exchanged at an assumed Final
Exchange Ratio (equal to the Minimum Exchange Ratio) of 0.4 shares of VII Cable
Class A Common Stock for each share of Viacom Common Stock (based on a per
share price of $40 reflecting recent per share prices of Viacom Common Stock).
The table should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year end December 31, 1994 and the
unaudited financial information as of and for the nine months ended September
30, 1995 of Viacom incorporated by reference in this Offering Circular -
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
--------------------- ---------------------
HISTORICAL EQUIVALENT HISTORICAL EQUIVALENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Per Share of Viacom Common Stock:
Net earnings from continuing
operations(a).................... $ .44 $ .46 $ .25 $ .27
Dividends......................... -- -- -- --
Book value(a)..................... $29.42 $30.45 $29.53 $30.59
</TABLE>
- --------
(a) Assuming that the assumed Final Exchange Ratio was .45 shares of VII Cable
Class A Common Stock for each share of Viacom Common Stock (the Maximum
Exchange Ratio based on per share price of $40 reflecting recent per share
prices of Viacom Common Stock), the equivalent net earnings per share from
continuing operations and equivalent book value per share would be $.45 and
$30.33 for the nine months ended September 30, 1995 and $.27 and $30.47 for
the year ended December 31, 1994.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth (i) the ratio of earnings to fixed charges for
Viacom for the nine-month periods ended September 30, 1995 and September 30,
1994 and each year in the five-year period ended December 31, 1994 and (ii) the
ratio of earnings to combined fixed charges and preferred stock dividends for
Viacom for the nine-month periods ended September 30, 1995 and September 30,
1994 and each applicable year in the five-year period ended December 31, 1994.
For purposes of computing the following ratios, earnings represent earnings
from operations before fixed charges and taxes, and fixed charges represent
interest on indebtedness, amortization of debt discount and such portion of
rental expense which is deemed to be representative of the interest factor. The
ratios set forth below should be read in conjunction with the financial
statements of Viacom incorporated in this Offering Circular - Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------- ----------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.... 1.8x 1.6x 1.7x 2.8x 1.8x 1.0x (a)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends............................ 1.6x 1.5x 1.1x 2.5x (b) (b) (b)
</TABLE>
- --------
(a) Earnings of Viacom were insufficient to cover fixed charges for the year
ended December 31, 1990. The additional amount of earnings required to
cover fixed charges of Viacom for the year ended December 31, 1990 would
have been $66.2 million.
(b) Viacom did not have any preferred stock outstanding from 1990 to October
1993.
17
<PAGE>
RISK FACTORS
In considering whether or not to tender shares of Viacom Common Stock
pursuant to the Exchange Offer, holders of Viacom Common Stock should consider
carefully all of the information set forth or incorporated in this Offering
Circular - Prospectus and, in particular, the following:
TOTAL INDEBTEDNESS AND CASH FLOW OF VII CABLE
After consummation of the Transaction, VII Cable will have debt which will
be substantial in relation to its stockholders' equity. See "Unaudited Pro
Forma Condensed Combined Financial Statements of VII Cable."
The amount of VII Cable's debt could have important consequences to holders
of shares of Viacom Common Stock who elect to tender shares in the Exchange
Offer, including: (i) limiting VII Cable's ability to obtain additional
financing to fund future working capital requirements, capital expenditures,
acquisitions or other general corporate requirements; (ii) requiring a
substantial portion of VII Cable's cash flow from operations to be dedicated
to debt service requirements, thereby reducing the funds available for
operations and future business opportunities; (iii) requiring all of the
indebtedness incurred under the Loan to be repaid prior to the time any
payments for mandatory redemption are required with respect to the VII Cable
Preferred Stock; and (iv) causing VII Cable to become more sensitive to
adverse economic and industry conditions. Based upon current levels of
operations, anticipated growth and intercompany advances, as required, from
TCI, VII Cable expects to be able to generate sufficient cash flow to make all
of the principal and interest payments when due on the Loan, but there can be
no assurances that VII Cable will be able to repay such borrowings. See
"Description of Certain Indebtedness of VII Cable."
CONTROLLING STOCKHOLDER
Immediately after completion of the Transaction, TCI Cable will own all of
the outstanding common stock of VII Cable and TCI will own all of the
outstanding common stock of TCI Cable. Consequently, TCI will be in a position
to control the election of the VII Cable Board (as defined herein) as well as
the direction and future operations of VII Cable.
POTENTIAL CONFLICTS OF INTEREST
General. Following the consummation of the Transaction, it is expected that
TCI or its affiliates will enter into business transactions, agreements and
arrangements with VII Cable and its affiliates. These transactions, agreements
and arrangements are expected to be on terms which in the aggregate are not
materially different from those which could be obtained from unrelated third
parties through negotiations on an arm's length basis. See "Description of VII
Cable Capital Stock--VII Cable Preferred Stock--Certain Covenants--
Transactions with Affiliates."
Intercompany Agreements. Following the consummation of the Transaction, TCI
and its affiliates will enter into a number of intercompany agreements with
VII Cable and its affiliates covering the carriage of programming services, as
well as matters such as lending arrangements, tax sharing and the use of
certain trade names and service marks by VII Cable. It is anticipated that VII
Cable will purchase a portion of its programming from cable programmers in
which TCI or its affiliates (other than VII Cable) have an interest. In
addition, it is anticipated that TCI will provide certain administrative,
financial, treasury, accounting, tax, legal and other services to VII Cable
and make available certain of its employee benefit plans to officers and
employees of VII Cable and its affiliates. While these agreements and
arrangements are expected to be on terms which in the aggregate are not
materially different from those which could be obtained from unrelated third
parties through negotiations on an arm's length basis, conflicts could arise
in the interpretation, extension or renegotiation of the foregoing agreements.
Furthermore, to the extent that TCI and its affiliates supply VII Cable with
program services after the consummation of the Transaction, the Channel
Occupancy Rules (as defined herein) may affect the number of TCI-affiliated
program services that VII Cable's systems distribute to their subscribers
until such time as VII Cable increases channel capacity on a system by system
basis beyond 75 channels. See "Business of VII Cable--Federal Regulation--
Carriage of Affiliated Programming" and "Relationship between VII Cable and
TCI after the Exchange Offer."
18
<PAGE>
Business Opportunities. Following the consummation of the Transaction, TCI
and VII Cable, through their respective affiliates, will each own or have
interests in cable television systems. The presence of both companies in the
cable distribution industry could give rise to potential conflicts of interest
between them, including conflicts which may arise with respect to the
acquisition of cable franchises covering areas contiguous with service areas
in which TCI and VII Cable, through their respective affiliates, have
franchises, as well as in other instances in which TCI and VII Cable may both
be pursuing the same business opportunity.
DEPENDENCE ON ADDITIONAL CAPITAL
The ownership, development and operation of cable television systems
requires substantial capital investment. Significant capital expenditures are
also required to maintain, upgrade, rebuild and expand such systems. During
the five year period ended December 31, 1994, VII Cable's capital expenditures
were $325 million. VII Cable's capital expenditures in 1995 are estimated to
be approximately $120 million. Of such amount, approximately 55% have been
incurred in connection with the rebuilding of VII Cable's cable distribution
network. Additional capital expenditures will be required in order for VII
Cable to take advantage of technological advances such as fiber optics, two-
way communication and digital compression so as to enable it to offer such
services as high-capacity data transmission, telephony, interactive video,
NVOD (as defined herein) and video on demand. VII Cable will therefore
continue to need capital to fund such capital expenditures and working capital
requirements for the foreseeable future. No assurance can be given that VII
Cable will be able to obtain additional financing on terms acceptable to it
and in an amount sufficient to meet such anticipated capital expenditure
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Liquidity and Capital Resources" and the historical
and pro forma financial statements, including the notes thereto, of VII Cable.
RAPID TECHNOLOGICAL CHANGES
The cable industry is subject to rapid and significant changes in
technology. While Viacom's Cable Business is in the process of rebuilding its
broadband network to be sufficiently flexible to permit the delivery to its
customers of a variety of existing television and telephony services, and
advanced, interactive and integrated entertainment, telecommunications and
information services as they become available in the future, the effect of any
future technological changes on the viability or competitiveness of VII
Cable's business cannot be predicted.
MARKET UNCERTAINTIES WITH RESPECT TO VII CABLE PREFERRED STOCK
Prior to the Exchange Offer, there has been no public market for the VII
Cable Preferred Stock. Although the VII Cable Preferred Stock was approved for
quotation on Nasdaq on , there can be no assurance that an active trading
market for the VII Cable Preferred Stock will be established or maintained
after the consummation of the Exchange Offer. The prices at which the VII
Cable Preferred Stock trades will be determined by the marketplace and could
be subject to significant fluctuations in response to many factors, including,
among other things, variations in quarterly operating results, changes in
economic conditions in the industries in which VII Cable participates and
changes in government regulations. In addition, the stock market often
experiences significant price fluctuations that are unrelated to the operating
performance of the specific companies whose stock is traded. Market
fluctuations as well as economic conditions may adversely affect the market
price of VII Cable Preferred Stock.
REGULATION AND COMPETITION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation on the
federal, state and local levels. Many aspects of such regulations are
currently the subject of judicial proceedings and administrative or
legislative proposals. The 1992 Cable Act (as defined herein) amended the
Communications Act (as defined herein) and has significantly expanded the
scope of cable television regulation in effect immediately prior to the
enactment of the 1992 Cable Act. The FCC was required to complete a number of
rulemaking proceedings under the 1992 Cable Act, the majority of which,
including certain of those related to rate regulation, have been completed. A
19
<PAGE>
number of provisions in the 1992 Cable Act relating to, among other things,
rate regulation, have had an adverse effect, potentially material, on the
cable television industry and on the Cable Business. In particular, pursuant
to the 1992 Cable Act, the FCC adopted regulations that permit franchising
authorities to set rates for basic service and the provision of cable-related
equipment. To the extent that existing rates (which VII Cable has adjusted to
comply with the 1992 Cable Act and the regulations thereunder) are found, upon
review, to exceed those permitted by the FCC regulations, franchising
authorities may require cable television systems to reduce those rates and
provide refunds for up to a one-year period. The FCC will also, upon a
complaint by a customer or franchising authority, determine whether rates for
regulated non-basic service tiers are unreasonable and, if so found, reduce
such rates and provide refunds from the date of such complaint.
The FCC's Cable Services Bureau has issued rulings with respect to the rates
which Viacom charged to subscribers for regulated non-basic Satellite Value
Package (as defined herein) services from the date of complaint to July 14,
1994. Although Viacom has adjusted its rates to conform with the FCC's rate
standards, these rulings required reductions in rates and refunds in most
cases. Virtually every case is now undergoing an internal appeal process at
the FCC. The FCC has not issued any rulings on the rates which have been in
effect since July 15, 1994. It is possible that these rate complaints could be
settled in an agreement with the FCC which would obviate the pursuit of the
appeals process. In addition, local franchising authorities have issued rate
rulings in respect of Viacom's Limited Service tier in a majority of
jurisdictions. These rulings have either been implemented or appealed to the
FCC for the correction of technical errors. It is possible that additional
orders by the FCC or by local franchising authorities will result in
additional rate refunds for prior periods. However, future rates will be
subject to increase under the FCC's recently revised rate rules, which
generally permit operators to increase tier rates to recover reasonably
anticipated changes in cost and inflation to account for past years' cost
changes, recovering such costs with interest for time lost as a result of
regulatory delays. In addition, pending legislation in Congress could, if
enacted, substantially deregulate many of these rates. Under the House Bill
(as defined herein), all pending complaints at the FCC in respect of any given
franchise would be dismissed unless there were complaints outstanding at the
enactment date which represented 3% or more of the subscribers in such
franchise area. (Most of VII Cable's FCC cases were initiated by only one or a
few complaints.) In addition, within 15 months after enactment of the House
Bill, services other than the Limited Service (as defined herein) tier would
be deregulated. Under the Senate Bill (as defined herein), non-premium
services other than the Limited Service tier would be subject to regulation
only if the rates charged for such services in a given system substantially
exceed the national average. Under the Conference Report (as defined herein),
only complaints filed by franchise authorities (as distinguished from
complaints filed by individuals) would trigger FCC review of rates for
regulated non-basic tiers of service. Moreover, the Conference Report would
deregulate all regulated tiers of programming (other than the basic tier)
after March 31, 1999. No assurance can be given as to whether and in what form
such proposed legislation will be enacted. See "Business of VII Cable--
Regulation--Federal Regulation."
Cable television companies operate under franchises granted by state, county
or local authorities which are subject to renewal and renegotiation from time
to time. The 1992 Cable Act prohibits franchising authorities from granting
exclusive cable television franchises and from unreasonably refusing to award
additional competitive franchises; it also permits municipal authorities where
authorized locally to operate cable television systems in their communities
without a franchise. Therefore, there is a potential for competition with VII
Cable's cable television systems from these sources, as well as from other
distribution systems capable of delivering television programming to homes.
Recent court and administrative decisions have removed certain of the
restrictions that heretofore have limited entry into the cable television
business by potential competitors, such as MMDS (as defined herein) delivery
systems and telcos, and the Conference Report, if enacted, could result in the
elimination of other such restrictions. Viacom cannot predict the extent to
which competition will materialize from other cable television operators,
other distribution systems for delivering television programming to the home
or other potential competitors, or, if such competition materializes, the
extent of its effect on VII Cable. See "Business of VII Cable--Competition."
20
<PAGE>
TAX TREATMENT OF THE TRANSACTION
On , 1996, Viacom received a Ruling Letter from the IRS stating that,
for U.S. federal income tax purposes, the Transaction will qualify under
Sections 355 and 368 of the Internal Revenue Code of 1986, as amended (the
"Code"), as a distribution that is tax-free to Viacom's stockholders (except
with respect to cash received in lieu of fractional shares) and, in general,
tax-free to Viacom. Nevertheless, if Viacom, having obtained the Ruling Letter
from the IRS, consummates the Transaction and the Transaction is subsequently
held to be taxable, both Viacom and its stockholders could be subject to tax
on the Transaction (subject to the obligation of TCI and TCI Cable to
indemnify Viacom under certain circumstances pursuant to the Tax Indemnity
Letter (as defined herein)), which tax could be material. See "Certain Federal
Income Tax Consequences."
The Tax Indemnity Letter provides for indemnification on an after-tax basis
by TCI and TCI Cable, jointly and severally, of each member of the Viacom
consolidated group of companies in the event that any or all of the Ruling
Letter, following its issuance by the IRS, is withdrawn or otherwise not
followed by the IRS and the Transaction or any of the component steps of the
Transaction gives rise to federal, state or local income or franchise tax
liability as a result of any misstatements or omissions of material fact in
respect of certain representations made by TCI and TCI Cable with regard to
VII Cable and its subsidiaries. See "Arrangements Among Viacom, Viacom
International, TCI and TCI Cable--Terms of Certain Ancillary Agreements."
21
<PAGE>
THE TRANSACTION
GENERAL
As of the date of this Offering Circular-Prospectus, Viacom International is
a wholly owned subsidiary of Viacom through which Viacom conducts its Networks
and Broadcasting, Entertainment, Theme Parks, Publishing and Cable Business
operations. Viacom has determined to implement the steps summarized below in
order to offer to holders of shares of Viacom Common Stock the opportunity to
acquire direct ownership of the Cable Business. All such steps are being
undertaken pursuant to the terms and conditions of the Parents Agreement, the
Implementation Agreement, the Subscription Agreement and the Ancillary
Agreements. For a description of each of those agreements, see "Arrangements
Among Viacom, Viacom International, TCI and TCI Cable."
Viacom is offering hereby to the holders of shares of Viacom Common Stock
the opportunity to exchange all or a portion of their shares of Viacom Common
Stock for shares of VII Cable Class A Common Stock. The total number of shares
of VII Cable Class A Common Stock exchangeable in the Exchange Offer
( shares) has been determined as the quotient obtained by dividing (x) the
excess of the Estimated Asset Value over the Loan Proceeds by (y) $100 (the
par value of VII Cable Class A Common Stock). Once the Trigger Amount is
reached, and subject to certain other conditions, Viacom will become obligated
to consummate the Exchange Offer.
NAI, a closely held corporation that owns approximately 61% of the
outstanding Viacom Class A Common Stock and approximately 25% of the
outstanding Viacom Common Stock, will not participate in the Exchange Offer.
Prior to expiration of the Exchange Offer, Viacom International will borrow
the Loan Proceeds. For a description of the terms of the Loan, see
"Description of Certain Indebtedness of VII Cable."
On the date the Exchange Offer is consummated, Viacom International will
convey to Viacom Services ownership of the assets relating to the Non-Cable
Businesses, the Loan Proceeds and certain nonmaterial assets (including
certain equity investments and marketable securities) which have historically
been reported as part of Viacom's Cable Television segment and which from and
after the First Distribution are deemed included in the definition of Non-
Cable Businesses and Viacom Services will assume substantially all of Viacom
International's liabilities (including its existing public debt, bank debt and
the existing intercompany debt owed by Viacom International to Viacom), other
than Viacom International's repayment and other obligations under the Loan and
liabilities relating to the Cable Business other than certain nonmaterial
specified liabilities. Next, Viacom International will distribute 100% of the
stock of Viacom Services to Viacom, and Viacom International will be
recapitalized, with all of the existing common stock being reclassified into
new VII Cable Class A Common Stock. VII Cable will be renamed "TCI Pacific
Communications, Inc." Upon consummation of the Exchange Offer, 100% of the
outstanding shares of VII Cable Class A Common Stock will be exchanged at the
Final Exchange Ratio for the shares of Viacom Common Stock properly tendered
and not withdrawn or deemed withdrawn in the Exchange Offer at exchange ratios
at or below the Final Exchange Ratio. VII Cable will thereupon cease to be a
subsidiary of Viacom.
Immediately following the consummation of the Exchange Offer, VII Cable has
agreed to issue and TCI Cable has agreed to acquire 100 shares of VII Cable
Class B Common Stock in consideration of the payment of the Subscription
Payment. Under the anticipated terms and conditions of the Loan, VII Cable
will be obligated to use such capital contribution to reduce VII Cable's
obligations under the Loan. Furthermore, as a result of such issuance, each
share of VII Cable Class A Common Stock distributed to Viacom stockholders
pursuant to the Exchange Offer will automatically convert into one share of
VII Cable Preferred Stock. See "Description of VII Cable Capital Stock--VII
Cable Preferred Stock."
If insufficient tenders are made by Viacom stockholders in the Exchange
Offer to permit the Trigger Amount to be reached, Viacom has the right to
extend the Exchange Offer not less than 10 nor more than 15 business days.
During such extension, TCI and Viacom have agreed to negotiate in good faith
to determine
22
<PAGE>
mutually acceptable changes to the terms and conditions for the VII Cable
Preferred Stock (including without limitation the Exchange Rate and the
dividend yield on the VII Cable Preferred Stock) and the Exchange Offer
(including without limitation the duration of any extension and the maximum
Exchange Ratio) that each believes in good faith will cause the Minimum
Condition to be fulfilled and that would cause the VII Cable Preferred Stock
to trade at a price equal to its $100 par value per share immediately
following the consummation of the Exchange Offer and the Stock Issuance. If
Viacom materially changes the terms and conditions of the VII Cable Preferred
Stock or the Exchange Offer, Viacom will extend the Exchange Offer to the
extent required by the Exchange Act. See "The Exchange Offer--Extension of
Tender Period; Termination; Amendment." In the event the Trigger Amount is not
thereafter reached, TCI and Viacom will each have the right to terminate the
Transaction.
Upon the closing of the Transaction, assuming the partial repayment of the
Loan with the proceeds of the Subscription Payment, VII Cable will have an
aggregate capitalization consisting of (i) approximately $1.35 billion of
borrowings under the Loan, (ii) VII Cable Preferred Stock with an estimated
aggregate par value of approximately $500 million and (iii) $350 million of
paid-in capital for the VII Cable Class B Common Stock (representing the
Subscription Payment), and will have no shares of VII Cable Class A Common
Stock outstanding (such shares having been converted into the VII Cable
Preferred Stock). See "Unaudited Pro Forma Condensed Combined Financial
Statements of VII Cable."
PURPOSE AND EFFECTS OF THE TRANSACTION
The Transaction will reduce Viacom's overall level of indebtedness, which
Viacom expects will enhance Viacom's prospects for an increase in the rating
of its long-term senior unsecured debt to investment grade, thereby lowering
Viacom's financing costs and enhancing the terms on which Viacom can access
the capital markets. The Transaction will enable Viacom to utilize its
investment capital to invest in the growth of its core, content-driven
entertainment and publishing businesses rather than in the further development
of its cable television business. The Transaction will eliminate perceived
conflicts and permit Viacom to further its position on regulatory matters
consistent with Viacom's focus on its programming businesses. Upon the
consummation of the Transaction, certain rules under current federal
telecommunications law which impose restrictions on cable programmers
affiliated with cable system operators would no longer apply to Viacom. Viacom
believes that all of the foregoing will result in improved deployment of its
assets that will enhance value for its stockholders. Viacom believes that this
enhanced value may have been a factor in the increased market price of shares
of Viacom Class B Common Stock in the period preceding the September 1995
maturity date of Viacom's Variable Common Rights (which were issued in
connection with the acquisition of Blockbuster Entertainment Corporation and
which represented the right to receive shares of Viacom Class B Common Stock
depending on market prices of Viacom Class B Common Stock). The magnitude of
the obligation of Viacom to deliver shares of Viacom Class B Common Stock upon
the maturity of the Variable Common Rights was inversely related to such
market prices during such period.
The Exchange Offer will also provide Viacom stockholders with an opportunity
to adjust, on a tax-free basis, their investment between the Cable Business
and Viacom's Non-Cable Businesses. See "Certain Federal Income Tax
Consequences." To the extent that a holder exchanges its Viacom Common Stock
pursuant to the Exchange Offer, such holder will no longer participate in any
increase in the value of such Viacom Common Stock.
Holders of shares of Viacom Common Stock will be affected by the Transaction
regardless of whether such holders tender their shares of Viacom Common Stock
for exchange pursuant to the Exchange Offer. Holders of shares of Viacom
Common Stock who tender all of their shares for exchange pursuant to the
Exchange Offer will, if all such shares are accepted for exchange, no longer
have an ownership interest in Viacom. Holders of shares of Viacom Common Stock
who tender all of their shares for exchange and who become subject to
proration because more shares of Viacom Common Stock are tendered for exchange
than are necessary to reach the Trigger Amount will have a diminished
ownership interest in Viacom. Holders of shares of Viacom Common
23
<PAGE>
Stock who do not tender any of their shares for exchange pursuant to the
Exchange Offer will not receive shares of VII Cable Class A Common Stock as a
result of the Exchange Offer and will continue to have an ownership interest
in Viacom, which ownership interest will have increased on a percentage basis
as a result of the Exchange Offer, but will no longer hold an interest in the
Cable Business.
NONE OF VIACOM, VIACOM INTERNATIONAL, THE BOARD OF DIRECTORS OF VIACOM NOR
THE BOARD OF DIRECTORS OF VIACOM INTERNATIONAL MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER OF VIACOM WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF
VIACOM COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH STOCKHOLDER MUST MAKE
ITS OWN DECISION WHETHER TO TENDER SHARES OF VIACOM COMMON STOCK PURSUANT TO
THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER AND AT WHAT EXCHANGE
RATIO TO TENDER SUCH SHARES, AFTER READING THIS OFFERING CIRCULAR - PROSPECTUS
AND CONSULTING WITH ITS ADVISORS BASED ON ITS OWN FINANCIAL POSITION AND
REQUIREMENTS.
NO APPRAISAL RIGHTS
No appraisal rights are available to Viacom stockholders in connection with
the Transaction.
REGULATORY APPROVALS
No filings under the HSR Act are required in connection with the Exchange
Offer generally. Viacom and TCI have to date made filings under the HSR Act
with respect to the Stock Issuance. The waiting period with respect to each of
these filings terminated in September 1995. To the extent that certain
stockholders of Viacom decide to participate in the Exchange Offer and thereby
acquire a number of shares of VII Cable Class A Common Stock that exceeds any
threshold stated in the regulations under the HSR Act, and if an exemption
under those regulations does not apply, such stockholders and Viacom would be
required to make filings under the HSR Act, and the waiting period under the
HSR Act would have to expire or be terminated before any exchanges of shares
with those particular stockholders could be effected.
Approvals must be obtained from certain local franchise authorities having
rights of approval over changes of control with respect to the change of
control of the VII Cable subsidiaries operating cable systems in such
authorities' jurisdictions. As of December 31, 1995 all but four local
franchise authorities having such rights approved the change of control. The
number of subscribers to VII Cable in these jurisdictions that had approved
the change of control together with subscribers in other jurisdictions which
have no right of approval is 1,073,928 or 91.7% of VII Cable's total
subscribers as of September 30, 1995. In addition, the FCC must approve the
change of control of the (i) entities licensed to operate the wireless
communications systems used in VII Cable's business and (ii) entities licensed
to operate the wireless communications systems used in the Non-Cable
Businesses. The approvals are obtained on an individual basis for each
separately licensed transmission facility. As of December 31, 1995, 79
approvals were obtained of the total 111 required. The remaining approvals are
expected to be granted. See "Arrangements Among Viacom, Viacom International,
TCI and TCI Cable--Terms of the Implementation Agreement--Consents and
Approvals."
Viacom and Viacom International do not believe that any other material
federal or state regulatory approvals will be necessary to consummate the
Transaction.
ANTICIPATED ACCOUNTING TREATMENT
Following completion of the Conveyance, the First Distribution, the
Recapitalization and the Second Distribution, the assets and liabilities and
results of operations of VII Cable will cease to be consolidated with the
assets and liabilities and results of operations of Viacom. It is expected
that the transactions contemplated by the Subscription Agreement will be
accounted for under the purchase method of accounting in accordance with
generally accepted accounting principles. Accordingly, the cost to acquire VII
Cable following consummation of the Exchange Offer will be allocated, by TCI,
to the assets and liabilities acquired based on their fair values, with any
excess being treated as intangible assets.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in the Exchange
Offer, Viacom is offering hereby to exchange all of the outstanding shares of
VII Cable Class A Common Stock for shares of Viacom Common Stock that are
validly tendered by the Expiration Time on the Expiration Date and not deemed
withdrawn, as set forth below under "--Withdrawal Rights," at an Exchange
Ratio (determined in the manner set forth below) not greater than (the
Maximum Exchange Ratio) nor less than (the Minimum Exchange Ratio) of a
share of VII Cable Class A Common Stock for each share of Viacom Common Stock
tendered. The term "Expiration Time" shall mean 12:00 Midnight, New York City
time, and the term "Expiration Date" shall mean , 1996, unless the period
of time during which the Exchange Offer is open shall have been extended in
accordance with applicable law and the Parents Agreement, in which event the
terms "Expiration Time" and "Expiration Date" shall mean the latest time and
date at which the Exchange Offer, as so extended, shall expire. See "--
Extension of Tender Period; Termination; Amendment." The maximum number of
shares of Viacom Common Stock which will be accepted for exchange will be that
number of shares which, when multiplied by the Final Exchange Ratio, equals
all of the outstanding shares of VII Cable Class A Common Stock. If more than
such maximum number of shares of Viacom Common Stock are tendered, the
Exchange Offer will be oversubscribed. If the Exchange Offer is
oversubscribed, shares of Viacom Common Stock tendered at or below the Final
Exchange Ratio will be subject to proration. The proration period will also
expire at the Expiration Time on the Expiration Date.
The Exchange Offer will be conducted as a modified "dutch auction" in which
holders of Viacom Common Stock will be able to specify a fraction of a share
of VII Cable Class A Common Stock (or Exchange Ratio) that such holders are
willing to receive in exchange for a share of Viacom Common Stock. The
Exchange Ratio specified by each tendering Viacom stockholder must be within
the Exchange Ratio Range. The Minimum Exchange Ratio and Maximum Exchange
Ratio were established by Viacom, pursuant to its obligations under the
Parents Agreement. The Maximum Exchange Ratio was set at a level equal to
112.5% of the weighted averages for all trades of shares of Viacom Class B
Common Stock, as reported by the ADP Financial Information Services reporting
service, during the twenty trading day period ended the date prior to the
commencement of the Exchange Offer (the "Viacom Market Value"), divided by
$100.00, and the Minimum Exchange Ratio was set at a level equal to the Viacom
Market Value. Viacom will, upon the terms and subject to the conditions of the
Exchange Offer, determine the Final Exchange Ratio (i.e., the amount of VII
Cable Class A Common Stock that Viacom will exchange for each share of Viacom
Common Stock accepted for exchange), taking into account the number of shares
of Viacom Common Stock tendered and the fraction of a share of VII Cable Class
A Common Stock specified by tendering stockholders. Viacom will select as the
Final Exchange Ratio the lowest Exchange Ratio that will allow it to exchange
all of the outstanding shares of VII Cable Class A Common Stock. The Final
Exchange Ratio will be calculated by Viacom as follows. At the expiration of
the Exchange Offer, Viacom will calculate the number of shares of Viacom
Common Stock validly tendered at Exchange Ratios within the Exchange Ratio
Range, beginning with shares tendered at the Minimum Exchange Ratio and
ending, if necessary, at the Maximum Exchange Ratio. When the aggregate dollar
value of the tenders made (calculated as described in the immediately
following sentence) in ascending order of Exchange Ratios is equal to or
greater than $[ ] million (i.e., the Trigger Amount), Viacom will become
obligated to accept, on a pro rata basis, the shares of all stockholders who
tendered at or below the highest Exchange Ratio required to reach the Trigger
Amount. Whether such aggregate dollar value amount is reached is determined by
multiplying (i) the total number of shares of Viacom Common Stock tendered at
or below such Exchange Ratio by (ii) the product of such Exchange Ratio times
100. The highest Exchange Ratio required to reach the Trigger Amount will be
the Final Exchange Ratio, at which Exchange Ratio all [ ] million shares of
VII Cable Class A Stock will be issued to holders of shares of Viacom Common
Stock whose shares are accepted for exchange pursuant to the Exchange Offer.
At the Minimum Exchange Ratio, Viacom would accept for exchange [ ]
shares of Viacom Common Stock (or % of the total number of shares of Viacom
Common Stock outstanding). At the Maximum Exchange Ratio, Viacom would accept
for exchange [ ] shares of Viacom Common Stock (or % of the total
number of shares of Viacom Common Stock outstanding). The total number of
shares of
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Viacom Common Stock to be accepted for exchange in the Exchange Offer will be
equal to (i) the total number of shares of VII Cable Class A Common Stock
exchangeable in the Exchange Offer ( shares) divided by (ii) the Final
Exchange Ratio.
Based on the Estimated Asset Value of $[ ] and Loan Proceeds of $1.7
billion, in calculating the number of shares of Viacom Common Stock to be
accepted for exchange in the Exchange Offer, Viacom: (i) subtracted the Loan
Proceeds ($1.7 billion) from the Estimated Asset Value ($[ ]), thereby
fixing the aggregate par value of VII Cable Class A Common Stock to be
distributed to Viacom stockholders (i.e. the Trigger Amount) at $[ ]
million; (ii) divided the Trigger Amount by the par value per share of VII
Cable Class A Common Stock ($100) in order to determine the number of shares
of VII Cable Class A Stock ([ ] million) to be received by stockholders of
Viacom Common Stock upon consummation of the Transaction; and (iii) will
divide such number of shares of VII Cable Class A Common Stock by the Final
Exchange Ratio.
When the aggregate dollar value of tenders made (calculated as described in
the immediately following sentence) in ascending order of Exchange Ratios is
equal to or greater than the Trigger Amount, Viacom will become obligated,
subject to the terms and conditions of the Exchange Offer, to accept, on a pro
rata basis, the shares of all stockholders which were validly tendered and not
properly withdrawn prior to the expiration of the Exchange Offer at or below
the highest Exchange Ratio required to reach the Trigger Amount. Whether such
aggregate dollar value amount is reached is determined by multiplying (i) the
total number of shares of Viacom Common Stock tendered at or below such
Exchange Ratio by (ii) the product of such Exchange Ratio times 100.
Consummation of the Exchange Offer is subject to a number of other conditions.
See "--Certain Conditions of the Exchange Offer."
Upon the terms and subject to the conditions of the Exchange Offer, if more
shares of Viacom Common Stock are validly tendered for exchange at or below
the Final Exchange Ratio than are necessary to reach the Trigger Amount and
are not properly withdrawn prior to the Expiration Date, Viacom will exchange
shares of VII Cable Class A Common Stock for shares of Viacom Common Stock on
a pro rata basis (with appropriate adjustments to avoid purchases of
fractional shares of Viacom Common Stock). In the event that the number of
shares tendered at any combination of Exchange Ratios within the Exchange
Ratio Range is insufficient to reach the Trigger Amount, Viacom will not
acquire any of the shares tendered in the Exchange Offer. All shares which are
tendered but not acquired pursuant to the Exchange Offer, including shares
tendered at Exchange Ratios greater than the Final Exchange Ratio and shares
not acquired because of proration, will be returned to tendering stockholders
promptly following the Expiration Date.
The Exchange Offer, proration period and withdrawal rights will expire at
12:00 Midnight, New York City time, on , 1996, unless the Exchange Offer
is extended.
If proration of tendered shares of Viacom Common Stock is required, Viacom
does not expect that it would be able to announce the final proration factor
or to commence delivery of any shares of VII Cable Class A Common Stock
exchanged pursuant to the Exchange Offer until approximately seven AMEX
trading days after the Expiration Date. This delay results from the difficulty
in determining the number of shares of Viacom Common Stock validly tendered
for exchange (including shares of Viacom Common Stock tendered for exchange
pursuant to the guaranteed delivery procedure described in "--Guaranteed
Delivery Procedure" below) and not properly withdrawn prior to the Expiration
Date. Preliminary results of proration will be announced by press release as
promptly as practicable after the Expiration Date. Holders of shares of Viacom
Common Stock may obtain such preliminary information from the Information
Agent and may also be able to obtain such information from their brokers.
No fractional shares of VII Cable Class A Common Stock or VII Cable
Preferred Stock, as the case may be, will be distributed. The Exchange Agent,
acting as agent for Viacom stockholders otherwise entitled to receive
fractional shares, will aggregate all fractional shares and sell them for the
accounts of such stockholders. Such proceeds as may be realized by the
Exchange Agent upon the sale of such fractional shares will be
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distributed, net of commissions, to such stockholders on a pro rata basis. Any
such cash payments will be made through the Exchange Agent if the related
shares of Viacom Common Stock are tendered to the Exchange Agent or, if such
shares of Viacom Common Stock are tendered through a Book-Entry Transfer
Facility (as defined herein), through such Book-Entry Transfer Facility. NONE
OF THE EXCHANGE AGENT, VIACOM, VIACOM INTERNATIONAL OR VII CABLE WILL
GUARANTEE ANY MINIMUM PROCEEDS FROM THE SALE OF SHARES OF VII CABLE CLASS A
COMMON STOCK OR, FOLLOWING THE CONVERSION, VII CABLE PREFERRED STOCK, AND NO
INTEREST WILL BE PAID ON ANY SUCH PROCEEDS.
Once the Trigger Amount is reached, and subject to certain conditions set
forth in "--Certain Conditions of the Exchange Offer" below, Viacom will
become obligated to consummate the Exchange Offer. If any such conditions are
not satisfied, Viacom may, subject to certain provisions of the Parents
Agreement, (w) terminate the Exchange Offer and as promptly as practicable
return all tendered shares of Viacom Common Stock to tendering stockholders,
(x) extend the Exchange Offer and, subject to the withdrawal rights described
in "--Withdrawal Rights" below, retain all such shares of Viacom Common Stock
until the expiration of the Exchange Offer as so extended, (y) waive any such
condition and, subject to any requirement to extend the period of time during
which the Exchange Offer is open, exchange all shares of Viacom Common Stock
validly tendered for exchange by the Expiration Date and not properly
withdrawn or (z) delay acceptance for exchange of any shares of Viacom Common
Stock until satisfaction or waiver of all such conditions to the Exchange
Offer. Viacom's right to delay acceptance for exchange of, or exchange for,
shares of Viacom Common Stock tendered for exchange pursuant to the Exchange
Offer is subject to the provisions of applicable law, including, to the extent
applicable, Rule 13e-4(f)(5) promulgated under the Exchange Act, which
requires that Viacom pay the consideration offered or return the shares of
Viacom Common Stock deposited by or on behalf of Viacom stockholders promptly
after the termination or withdrawal of the Exchange Offer. For a description
of Viacom's right to extend the period of time during which the Exchange Offer
is open and to amend, delay or terminate the Exchange Offer and of the
provisions of the Parents Agreement applicable thereto, see "--Extension of
Tender Period; Termination; Amendment" below.
This Offering Circular - Prospectus and the Letter of Transmittal are being
sent to persons who were holders of record of Viacom Common Stock at the close
of business on , 1996. As of such date, there were
shares of Viacom Class A Common Stock and shares of Viacom Class B Common
Stock outstanding. This Offering Circular - Prospectus and related Letter of
Transmittal also will be furnished to brokers, banks and similar persons whose
names or the names of whose nominees appear on the Viacom stockholder list or,
if applicable, who are listed as participants in a clearing agency's security
position listing for subsequent transmittal to beneficial owners of shares of
Viacom Common Stock.
EXCHANGE OF SHARES OF VIACOM COMMON STOCK
Upon the terms (including, without limitation, the proration provisions of
the Exchange Offer) and subject to the satisfaction or waiver of the
conditions of the Exchange Offer, Viacom will accept for exchange, and shares
of VII Cable Class A Common Stock will be exchanged for, shares of Viacom
Common Stock that have been validly tendered and not properly withdrawn by the
Expiration Time on the Expiration Date. In addition, Viacom reserves the
right, in its sole discretion (subject to Rule 13e-4(f)(5) under the Exchange
Act), to delay the acceptance for exchange or delay exchange of any shares of
Viacom Common Stock in order to comply in whole or in part with any applicable
law. For a description of Viacom's right to terminate the Exchange Offer and
not accept for exchange or exchange any shares of Viacom Common Stock or to
delay acceptance for exchange or exchange any shares of Viacom Common Stock,
see "--Extension of Tender Period; Termination; Amendment" below.
Assuming consummation of the Stock Issuance, each share of VII Cable Class A
Common Stock issued in connection with the Exchange Offer will automatically
convert into a share of VII Cable Preferred Stock, and shares of VII Cable
Preferred Stock and cash in lieu of fractional shares will be delivered as
soon as possible after acceptance of Viacom Common Stock for exchange.
Accordingly, holders of shares of Viacom Common
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Stock electing to tender such shares in the Exchange Offer should not expect
to take physical delivery of shares of VII Cable Class A Common Stock which
they receive in exchange after the consummation of the Stock Issuance.
For purposes of the Exchange Offer, Viacom shall be deemed, subject to the
proration provisions of the Exchange Offer, to have accepted for exchange and
exchanged shares of Viacom Common Stock validly tendered for exchange when, as
and if Viacom gives oral or written notice to the Exchange Agent of its
acceptance of the tenders of such shares of Viacom Common Stock for exchange.
Exchange of shares of Viacom Common Stock accepted for exchange pursuant to
the Exchange Offer will be made on the first business day following
announcement by Viacom of the final proration factor (which first business day
in no event shall be more than ten business days after the Expiration Date and
which first business day shall be hereinafter referred to as the "Exchange
Time") by deposit of tendered shares of Viacom Common Stock with the Exchange
Agent, which will act as agent for the tendering stockholders for the purpose
of receiving shares of VII Cable Class A Common Stock and VII Cable Preferred
Stock and transmitting such shares to tendering stockholders. (The date on
which the Exchange Time occurs is hereinafter referred to as the "Exchange
Date.") In all cases, tendered shares of Viacom Common Stock accepted for
exchange pursuant to the Exchange Offer will be exchanged only after timely
receipt by the Exchange Agent of (i) certificates for such shares of Viacom
Common Stock (or of a confirmation of a book-entry transfer of such shares of
Viacom Common Stock into the Exchange Agent's account at one of the Book-Entry
Transfer Facilities), and (ii) a properly completed and duly executed Letter
of Transmittal (or manually signed facsimile thereof) or an Agent's Message
(as defined herein) in connection with a book-entry transfer of shares,
together with any other documents required by the Letter of Transmittal. For a
description of the procedures for tendering shares of Viacom Common Stock
pursuant to the Exchange Offer, see "--Procedures for Tendering Shares of
Viacom Common Stock" below. Under no circumstances will interest be paid by
Viacom pursuant to the Exchange Offer, regardless of any delay in making such
exchange.
The exchange of shares of VII Cable Class A Common Stock for shares of
Viacom Common Stock may be delayed in the event of difficulty in determining
the number of shares of Viacom Common Stock validly tendered or if proration
is required. See "--Terms of the Exchange Offer" above. In addition, if
certain events occur, Viacom may not be obligated to exchange shares of VII
Cable Class A Common Stock for shares of Viacom Common Stock pursuant to the
Exchange Offer. See "--Certain Conditions of the Exchange Offer" below. As
provided in Rules 13e-4(f)(4) and (8)(ii) under the Exchange Act, Viacom will
exchange the same number of shares of VII Cable Class A Common Stock for each
share of Viacom Common Stock accepted for exchange pursuant to the Exchange
Offer.
If any tendered shares of Viacom Common Stock are not exchanged pursuant to
the Exchange Offer for any reason, or if certificates are submitted for more
shares of Viacom Common Stock than are (i) tendered for exchange or (ii)
accepted for exchange due to the proration provisions, certificates for such
unexchanged or untendered shares of Viacom Common Stock will be returned (or,
in the case of shares of Viacom Common Stock tendered by book-entry transfer,
such shares of Viacom Common Stock will be credited to an account maintained
at one of the Book-Entry Transfer Facilities (as defined herein)), without
expense to the tendering stockholder, as promptly as practicable following the
expiration or termination of the Exchange Offer.
Viacom will pay all stock transfer taxes, if any, payable on the transfer to
it of shares of Viacom Common Stock and the transfer to tendering stockholders
of shares of VII Cable Class A Common Stock or VII Cable Preferred Stock, as
the case may be, pursuant to the Exchange Offer. If, however, the exchange of
shares is to be made to, or (in the circumstances permitted by the Exchange
Offer) if shares of Viacom Common Stock that are not tendered or not accepted
for exchange are to be registered in the name of or delivered to any person
other than the registered owner, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of
Transmittal, the amount of all stock transfer taxes, if any (whether imposed
on the registered owner or such other person), payable on account of the
transfer to such person must be paid by the tendering stockholder unless
evidence satisfactory to Viacom of the payment of such taxes or exemption
therefrom is submitted.
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PROCEDURES FOR TENDERING SHARES OF VIACOM COMMON STOCK
To tender shares of Viacom Common Stock pursuant to the Exchange Offer,
either (i) a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) with any required signature guarantees, or
an Agent's Message (as defined herein) in the case of a book-entry transfer of
shares, and any other documents required by the Letter of Transmittal must be
received by the Exchange Agent at one of its addresses set forth on the back
cover of this Offering Circular - Prospectus prior to the Expiration Time on
the Expiration Date, and either (a) certificates for the shares of Viacom
Common Stock to be tendered must be transmitted to and received by the
Exchange Agent at one of such addresses prior to such time or (b) such shares
of Viacom Common Stock must be delivered pursuant to the procedures for book-
entry transfer described below (and a confirmation of such delivery received
by the Exchange Agent), in each case by the Expiration Date, or (ii) the
guaranteed delivery procedure described below must be complied with.
As specified in Instruction 3 of the Letter of Transmittal, each stockholder
desiring to tender shares of Viacom Common Stock pursuant to the Exchange
Offer must properly indicate in the section captioned "Exchange Ratio At Which
Shares Are Being Tendered" of the Letter of Transmittal the Exchange Ratio (in
multiples of 0.01) at which such stockholder's shares of Viacom Common Stock
are being tendered. STOCKHOLDERS DESIRING TO TENDER SHARES AT MORE THAN ONE
EXCHANGE RATIO MUST COMPLETE SEPARATE LETTERS OF TRANSMITTAL FOR EACH EXCHANGE
RATIO AT WHICH SUCH STOCKHOLDER IS TENDERING SHARES, EXCEPT THAT THE SAME
SHARES CANNOT BE TENDERED (UNLESS PROPERLY WITHDRAWN PREVIOUSLY IN ACCORDANCE
WITH THE TERMS OF THE OFFER) AT MORE THAN ONE EXCHANGE RATIO. IN ORDER TO
TENDER SHARES PROPERLY, ONE AND ONLY ONE EXCHANGE RATIO MUST BE INDICATED IN
THE APPROPRIATE SECTION ON EACH LETTER OF TRANSMITTAL.
LETTERS OF TRANSMITTAL AND CERTIFICATES FOR SHARES OF VIACOM COMMON STOCK
SHOULD NOT BE SENT TO VIACOM, VIACOM INTERNATIONAL OR THE INFORMATION AGENT.
DELIVERY OF ANY OF THE AFOREMENTIONED REQUIRED DOCUMENTS TO ANY ADDRESS OTHER
THAN AS SET FORTH HEREIN WILL NOT CONSTITUTE VALID DELIVERY THEREOF.
It is a violation of Rule 14e-4 promulgated under the Exchange Act for a
person to tender shares of Viacom Common Stock for such person's own account
unless the person so tendering (i) owns such shares of Viacom Common Stock or
(ii) owns other securities convertible into or exchangeable for such shares of
Viacom Common Stock or owns an option, warrant or right to purchase such
shares of Viacom Common Stock and intends to acquire shares of Viacom Common
Stock for tender by conversion or exchange of such securities or by exercise
of such option, warrant or right. Rule 14e-4 provides a similar restriction
applicable to the tender or guarantee of a tender on behalf of another person.
A tender of shares of Viacom Common Stock made pursuant to any method of
delivery set forth herein will constitute a binding agreement between the
tendering stockholder and Viacom upon the terms and subject to the conditions
of the Exchange Offer, including the tendering stockholder's representation
that (i) such stockholder owns the shares of Viacom Common Stock being
tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act
and (ii) the tender of such shares of Viacom Common Stock complies with Rule
14e-4.
The Exchange Agent will establish accounts with respect to shares of Viacom
Common Stock at The Depository Trust Company ("DTC"), the Midwest Securities
Trust Company ("MSTC") and the Philadelphia Depository Trust Company
("PHILADEP," and together with DTC and MSTC, the "Book-Entry Transfer
Facilities" and each alone, a "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of this Offering
Circular - Prospectus, and any financial institution that is a participant in
the system of any Book-Entry Transfer Facility may make delivery of shares of
Viacom Common Stock by causing such Book-Entry Transfer Facility to transfer
such shares of Viacom Common Stock into the Exchange Agent's account in
accordance with the procedures of such Book-Entry Transfer Facility. Although
delivery of shares of Viacom Common Stock may be effected through book-entry
transfer to the Exchange
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Agent's account at DTC, MSTC or PHILADEP, a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof) and any
other required documents, or an Agent's Message (as defined herein) must, in
any case, be transmitted to and received or confirmed by the Exchange Agent at
one of its addresses set forth on the back cover of this Offering Circular -
Prospectus on or prior to 12:00 Midnight New York City time on the Expiration
Date, or the guaranteed delivery procedure described below must be complied
with. "Agent's Message" means a message transmitted through electronic means
by a Book-Entry Transfer Facility to and received by the Exchange Agent and
forming a part of a book-entry confirmation, which states that such Book-Entry
Transfer Facility has received an express acknowledgement from the participant
in such Book-Entry Transfer Facility tendering the shares that such
participant has received and agrees to be bound by the Letter of Transmittal.
DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT AS REQUIRED
HEREBY.
Signatures on a Letter of Transmittal must be guaranteed by an Eligible
Institution (as defined herein) unless the shares of Viacom Common Stock
tendered pursuant to the Letter of Transmittal are tendered (i) by the
registered holder of the shares of Viacom Common Stock tendered therewith and
such holder has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution. An "Eligible Institution" means a
participant in the Security Transfer Agents Medallion Program or the New York
Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program. A verification by a notary public alone is not acceptable.
If a certificate representing shares of Viacom Common Stock is registered in
the name of a person other than the signer of a Letter of Transmittal, or if
delivery of shares of VII Cable Class A Common Stock is to be made or shares
of Viacom Common Stock not tendered or not accepted for exchange are to be
returned to a person other than the registered owner, the certificate must be
endorsed or accompanied by an appropriate stock power, and the signature on
such certificate or stock power must appear exactly as the name of the
registered owner appears on the certificate with the signature on the
certificate or stock power guaranteed by an Eligible Institution.
If the Letter of Transmittal or Notice of Guaranteed Delivery or any
certificates or stock powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by Viacom, proper evidence
satisfactory to Viacom of their authority so to act must be submitted.
If any certificate representing shares of Viacom Common Stock has been
mutilated, destroyed, lost or stolen, the stockholder must (i) furnish to the
Exchange Agent evidence, satisfactory to it in its discretion, of the
ownership of and the destruction, loss or theft of such certificate, (ii)
furnish to the Exchange Agent indemnity, satisfactory to it in its discretion
and (iii) comply with such other reasonable regulations as the Exchange Agent
may prescribe.
Shares held by Savings Plans. Participants or, as applicable, beneficiaries
("VIP participants") under the Viacom Investment Plan (the "VIP") may direct
the Trustee of the VIP to tender shares of Viacom Common Stock credited to
their matching accounts or to their investment accounts in the Viacom Common
Stock fund (the "VIP Viacom Stock Fund Account"). The Trustee will make
available to such VIP participants all documents furnished to stockholders
generally in connection with the Exchange Offer. Each such VIP participant
will also receive a form upon which the VIP participant may instruct the
Trustee regarding the Exchange Offer. Each VIP participant may direct that
all, some or none of the shares credited to the VIP participant's VIP Viacom
Stock Fund Account and/or matching account be tendered and shall specify the
Exchange Ratio at which such shares are to be tendered. VIP PARTICIPANTS MAY
NOT USE THE LETTER OF TRANSMITTAL BUT MUST USE THE SEPARATE FORM SENT TO THEM.
Participants or, as applicable, beneficiaries ("PVIT/PDI participants")
under the Savings and Investment Plan for Employees of PVI Transmission Inc.
and Paramount (PDI) Distribution Inc. (the "PVIT/PDI Plan") may direct the
Trustee of the PVIT/PDI Plan to tender shares of Viacom Common Stock credited
to their matching accounts or to their investment accounts in the Viacom
Common Stock fund (the "PVIT/PDI Plan
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Viacom Stock Fund Account"). The Trustee will make available to such PVIT/PDI
participants all documents furnished to stockholders generally in connection
with the Exchange Offer. Each such PVIT/PDI participant will also receive a
form upon which the PVIT/PDI participant may instruct the Trustee regarding
the Exchange Offer. Each PVIT/PDI participant may direct that all, some or
none of the shares credited to the PVIT/PDI participant's PVIT/PDI Plan Viacom
Stock Fund Account and/or matching account be tendered and shall specify the
Exchange Ratio at which such shares are to be tendered. PVIT/PDI PARTICIPANTS
MAY NOT USE THE LETTER OF TRANSMITTAL BUT MUST USE THE SEPARATE FORM SENT TO
THEM.
Under the Employee Retirement Income Security Act of 1974, as amended,
Viacom will be prohibited from accepting for exchange any shares from the VIP
or the PVIT/PDI Plan if the Final Exchange Ratio multiplied by 100 is an
amount less than the prevailing market price of the shares on the date the
shares are accepted for exchange pursuant to the Exchange Offer.
GUARANTEED DELIVERY PROCEDURE
If a stockholder desires to tender shares of Viacom Common Stock pursuant to
the Exchange Offer and cannot deliver such shares of Viacom Common Stock and
all other required documents to the Exchange Agent prior to the Expiration
Time on the Expiration Date, such shares of Viacom Common Stock may
nevertheless be tendered if all of the following conditions are met:
(i) such tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form provided by Viacom setting forth the name and
address of the holder and the number of shares of Viacom Common Stock
tendered, stating that the tender is being made thereby and guaranteeing
that, within three AMEX trading days after the date of the Notice of
Guaranteed Delivery, the certificate(s) representing the shares of Viacom
Common Stock accompanied by all other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, is received by the Exchange Agent (as provided below) by the
Expiration Date; and
(iii) the certificate(s) for such shares of Viacom Common Stock (or a
confirmation of a book-entry transfer of such shares of Viacom Common Stock
into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities), together with a properly completed and duly executed Letter of
Transmittal (or a manually signed facsimile thereof) and any required
signature guarantees, or an Agent's Message in connection with a book-entry
transfer, and any other documents required by the Letter of Transmittal,
are received by the Exchange Agent within three AMEX trading days after the
date of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, telegram,
facsimile transmission or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such Notice.
THE METHOD OF DELIVERY OF SHARES OF VIACOM COMMON STOCK AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF
CERTIFICATES REPRESENTING SHARES OF VIACOM COMMON STOCK ARE SENT BY MAIL, IT
IS RECOMMENDED THAT TENDERING STOCKHOLDERS USE PROPERLY INSURED, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, AND ALLOW SUFFICIENT TIME TO ENSURE TIMELY
RECEIPT.
All questions as to the form of documents (including notices of withdrawal)
and the validity, form, eligibility (including time of receipt) and acceptance
for exchange of any tender of shares of Viacom Common Stock will be determined
by Viacom in its sole discretion, which determination will be final and
binding on all tendering stockholders. Viacom reserves the absolute right to
reject any or all tenders of shares of Viacom Common Stock determined by it
not to be in proper form or the acceptance for exchange of shares of Viacom
Common Stock which may, in the opinion of Viacom counsel, be unlawful. Viacom
also reserves the absolute right to waive any defect or irregularity in any
tender of shares of Viacom Common Stock. None of Viacom, the Exchange Agent,
the Information Agent or any other person will be under any duty to give
notification of any
31
<PAGE>
defect or irregularity in tenders or notices of withdrawal or incur any
liability for failure to give any such notification.
The Exchange Offer, proration period and withdrawal rights will expire at
12:00 Midnight, New York City time, on , 1996, unless the Exchange Offer
is extended.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, any tender of shares of Viacom Common
Stock made pursuant to the Exchange Offer is irrevocable. Tenders of shares of
Viacom Common Stock may be withdrawn at any time on or prior to the Expiration
Time on the Expiration Date and, unless theretofore accepted for exchange as
provided in this Offering Circular - Prospectus, may also be withdrawn after
the expiration of 40 business days from the commencement of the Exchange
Offer. If Viacom (i) extends the period of time during which the Exchange
Offer is open, (ii) is delayed in its acceptance of shares of Viacom Common
Stock for exchange or (iii) is unable to accept shares of Viacom Common Stock
for exchange pursuant to the Exchange Offer for any reason, then, without
prejudice to Viacom's rights under the Exchange Offer, the Exchange Agent may,
on behalf of Viacom, retain all shares of Viacom Common Stock tendered, and
such shares of Viacom Common Stock may not be withdrawn except as otherwise
provided herein, subject to Rule 13e-4(f)(5) under the Exchange Act, which
provides that the person making an issuer exchange offer shall either pay the
consideration offered or return tendered securities promptly after the
termination or withdrawal of the offer.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at one of its
addresses set forth on the back cover of this Offering Circular - Prospectus
and must specify the name of the person who tendered the shares of Viacom
Common Stock to be withdrawn and the number of shares of Viacom Common Stock
to be withdrawn precisely as they appear in the Letter of Transmittal. If the
shares of Viacom Common Stock to be withdrawn have been delivered to the
Exchange Agent, a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution must be submitted prior to the release of such shares of
Viacom Common Stock (except that such signature guarantee requirement is not
applicable in the case of shares of Viacom Common Stock tendered by an
Eligible Institution). In addition, such notice must specify, in the case of
shares of Viacom Common Stock tendered by delivery of certificates, the name
of the registered holder (if different from that of the tendering stockholder)
and the serial numbers shown on the particular certificates evidencing the
shares of Viacom Common Stock to be withdrawn or, in the case of shares of
Viacom Common Stock tendered by book-entry transfer, the name and number of
the account at the Book-Entry Transfer Facility from which the shares were
transferred. Withdrawals may not be rescinded, and shares of Viacom Common
Stock withdrawn will thereafter be deemed not validly tendered for purposes of
the Exchange Offer. However, withdrawn shares of Viacom Common Stock may be
retendered by again following one of the procedures described above in "--
Procedures for Tendering Shares of Viacom Common Stock" at any time prior to
the Expiration Date.
All questions as to the form and validity (including time of receipt) of any
notice of withdrawal will be determined by Viacom, in its sole discretion,
which determination shall be final and binding. None of Viacom, the Exchange
Agent, the Information Agent or any other person will be under any duty to
give notification of any defect or irregularity in any notice of withdrawal or
incur any liability for failure to give any such notification.
EXTENSION OF TENDER PERIOD; TERMINATION; AMENDMENT
Subject to the immediately following sentence, Viacom expressly reserves the
right, at any time or from time to time, in its sole discretion and regardless
of whether any of the conditions specified in "--Certain Conditions of the
Exchange Offer" below shall have been satisfied, (i) to extend the period of
time during which the Exchange Offer is open by giving oral or written notice
of such extension to the Exchange Agent and by making a public announcement of
such extension or (ii) to amend the Exchange Offer in any respect by making a
public announcement of such amendment. If insufficient tenders are made by
Viacom stockholders in the
32
<PAGE>
Exchange Offer to permit the Trigger Amount to be reached, Viacom has the
right to extend the Exchange Offer for not less than 10 nor more than 15
business days. During such extension, TCI and Viacom have agreed to negotiate
in good faith to determine mutually acceptable changes to terms and conditions
for the VII Cable Preferred Stock (including without limitation the Exchange
Rate and the dividend yield on the VII Cable Preferred Stock) and the Exchange
Offer (including without limitation the duration of any extension and the
maximum Exchange Ratio) that each believes in good faith will cause the
Trigger Amount to be reached and that would cause the VII Cable Preferred
Stock to trade at a price equal to its $100 par value per share immediately
following the consummation of the Exchange Offer and the Stock Issuance. There
can be no assurance that Viacom will exercise its right to extend or amend the
Exchange Offer.
Subject to the foregoing paragraph, if Viacom materially changes the terms
of the Exchange Offer or the information concerning the Exchange Offer, Viacom
will extend the Exchange Offer to the extent required by the Exchange Act.
Certain rules promulgated under the Exchange Act provide that the minimum
period during which an offer must remain open following material changes in
the terms of the offer or information concerning the offer (other than a
change in price, change in the dealer's soliciting fee or a change in
percentage of securities sought) will depend on the facts and circumstances,
including the relative materiality of such terms or information. The
Commission has stated that, as a general rule, it is of the view that an offer
should remain open for a minimum of five business days from the date that
notice of such material change is first published, sent or given, and that if
material changes are made with respect to information that approaches the
significance of price and share levels, a minimum of ten business days may be
required to allow adequate dissemination and investor response. Subject to the
foregoing paragraph, if (i) Viacom increases or decreases (x) the number of
shares of VII Cable Class A Common Stock offered in exchange for shares of
Viacom Common Stock pursuant to the Exchange Offer, (y) the number of shares
of Viacom Common Stock eligible for exchange or (z) the Trigger Amount, and
(ii) the Exchange Offer is scheduled to expire at any time earlier than the
expiration of a period ending on the tenth business day from and including the
date that notice of such increase or decrease is first published, sent or
given, the Exchange Offer will be extended until the expiration of such period
of ten business days. The term "business day" shall mean any day other than
Saturday, Sunday or a federal holiday and shall consist of the time period
from 12:01 a.m. through 12:00 Midnight, New York City time.
Viacom also reserves the right, in its sole discretion, in the event any of
the conditions specified in "--Certain Conditions of the Exchange Offer" below
shall not have been satisfied and so long as shares of Viacom Common Stock
have not theretofore been accepted for exchange, to delay (except as otherwise
required by applicable law) acceptance for exchange of or exchange for any
shares of Viacom Common Stock or to terminate the Exchange Offer and not
accept for exchange of or exchange for any shares of Viacom Common Stock.
If Viacom (i) extends the period of time during which the Exchange Offer is
open, (ii) is delayed in accepting for exchange of or exchange for any shares
of Viacom Common Stock or (iii) is unable to accept for exchange of or
exchange for any shares of Viacom Common Stock pursuant to the Exchange Offer
for any reason, then, without prejudice to Viacom rights under the Exchange
Offer, the Exchange Agent may, on behalf of Viacom, retain all shares of
Viacom Common Stock tendered and such shares of Viacom Common Stock may not be
withdrawn except as otherwise provided in "--Withdrawal Rights" above. The
reservation by Viacom of the right to delay acceptance for exchange of or
exchange for any shares of Viacom Common Stock is subject to applicable law,
which requires that Viacom pay the consideration offered or return the shares
of Viacom Common Stock deposited by or on behalf of stockholders promptly
after the termination or withdrawal of the Exchange Offer.
Any extension, termination or amendment of the Exchange Offer will be
followed as promptly as practicable by a public announcement thereof. Without
limiting the manner in which Viacom may choose to make any public
announcement, Viacom will have no obligation (except as otherwise required by
applicable law) to publish, advertise or otherwise communicate any such public
announcement other than by making a release to the Dow Jones News Service. In
the case of an extension of the Exchange Offer, Commission regulations require
a public
33
<PAGE>
announcement of such extension no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date.
CONDITIONS TO CONSUMMATION OF THE EXCHANGE OFFER
The conditions to the obligations of Viacom to commence the Exchange Offer
were satisfied or waived on , 1996. See "Arrangements Among Viacom,
Viacom International, TCI and TCI Cable--Terms of the Parents Agreement--
Conditions Precedent." In addition, there are conditions to Viacom's
obligations to consummate the Exchange Offer. Notwithstanding any other
provisions of the Exchange Offer and without prejudice to Viacom's other
rights under the Exchange Offer, Viacom shall not be required to accept for
exchange of or, subject to any applicable rules and regulations of the
Commission, including Rule 14e-1(c) under the Exchange Act relating to
Viacom's obligation to exchange or return tendered shares of Viacom Common
Stock promptly after termination or withdrawal of the Exchange Offer, exchange
for any shares of Viacom Common Stock, and may terminate the Exchange Offer as
provided in "--Extension of Tender Period; Termination; Amendment" above, if
prior to the acceptance for exchange of any shares of Viacom Common Stock, any
of the following conditions exist:
(a) the Trigger Amount shall not have been reached;
(b) all conditions of Viacom International, TCI and TCI Cable to
consummate the closing under the Subscription Agreement shall not have been
satisfied or waived (other than the acceptance for exchange of shares by
Viacom in this Exchange Offer);
(c) Viacom International shall not have received loans in an aggregate
principal amount at least equal to $1.7 billion (the "Aggregate Loan
Amount"), to the satisfaction of Viacom International, or the Aggregate
Loan Amount shall not be available for transfer as a contribution to Viacom
Services prior to the Exchange Time as contemplated in the Implementation
Agreement;
(d) (i) any action, proceeding or litigation seeking to enjoin, make
illegal or materially delay consummation of the Exchange Offer or otherwise
relating in any manner to the Exchange Offer shall have been instituted
before any court or other regulatory or administrative authority; or (ii)
any order, stay, judgment or decree shall have been issued by any court,
government, governmental authority or other regulatory or administrative
authority and be in effect, or any statute, rule, regulation, governmental
order or injunction shall have been proposed, enacted, enforced or deemed
applicable to the Exchange Offer, any of which would or might restrain,
prohibit or delay consummation of the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to Viacom;
(e) there shall have occurred (and the adverse effect of such occurrence
shall, in the reasonable judgment of Viacom, be continuing) (i) any general
suspension of trading in, or limitation on prices for, securities on any
national securities exchange or in the over-the-counter market in the
United States, (ii) any extraordinary or material adverse change in United
States financial markets generally, including, without limitation, a
decline of at least 25% in either the Dow Jones average of industrial
stocks or the Standard & Poor's 500 index from July 24, 1995, (iii) a
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States, (iv) any limitation (whether or not
mandatory) by any governmental entity, on, or any other event that would
reasonably be expected to materially adversely affect, the extension of
credit by banks or other lending institutions, (v) a commencement of a war
or armed hostilities or other national or international calamity directly
or indirectly involving the United States, which would reasonably be
expected to affect materially and adversely (or to delay materially) the
consummation of the Exchange Offer or (vi) in the case of any of the
foregoing existing at the time of commencement of the Exchange Offer, a
material acceleration or worsening thereof; or
(f) any of the Parents Agreement, the Implementation Agreement or the
Subscription Agreement shall have been terminated in accordance with its
terms;
which in the reasonable judgment of Viacom in any such case, and regardless of
the circumstances, makes it inadvisable to proceed with the Exchange Offer or
with such acceptance for exchange of shares.
34
<PAGE>
The foregoing conditions are for the sole benefit of Viacom and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances giving rise to such conditions or may be
waived by Viacom in whole or in part at any time and from time to time in its
sole discretion. Any determination by Viacom concerning the conditions
described above will be final and binding upon all parties.
The failure by Viacom at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to
time.
In addition, Viacom will not accept any shares of Viacom Common Stock
tendered, and no shares of VII Cable Class A Common Stock will be exchanged
for any shares of Viacom Common Stock, at any time at which there shall be a
stop order issued by the Commission which shall remain in effect with respect
to the Registration Statement.
FEES AND EXPENSES
Wasserstein Perella & Co., Inc. is acting as Dealer Manager in connection
with the Exchange Offer. The Dealer Manager will, among other things,
coordinate all aspects of marketing of the Exchange Offer through the conduct
of informational meetings, the direct solicitation of certain identified
stockholders and the management of a selected group of dealers (the
"Soliciting Dealers") that will solicit shares of Viacom Common Stock pursuant
to the Exchange Offer. Viacom has agreed to pay Wasserstein Perella & Co.,
Inc. as compensation for their services as Dealer Manager, a fee of $
plus reasonable out of pocket financial expenses. Wasserstein Perella & Co.,
Inc. from time to time has provided and continues to provide financial
advisory and financing services to Viacom and has received customary fees for
the rendering of these services. In particular Wasserstein Perella & Co., Inc.
has provided financial advisory services in connection with the Transaction.
Upon consummation of the Transaction, Wasserstein Perella & Co., Inc. will
receive its customary fee for services rendered in connection with the
Transaction in addition to its fee as Dealer Manager. Viacom will pay each
Soliciting Dealer only in the event such Soliciting Dealer is so designated by
a tendering stockholder of Viacom Common Stock on the Letter of Transmittal a
fee equal to $ in respect of each share of VII Cable Class A Common
Stock issued to such stockholder pursuant to the Exchange Offer, up to a
maximum of shares of VII Cable Class A Common Stock distributed to
such stockholder. Viacom has agreed to indemnify the Dealer Manager and the
Soliciting Dealers against certain liabilities, including civil liabilities
under the Securities Act, or contribute to payments which the Dealer Manager
or the Soliciting Dealers may be required to make in respect thereof.
Viacom has retained Georgeson & Company Inc. to act as the Information Agent
and to act as the Exchange Agent in connection with the Exchange
Offer. The Information Agent may contact holders of shares of Viacom Common
Stock by mail, telephone, facsimile transmission and personal interviews and
may request brokers, dealers and other nominee stockholders to forward
materials relating to the Exchange Offer to beneficial owners. The Information
Agent and the Exchange Agent each will receive reasonable and customary
compensation for their respective services, will be reimbursed for certain
reasonable out-of-pocket expenses and will be indemnified against certain
liabilities in connection with their services, including certain liabilities
under the federal securities laws. Neither the Information Agent nor the
Exchange Agent has been retained to make solicitations or recommendations in
their respective roles as Information Agent and Exchange Agent, and the fees
to be paid to them will not be based on the number of shares of Viacom Common
Stock tendered pursuant to the Exchange Offer; however, the Exchange Agent
will be compensated in part on the basis of the number of Letters of
Transmittal received and the number of stock certificates distributed pursuant
to the Exchange Offer.
Viacom will not pay any fees or commissions to any broker or dealer or any
other person (other than the Dealer Manager, the Soliciting Dealers, the
Information Agent, and the Exchange Agent) for soliciting tenders of shares of
Viacom Common Stock pursuant to the Exchange Offer. Brokers, dealers,
commercial banks and trust companies will, upon request, be reimbursed by
Viacom for reasonable and necessary costs and expenses incurred by them in
forwarding materials to their customers.
35
<PAGE>
MISCELLANEOUS
The Exchange Offer is not being made to (nor will tenders be accepted from
or on behalf of) holders of Viacom Common Stock in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. Viacom is not aware of any
jurisdiction where the making of the Exchange Offer or the acceptance thereof
would not be in compliance with applicable law. If Viacom becomes aware of any
jurisdiction where the making of the Exchange Offer or acceptance thereof
would not be in compliance with any valid applicable law, Viacom will make a
good faith effort to comply with such law. If, after such good faith effort,
Viacom cannot comply with such law, the Exchange Offer will not be made to,
nor will tenders be accepted from or on behalf of, holders of shares of Viacom
Common Stock in any such jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR -
PROSPECTUS OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY VIACOM OR VIACOM INTERNATIONAL. SEE ALSO "TCI PROSPECTUS--
EXPLANATORY NOTE."
36
<PAGE>
MARKET PRICES, TRADING AND DIVIDEND INFORMATION
VIACOM COMMON STOCK
Viacom Class A Common Stock and Viacom Class B Common Stock are listed and
traded on the AMEX under the symbols "VIA" and "VIA B," respectively.
The following table sets forth, for the calendar periods indicated, the per
share range of high and low sales prices for Viacom Class A Common Stock and
Viacom Class B Common Stock, as reported on the AMEX Composite Tape.
<TABLE>
<CAPTION>
VIACOM CLASS A VIACOM CLASS B
COMMON STOCK COMMON STOCK
--------------- ---------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1994
1st Quarter................................... $49 3/4 $28 1/2 $45 $23 3/4
2nd Quarter................................... $34 1/4 $24 1/2 $32 1/2 $21 3/4
3rd Quarter................................... $41 3/4 $33 7/8 $39 3/4 $30 1/4
4th Quarter................................... $42 1/8 $38 $41 $37 1/8
1995
1st Quarter................................... $48 1/4 $41 1/8 $47 3/8 $40 1/4
2nd Quarter................................... $49 1/2 $41 $48 5/8 $40 3/4
3rd Quarter................................... $54 1/8 $44 3/4 $54 1/4 $44 5/8
4th Quarter................................... $50 5/8 $44 $50 3/4 $44 5/8
1996
1st Quarter (through January 16, 1996)........ $46 3/4 $38 5/8 $47 5/8 $39 1/8
</TABLE>
----------------
The number of holders of record of Viacom Class A Common Stock and Viacom
Class B Common Stock as of January 16, 1995 was 13,839 and 24,973,
respectively.
On July 24, 1995 (the last trading day prior to announcement of the
Transaction), the closing sales prices per share of Viacom Class A Common
Stock and Viacom Class B Common Stock as reported on the AMEX Composite Tape
were $50 1/4, and $50, respectively. On January 16, 1996, the last reported
sales prices per share of Viacom Class A Common Stock and Viacom Class B
Common Stock as reported on the AMEX Composite Tape were $39 7/8 and $40 1/4,
respectively. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
SHARES OF VIACOM COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET
PRICE OF VIACOM COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE EXCHANGE
OFFER IS CONSUMMATED.
Viacom has not declared cash dividends on its common equity and has no
present intention of so doing.
VII CABLE CLASS A COMMON STOCK AND VII CABLE PREFERRED STOCK
On , 1996, the VII Cable Preferred Stock was approved for quotation on
Nasdaq under the symbol "TPACP."
No current public trading market for either the VII Cable Class A Common
Stock or the VII Cable Preferred Stock exists. The extent of any market for
the VII Cable Preferred Stock and the prices at which these securities may
trade prior to or after the expiration of the Exchange Offer cannot be
predicted. No assurance can be given that an active trading market for the VII
Cable Preferred Stock will be established or maintained after the consummation
of the Exchange Offer. Although the dividend rate on the VII Cable Preferred
Stock has been determined by two investment banking firms as the rate that, in
the opinion of such firms, will cause the VII Cable Preferred Stock to trade
initially at its par value of $100 per share immediately following the
Exchange Date, see "Summary--Terms of the Class A Senior Cumulative
Exchangeable Preferred Stock-- Dividends,"
37
<PAGE>
the prices at which the VII Cable Preferred Stock trades immediately following
the Exchange Date and thereafter will be determined by the marketplace and
could be subject to significant fluctuations. See "Risk Factors--Market
Uncertainties with Respect to VII Cable Preferred Stock."
Shares received by Viacom stockholders in the Exchange Offer will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of VII Cable under the Securities Act. Persons who may be deemed
to be affiliates of VII Cable after the expiration of the Exchange Offer
generally include individuals or entities that control, are controlled by or
are under common control with VII Cable, and will include the directors and
principal executive officers of VII Cable as well as any principal stockholder
of VII Cable. Persons who are affiliates of VII Cable will be permitted to sell
their shares of VII Cable Preferred Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemptions
afforded by Rule 144 thereunder.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
VII CABLE
The following unaudited pro forma condensed combined financial statements of
VII Cable as of and for the nine months ended September 30, 1995 and as of and
for the twelve months ended December 31, 1994 give effect to the VII Cable Pro
Forma Events as if such events occurred at the beginning of the earliest
period presented for results of operations data. The unaudited pro forma
condensed combined statements of operations for the nine months ended
September 30, 1995 and the year ended December 31, 1994 are based upon the
statements of operations of VII Cable for the nine months ended September 30,
1995 and year ended December 31, 1994, respectively. The unaudited pro forma
condensed combined balance sheet gives effect to the VII Cable Pro Forma
Events as if they had occurred on September 30, 1995. The unaudited pro forma
condensed combined financial statements of VII Cable were derived from, and
should be read in conjunction with, the VII Cable Carve-Out Financial
Statements appearing elsewhere in this Offering Circular - Prospectus.
The unaudited pro forma data are not necessarily indicative of the combined
results of operations or financial position that would have occurred if the
VII Cable Pro Forma Events had been in effect at the beginning of the earliest
period presented nor are they necessarily indicative of future results of
operations or financial position. The pro forma adjustments are based upon
available information and certain assumptions set forth herein, including in
the notes to the unaudited pro forma condensed combined financial statements.
It is expected that the transactions contemplated by the Subscription
Agreement will be accounted for under the purchase method of accounting.
Accordingly, the cost to acquire VII Cable following the consummation of the
Exchange Offer estimated at approximately $2.2 billion (reflecting the Loan
Proceeds and the estimated aggregate par value of the VII Cable Preferred
Stock) will be allocated by TCI to the assets and liabilities acquired
according to their respective fair values, with any excess being treated as
intangible assets. The valuations and other studies which will provide the
basis for the allocation of the cost to acquire VII Cable following
consummation of the Exchange Offer have not yet been performed. Accordingly,
the purchase accounting adjustments made in connection with the development of
the unaudited pro forma condensed combined financial statements are
preliminary and have been made solely for the purposes of developing such
unaudited pro forma condensed combined financial statements. The approximate
$1.3 billion pro forma excess of unallocated acquisition costs as of September
30, 1995 is being amortized over 40 years at a rate of $32.6 million per year.
Solely for purposes of presentation of the unaudited pro forma condensed
combined financial statements of VII Cable, the Estimated Asset Value of VII
Cable has been assumed to be approximately $2.2 billion. The Estimated Asset
Value is equal to (i) the Fixed Amount, plus (ii) the Capital Expenditure
Amount, plus (iii) the Inventory Amount, plus (iv) the Telecom Amount, plus
(v) an amount equal to Working Capital, if Working Capital is a positive
number, minus (vi) an amount, if any, equal to the amount by which Working
Capital is a negative number, minus (vii) the amount of certain front-end
loaded programming payments specified in the Implementation Agreement, plus
(viii) an amount equal to interest on the sum of the foregoing amounts at one-
month LIBOR plus 1 1/4% for the period from September 1, 1995 to the Exchange
Date. The foregoing Adjustment Amounts are subject to change as a result of
adjustments from estimated to actual values. To the extent that the Asset
Value (as defined herein) as finally determined minus the amount of Loan
Proceeds actually transferred to Viacom Services pursuant to the Conveyance of
Assets (the "Net Asset Value") is greater than the Estimated Asset Value minus
$1.7 billion (the "Estimated Net Asset Value"), VII Cable will pay to Viacom
Services an amount in cash equal to such excess, plus an amount equal to
interest thereon from the Exchange Date. If the Net Asset Value is less than
the Estimated Net Asset Value, Viacom services will pay to VII Cable an amount
in cash equal to such deficiency plus an amount equal to interest thereon from
the Exchange Date. For further discussion of such post-closing adjustments,
see "Arrangements Among Viacom, Viacom International, TCI and TCI Cable--Terms
of the Implementation Agreement--Post-Closing Adjustments." Any change between
the Estimated Asset Value assumed for purposes of the unaudited pro forma
condensed combined financial statements of VII Cable and the Estimated Asset
Value will result in corresponding changes
39
<PAGE>
in the pro forma amounts of intangible assets, the related amortization
thereof, the aggregate par value of the VII Cable Preferred Stock and the
related dividends thereon. An increase in the Estimated Asset Value of $10
million will result in an increase to annual amortization expense of $0.25
million and an increase in annual VII Cable Preferred Stock dividend
requirements of $0.45 million based upon an estimated useful life of 40 years
and an annual dividend rate of 4.5%.
It is expected that after the consummation of the Stock Issuance, an
appraisal of the significant assets, liabilities and business operations of
VII Cable will be completed. On the basis of this information, a final
allocation of the cost to acquire VII Cable following consummation of the
Exchange Offer will be made by TCI.
The future financial position of VII Cable may reflect increased property
and equipment, intangibles, increased long-term debt and decreased common
stockholders' equity resulting from the Conveyance and the Conversion. The
future results of operations of VII Cable may reflect increased depreciation,
amortization of goodwill, increased interest expense and VII Cable Preferred
Stock dividend requirements. The following unaudited pro forma condensed
combined statement of operations does not reflect potential cost savings
attributable to (i) economies of scale which may be realized in connection
with purchases of programming and equipment or (ii) consolidation of certain
operating and administrative functions including the elimination of
duplicative facilities and personnel.
40
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
VII CABLE
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------
PRO FORMA
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
------ ---------- ----------- ---------
<S> <C> <C> <C>
Cash....................................... $ 2.3 $ 1,700.0 (1) $ 2.3
(1,700.0)(2)
Other current assets....................... 17.9 0.8 (2) 18.7
-------- --------- --------
Total current assets................... 20.2 0.8 21.0
Property and equipment, net................ 403.6 (3.3)(2) 400.3
Intangible assets, at amortized cost....... 565.7 1,303.6 (5) 1,869.3
Other assets............................... 64.4 (43.9)(2) 20.5
-------- --------- --------
$1,053.9 $ 1,257.2 $2,311.1
======== ========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities........................ $ 82.9 $ (30.5)(2) $ 52.4
Long-term debt............................. 57.0 1,700.0 (1) 1,350.0
(57.0)(2)
(350.0)(3)
Other liabilities.......................... 71.3 (12.6)(2) 58.7
% Series A Preferred Stock (mandatory
redemption).............................. -- 500.0 (4) 500.0
Stockholders' Equity:
Class B Common Stock..................... -- 350.0 (3) 350.0
Viacom equity investment................. 842.7 (842.7)(5) --
-------- --------- --------
$1,053.9 $ 1,257.2 $2,311.1
======== ========= ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
41
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
VII CABLE
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
-------------------------------- ------------------------------------
PRO FORMA PRO PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS FORMA
---------- ----------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $328.6 $ (1.9)(2) $326.7 $404.5 $ 3.1 (2) $ 407.6
Expenses:
Operating............. 142.1 142.1 170.8 -- 170.8
Selling, general and
administrative....... 65.6 65.6 99.9 -- 99.9
Depreciation and
amortization......... 61.1 24.3 (6a) 85.4 76.4 31.9 (2)(6a) 108.3
------ ------ ------ ------ ------ -------
Total expenses...... 268.8 24.3 293.1 347.1 31.9 379.0
------ ------ ------ ------ ------ -------
Earnings from
operations............. 59.8 (26.2) 33.6 57.4 (28.8) 28.6
Other income (expense):
Interest expense...... (37.9) (40.6)(6b) (78.5) (38.0) (66.6)(6b) (104.6)
Other items, net...... 32.2 (26.9)(2) 5.3 7.0 (1.7)(2) 5.3
------ ------ ------ ------ ------ -------
Total other income
(expense).......... (5.7) (67.5) (73.2) (31.0) (68.3) (99.3)
------ ------ ------ ------ ------ -------
Earnings from operations
before income taxes.... 54.1 (93.7) (39.6) 26.4 (97.1) (70.7)
Benefit (provision) for
income taxes........... (25.9) 25.3 (6c) (0.6) (17.7) 22.8 (6c) 5.1
Equity in earnings
(loss) of affiliated
companies, net of tax.. (0.4) (0.4)(2) (0.8) 0.4 (0.3)(2) 0.1
------ ------ ------ ------ ------ -------
Net earnings............ 27.8 (68.8) (41.0) 9.1 (74.6) (65.5)
Preferred stock dividend
requirement............ -- (16.9)(6d) (16.9) -- (22.5)(6d) (22.5)
------ ------ ------ ------ ------ -------
Net earnings
attributable to common
stock.................. $ 27.8 $(85.7) $(57.9) $ 9.1 $(97.1) $ (88.0)
====== ====== ====== ====== ====== =======
</TABLE>
See notes to unaudited pro forma condensed combined financial statements.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
VII CABLE
1. Reflects the borrowing of the Loan Proceeds ($1.7 billion) under the Loan.
Scheduled maturities of the Loan through December 31, 2000 are assumed to
be $300 million (1996), none (1997), $30 million (1998), $110 million
(1999) and $135 million (2000).
2. Reflects the conveyance to Viacom Services of the Loan Proceeds, existing
bank debt of $57 million and certain other nonmaterial assets, liabilities
and related results of operations of VII Cable.
3. Reflects the assumed reduction of debt with the proceeds of TCI Cable's
capital contribution of $350 million and the corresponding issuance to TCI
Cable of 100 shares of VII Cable Class B Common Stock immediately following
the consummation of the Exchange Offer.
4. Assumes the shares of VII Cable Class A Common Stock to be issued as part
of the Exchange Offer are converted into shares of VII Cable Preferred
Stock at the time of TCI Cable's capital contribution as described in Note
3. Solely for the purposes of this presentation the shares of VII Cable
Preferred Stock are assumed to pay dividends at a rate of 4.5% per annum.
The assumed dividend rate was derived from the actual rate for a market
comparable preferred security recently issued by TCI Cable.
5. The unallocated excess of the Loan and the estimated aggregate par value of
the VII Cable Preferred Stock over the adjusted net assets of VII Cable is
summarized below (in millions):
<TABLE>
<S> <C>
Loan........................................................... $1,700.0
VII Cable Preferred Stock...................................... 500.0
--------
2,200.0
VII Cable net assets........................................... (842.7)
Net liabilities conveyed to Viacom Services(a)................. (53.7)
--------
$1,303.6
========
</TABLE>
(a) Represents VII Cable's existing bank debt of $57 million and certain
equity investments, marketable securities and other nonmaterial assets
and liabilities conveyed to Viacom Services in accordance with the
Implementation Agreement.
6. Other pro forma adjustments relating to the Transaction are as follows:
a. An increase in annual amortization expense of $32.6 million resulting
from the increase in intangibles as described in Note 5.
b. Additional interest expense resulting from the incremental borrowings
described in Note 1. Solely for the purposes of this presentation Viacom
has assumed an interest rate of 7.75% based upon the anticipated terms
of the Loan. A change in the assumed interest rate of 1/8% will result
in a change in interest expense of $1.7 million on an annual basis.
c. Reflects the income tax effects of certain pro forma adjustments
calculated at the statutory tax rate in effect during the periods
presented. The effective income tax rate on a pro forma basis is
adversely affected by amortization of excess acquisition costs, which
are assumed to be not deductible for tax purposes.
d. Reflects an assumed 4.5% cumulative annual dividend on the $500 million
of VII Cable Preferred Stock. (See Note 4 above)
43
<PAGE>
SELECTED COMBINED HISTORICAL FINANCIAL DATA
VII CABLE
(IN MILLIONS)
The following table sets forth certain selected historical combined
financial data of VII Cable and has been derived from and should be read in
conjunction with the VII Cable Carve-Out Financial Statements for the three
years ended December 31, 1994. See Notes 1 and 6 of the Notes to the Combined
Financial Statements of VII Cable included elsewhere in this Offering Circular
- - Prospectus. Unaudited interim data as of and for the nine-month periods
ended September 30, 1995 and 1994 reflect, in the opinion of management of VII
Cable, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of such data. Results of
operations for the nine months ended September 30, 1995 are not necessarily
indicative of results which may be expected for any other interim or annual
period. The VII Cable Carve-Out Financial Statements reflect the carve-out
historical results of operations and financial position of VII Cable during
the periods presented and are not necessarily indicative of results of
operations or financial position that would have occurred if VII Cable had
been a separate stand-alone entity during the periods presented or of future
results of operations or financial position of VII Cable.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
DATA:
Revenues................ $ 328.6 $ 303.6 $404.5 $414.8 $410.1 $378.0 $330.5
Earnings from
operations.............. 59.8 42.7 57.4 83.8 97.5 82.2 55.9
Earnings (loss) before
taxes................... 54.1 20.2 26.4 128.1 53.1 15.0 (10.0)
Net earnings (loss)
before cumulative
effect of change in
accounting principle... 27.8 6.7 9.1 83.9 25.8 (.2) (15.3)
Net earnings (loss)..... 27.8 6.7 9.1 97.4 25.8 (.2) (15.3)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------------------
1995 1994 1993 1992 1991 1990
---------------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............. $1,053.9 $1,040.4 $966.2 $964.7 $976.0 $992.7
Total debt............... 57.0 57.0 57.0 106.0 106.1 106.1
Viacom equity investment. 842.7 823.9 765.5 753.9 767.7 788.1
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VII CABLE
GENERAL
VII Cable owns and operates cable television systems in five geographic
regions in the United States. Substantially all of VII Cable's revenues are
earned from subscriber fees for primary (i.e., non-premium) and premium
subscription services, the rental of converters and remote control devices,
and installation fees. Additional revenues are derived from the sale of
advertising, pay-per-view programming fees, payments received from revenue-
sharing arrangements in respect of products sold through home shopping
services, and the leasing of fiber optic capacity in three of VII Cable's
franchise areas to partnerships (in which VII Cable has an equity interest)
engaged in the provision of competitive access telephone services.
Recent federal laws and regulations, including the decision to reregulate
certain aspects of the cable television distribution industry, have affected
VII Cable's ability to increase rates for certain subscriber services or
restructure its rates for certain services. These reregulation activities are
designed to reduce customer rates and limit future rate increases for non-
premium program services. Legislation pending in Congress would substantially
amend the rate regulation provisions under current federal law. For further
discussion of federal regulation of the cable television distribution
industry, see "--Recent Legislation" and "Business of VII Cable--Regulation--
Federal Regulation."
The following discussion should be read in conjunction with VII Cable's pro
forma and historical financial statements, including the notes thereto,
included elsewhere in this Offering Circular - Prospectus. The historical
financial statements of VII Cable reflect the carve-out historical results of
operations and financial position of the cable television distribution
business of Viacom International. Such financial statements are not
necessarily indicative of the results that would have occurred if VII Cable
had been a separate stand-alone entity during the periods presented or of
future results of operations or financial condition of VII Cable.
The following comparisons of operating results include an analysis of
earnings from operations before interest, taxes, depreciation and amortization
("EBITDA"). While many in the financial community consider EBITDA to be an
important measure of comparative operating performance, it should be
considered in addition to, not as a substitute for or superior to, earnings
from operations, net earnings, cash flow and other measures of financial
performance prepared in accordance with generally accepted accounting
principles.
RESULTS OF OPERATIONS
Three Months and Nine Months ended September 30, 1995 vs. September 30, 1994
Revenues increased to $113.0 million for the third quarter of 1995 from
$100.1 million for the third quarter of 1994 (or 13%), attributable to
increases of $8.6 million of primary, $1.0 million of premium and $2.4 million
of pay-per-view revenues and $.9 million of other operating revenues. Earnings
from operations increased to $21.1 million for the third quarter of 1995 from
$13.4 million for the third quarter of 1994 (or 58%). The increase in revenues
reflects a 10% and 4% increase in average premium and primary customers,
respectively, an 8% increase in primary rates, partially offset by a 4%
decrease in the average premium rate. Total revenues per primary customer per
month increased 9% to $32.43 for the third quarter of 1995 from $29.80 for the
third quarter of 1994. The increase in earnings from operations principally
reflects the increased revenues. EBITDA increased to $41.7 million for the
third quarter of 1995 from $32.6 million for the third quarter of 1994 (or
28%), principally reflecting the increased revenues.
Revenues increased to $328.6 million for the nine months ended September 30,
1995 from $303.6 million for the nine months ended September 30, 1994 (or 8%),
attributable to an increase of $15.5 million of primary, $3.3 million of
premium, $3.0 million of pay-per-view revenues and $3.2 million of other
operating revenues. Earnings from operations increased to $59.8 million for
the nine months ended September 30, 1995 from $42.7
45
<PAGE>
million for the nine months ended September 30, 1994 (or 40%). The increase in
revenues primarily reflects 17% and 4% increases in average premium and
primary customers, respectively, a 3% increase in primary rates, partially
offset by an 8% decrease in the average premium rate. Total revenues per
primary customer per month increased 4% to $31.57 for the nine months ended
September 30, 1995 from $30.33 for the nine months ended September 30, 1994.
The increase in earnings from operations principally reflect the increased
revenues. EBITDA increased to $120.8 million for the nine months ended
September 30, 1995 from $100.3 million for the nine months ended September 30,
1994 (or 20%), principally reflecting the increased revenues.
It is anticipated that following the consummation of the Stock Issuance, VII
Cable will reflect an increase in amortization expense of approximately $32.6
million per year due to the allocation of the cost to acquire VII Cable to
intangible assets, increased interest expense of approximately $66.6 million
per year and preferred stock dividends of $22.5 million per year.
As of September 30, 1995, VII Cable serviced approximately 1,171,000 primary
customers subscribing to approximately 945,000 premium units, representing a
4% and 5% increase, respectively, since September 30, 1994.
Viacom provides VII Cable with certain general services, including
insurance, legal, financial and other corporate functions. Charges for these
services have been made based on the average of certain specified ratios of
revenues, earnings from operations and net assets. Management believes that
the methodologies used to allocate these charges are reasonable. See Note 4 of
the Notes to the Combined Financial Statements of VII Cable for the period
ended September 30, 1995.
Interest expense
Interest expense increased 43% to $13.0 million for the third quarter of
1995 from $9.1 million for the third quarter of 1994. Interest expense
increased 36% to $37.9 million for the nine months ended September 30, 1995
from $28.0 million for the nine months ended September 30, 1994. Interest
expense reflects amounts recorded by VII Cable on borrowings under a credit
agreement and amounts allocated by Viacom of $12.4 and $8.3 million for the
quarters ended September 30, 1995 and September 30, 1994, respectively, and
$36.3 and $26.3 million for the nine months ended September 30, 1995 and
September 30, 1994, respectively. Viacom allocated interest expense to VII
Cable based on a percentage of VII Cable's average net assets to Viacom's
average net assets. VII Cable's allocated interest expense from Viacom may not
be reflective of any interest allocated by TCI subsequent to the Transaction.
Interest expense is expected to increase significantly following consummation
of the Transaction as a result of the borrowings under the Loan. See
"Unaudited Pro Forma Condensed Combined Financial Statements of VII Cable."
Other items, net
Other items, net, principally reflects late fee income and for the nine-
month period ended September 30, 1995, includes a pre-tax gain of $26.9
million from the sale of marketable securities.
Provision for income taxes
VII Cable has been included in the consolidated federal, state and local
income tax returns filed by Viacom. However, the income tax provision has been
prepared on a separate return basis as though VII Cable filed stand-alone
income tax returns.
The annual effective tax rates of 48% for 1995 and 67% for 1994 were both
adversely affected by the amortization of acquisition costs which are not
deductible for tax purposes.
46
<PAGE>
1994 vs. 1993
Revenues decreased to $404.5 million for 1994 from $414.8 million for 1993
(or 2%), attributable to decreases of $20.2 million in primary and $4.8
million in premium revenues, partially offset by increases of $10.6 million in
other operating revenues, $2.3 million in pay-per-view revenues and $1.8
million in advertising revenues. The decrease in revenues primarily reflects a
10% decrease in average rates for primary services partially offset by a 3%
increase in average primary customers. Earnings from operations decreased to
$57.4 million for 1994 from $83.8 million for 1993 (or 31%). Total revenues
per primary customer per month decreased 6% to $30.17 for 1994 from $31.94 for
1993. The revenue variance reflects the effect of the FCC rate regulations
pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act") governing rates in effect as of September 1, 1993
and as of May 15, 1994. The decrease in earnings from operations principally
reflects the decreased revenues attributable to the above rate regulations and
increased programming expense of $11.4 million. EBITDA decreased to $133.8
million for 1994 from $157.2 million for 1993 (or 15%), principally reflecting
the decrease in revenues and the increase in programming expenses.
As of December 31, 1994, VII Cable served approximately 1,139,000 primary
customers subscribing to approximately 875,000 premium units, representing a
4% and 22% increase, respectively, since December 31, 1993.
Interest expense
Interest expense increased 14% to $38.0 million for 1994 from $33.4 million
for 1993. Amounts allocated by Viacom were $35.7 million for 1994 and $31.2
million for 1993.
Other items, net
Other items, net in 1993, principally reflected a pre-tax gain of
approximately $55 million from the sale of the stock of Viacom Cablevision of
Wisconsin, Inc. (the "Wisconsin cable system") and a pre-tax gain of $17.4
million from sales of a portion of an investment held at cost and late fee
income.
Provision for income taxes
The annual effective tax rates of 67% for 1994 and 35% for 1993 were both
adversely affected by the amortization of acquisition costs which are not
deductible for tax purposes. For 1993, the annual effective tax rate reflects
a 9% tax benefit related to the sale of the Wisconsin cable system.
During the first quarter of 1993, VII Cable adopted Statement of Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," on a prospective
basis. As a result, VII Cable recognized an increase to earnings of $13.5
million in 1993 as the cumulative effect of a change in accounting principle.
1993 vs. 1992
Revenues increased to $414.8 million for 1993 from $410.1 million for 1992
(or 1%). Earnings from operations decreased to $83.8 million for 1993 from
$97.5 million for 1992 (or 14%). EBITDA decreased to $157.2 million for 1993
from $164.7 million for 1992 (or 5%).
On a comparable basis with the 1992 results (excluding the Wisconsin cable
system, which was sold effective January 1, 1993), revenues increased to
$414.8 million for 1993 from $392.7 million for 1992 (or 6%), attributable to
an increase of $18.7 million in primary revenues, $1.8 million in advertising
revenues, $1.7 million in pay-per-view revenues and $1.0 million in other
revenues partially offset by a decrease of $1.1 million in premium revenues.
Earnings from operations decreased to $83.8 million for 1993 from $94.7
million for 1992 (or 12%). The increase in revenues reflects a 4% increase in
average rates for primary services and a 2% increase in average primary
customers. Total revenues per primary customer per month increased 3% to
$31.94 for 1993 from $30.97 for 1992. The decrease in earnings from operations
reflects increased programming expenses of $7.2
47
<PAGE>
million and operating expenses (which included non-recurring costs associated
with the implementation of FCC rate regulations during the period), and
increased depreciation and amortization expense related to the step-up in
basis of property and equipment due to the implementation of SFAS 109. On a
comparable basis, EBITDA decreased to $157.2 million for 1993 from $158.2
million for 1992 due to increases in programming and operating expenses.
As of December 31, 1993, VII Cable served approximately 1,094,000 primary
customers subscribing to approximately 718,000 premium units, representing a
2% and 9% decrease, respectively, since December 31, 1992. Excluding the
Wisconsin cable system customers in 1993, primary customers increased 2% and
premium units decreased 5% since December 31, 1992.
Interest expense
Interest expense decreased 33% to $33.4 million for 1993 from $49.8 million
for 1992. Amounts allocated by Viacom were $31.2 million for 1993 and $44.6
million for 1992.
Other items, net
Other items, net in 1992, principally reflects late fee income.
Provision for income taxes
The annual effective tax rates of 35% for 1993 and 53% for 1992 were both
adversely affected by the amortization of acquisition costs which were not
deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Immediately following the consummation of the Stock Issuance, it is expected
that VII Cable will have borrowings of approximately $1.35 billion under the
Loan and approximately $500 million aggregate par value of VII Cable Preferred
Stock. See "Unaudited Pro Forma Condensed Combined Financial Statements of VII
Cable." Additionally, VII Cable's business requires significant capital
expenditures to maintain, upgrade, rebuild and expand its cable television
systems. VII Cable's cash requirements have been funded by VII Cable's
operating activities and historically, as needed, through intercompany
advances from Viacom. VII Cable expects its future cash requirements
(including capital expenditures, capital contributions to joint ventures,
commitments and payments of principal and interest on the Loan and dividends
payable on the VII Cable Preferred Stock) to be funded by cash provided by
operating activities, expected availability under the Loan of $50 million and
intercompany advances, as required, from TCI. See "Risk Factors--Total
Indebtedness and Cash Flow of VII Cable" and "--Dependence on Additional
Capital."
VII Cable has several general partnership interests, including interests in
Northwest Cable Advertising (50% owned), Bay Cable Advertising (33 1/3%
owned), TCG San Francisco ("TCGSF") (23% owned), TCG Seattle ("TCGS") (22%
owned) and Prime Sports Northwest Network ("Prime Sports") (40% owned). The
principal business of Northwest Cable Advertising and Bay Cable Advertising is
the sale of advertising on cable television systems owned by VII Cable, its
general partners and other cable television operators. TCGSF and TCGS were
formed on January 1, 1994 for the purpose of investing in and operating
communication facilities. Both TCGSF and TCGS lease communication network
facilities from VII Cable, which are financed and constructed by VII Cable.
Prime Sports is a partnership between VII Cable and a subsidiary of Liberty
Media Corporation. The principal business of Prime Sports is to provide a
television sports programming service in the northwest United States. In
exchange for programming, Prime Sports receives subscriber revenue from cable
television operators including its general partners.
48
<PAGE>
VII Cable's partnerships are expected to require estimated cash
contributions of approximately $8 million to $10 million in both 1995 and
1996. Planned capital expenditures, including information systems costs, are
estimated to be approximately $120 million in 1995 and $150 million in 1996.
Capital expenditures are primarily related to additional construction and
equipment upgrades for the existing cable franchises.
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position or results of
operations.
VII Cable's current franchises expire on various dates through 2017. VII
Cable has never had a franchise revoked and, to date, all of VII Cable's
franchises have been renewed or extended at or prior to their scheduled
expirations. VII Cable has no reason to believe that its franchises will not
be renewed.
VII Cable's cable systems currently compete for viewers with, or face
potential competition from, other distribution systems which deliver
programming by microwave transmission (through multichannel multipoint
distribution systems ("MMDS") and satellite master antenna television
("SMATV") systems or directly to subscribers via either direct broadcast
satellite ("DBS") or TV-receive only ("TVRO") technology. See "Business of VII
Cable--Competition."
In the ordinary course of business, VII Cable enters into long-term
affiliation agreements with programming services which require that VII Cable
continue to carry and pay for programming and meet certain performance
requirements.
In July 1994, Viacom International and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement") with certain banks. The Credit Agreement is an 8-year term
loan maturing on July 1, 2002. Viacom Cablevision of Dayton Inc. ("Dayton") is
a Subsidiary Borrower of $57 million under this facility, which amount of
indebtedness is included in the historical financial statements of VII Cable
included elsewhere in this Offering Circular - Prospectus. The Credit
Agreement provides that in the event that Dayton ceases to be a wholly owned
subsidiary of Viacom or Viacom International, the $57 million of borrowings
shall become due and payable. Under the Implementation Agreement, Viacom
Services will assume Dayton's obligation in respect of the $57 million of
indebtedness under the Credit Agreement.
VII Cable was in compliance with all debt covenants and had satisfied all
financial ratios and tests as of December 31, 1994 in respect of its $57
million of borrowings under the Credit Agreement and expects to remain in
compliance and satisfy all such financial ratios and tests during 1995.
Net cash flow from operating activities increased 2% to $57.9 million for
the nine months ended September 30, 1995 from $56.9 million for the nine
months ended September 30, 1994, primarily reflecting increased earnings from
operations offset by increased interest expense. Investing activities
primarily reflect capital expenditures, VII Cable's investment in two
partnerships (TCG San Francisco and TCG Seattle) and in 1995 proceeds from the
sale of marketable securities available-for-sale. Net cash flow from financing
activities reflect Viacom's funding of VII Cable's working capital
requirements, net of amount allocated to VII Cable from Viacom, including
amounts for interest, certain administrative services and salaries and
benefits.
Net cash flow from operating activities decreased 21% to $77.9 million in
1994 from $98.8 million in 1993, primarily reflecting decreased earnings from
operations. Investing activities principally reflect capital expenditures and
VII Cable's investment in two partnerships (TCG San Francisco and TCG Seattle)
in 1994, and proceeds from the sale of the Wisconsin cable system in 1993.
Financing activities reflect Viacom's funding of VII Cable's working capital
requirements, net of amounts allocated to VII Cable from Viacom. Net cash flow
from financing activities for 1992 also reflect the repayment of $49 million
of bank debt in connection with the sale of the Wisconsin cable system.
49
<PAGE>
Receivables increased $4.2 million between 1994 and 1993 primarily due to
increased non-cable customer receivables, principally from receivables from
the leasing of communication network facilities to TCGSF and TCGS. Cable
customer receivables also increased, due to an increase in customers offset by
a slight decrease in the average cable customer receivable.
The decrease in allowance for doubtful accounts of $540 thousand between
December 31, 1993 and December 31, 1994 is primarily due to a decrease in
cable customer churn and the decrease in the average cable customer
receivable. The allowance for doubtful accounts increased $463 thousand
between December 31, 1994 and September 30, 1995 primarily due to an increase
in the average cable customer receivable and pay-per-view events.
Collectibility of revenues approximated 98% in 1993 and 1994 and the nine
months ended September 30, 1995.
IMPACT OF INFLATION
The net impact of inflation on operations has not been material in the last
three years due to the relatively low rates of inflation during the period.
RECENTLY ISSUED ACCOUNTING REQUIREMENTS
In March of 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", effective for fiscal years beginning after December 15,
1995. SFAS 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the asset carrying amount. SFAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. VII Cable has not yet
determined the financial statement impact of the adoption of SFAS 121.
Effective January 1, 1994, VII Cable adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS 115,
investments classified as available-for-sale are carried at fair value and
unrealized holding gains and losses during the period are recorded as a
component of equity. The cumulative effect of the change in accounting
principle is recorded, net of tax, as a component of equity. Prior to the
adoption of SFAS 115, marketable equity securities held by VII Cable were
reported at the lower of cost or market. During February 1995, VII Cable sold
its marketable securities available-for-sale, resulting in a pre-tax gain of
$27 million.
RECENT LEGISLATION
On October 5, 1992, Congress enacted the 1992 Cable Act substantially
amending the regulatory framework under which cable television systems have
operated since the Communications Act of 1934 (the "Communications Act") was
amended by the Cable Communications Policy Act of 1984 (the "1984 Cable Act").
The FCC, through its rules and regulations, began implementing the
requirements of the 1992 Cable Act in 1993. Rate regulations adopted in 1993
and revised in 1994 by the FCC (collectively, the "Benchmark Regulations")
established a "benchmark" formula used to set a cable operator's "initial
permitted rate" or "transitional rate" for regulated tiers of cable service.
Cable systems whose rates exceeded the applicable benchmark were required to
reduce their rates either to the benchmark or by 17% from those charged on
September 30, 1992, whichever reduction was less. These regulations also
established the prices that an operator may charge for subscriber equipment
and installation services, based on the operator's actual cost plus a
permitted 11.25% margin of profit.
The FCC in 1994 also (1) adopted interim standards governing "cost-of-
service" proceedings pursuant to which a cable operator may attempt to prove
that its costs of providing regulated service justify initial permitted rates
that are higher than those produced under the benchmark approach, and (2)
established a regulatory scheme to adjust initial permitted rates on a going-
forward basis for inflation and certain "external" cost increases, which
provided (among other things) a pass-through of and 7.5% mark-up for increases
in an operator's programming expenses.
50
<PAGE>
In November 1994, the FCC revised its "going forward" rules ("November 1994
Regulations") to increase the price which could be charged for new channels.
The new rules allow operators to pass through to subscribers the costs, plus a
$0.20 per channel mark-up, for channels added to regulated tiers other than
limited basic service, so long as the total increase does not exceed $1.50
through 1996. For 1997, the November 1994 Regulations allow an operator to
recover all product costs for such new channels, plus $0.20 per channel, up to
a ceiling allowing recovery of all product costs plus $1.20. In addition,
operators may launch new services as optional New Product Tiers ("NPTs") on an
unregulated basis, although the FCC may in the future determine to regulate
NPTs. In September 1995, the FCC again liberalized its cable rate rules. Among
other things, the new rules permit the recovery of significant upgrade costs
on a cost-of-service basis without subjecting all of the system's costs to a
full cost-of-service review. There are positive and negative effects to the
new rules. They will change how often rate changes can be made (once per year)
but allow for full recovery of costs. However, there is expected to be a delay
between the incurrence of cost increases and the collection of revenue.
The implementation of the Benchmark Regulations has had and is expected to
continue to have a negative effect on VII Cable's revenues and earnings from
operations. The reduction in revenues in 1994 was partially offset by customer
growth and subsequent permitted rate increases. On a going forward basis, the
November 1994 Regulations have mitigated and are expected to continue to
mitigate a portion of the adverse impact of the reduction in revenues of VII
Cable. See "Business of VII Cable--Subscriber Services and Rates." Further,
VII Cable has made cost-of-service filings in two systems. While VII Cable
cannot predict the outcome of these filings, it believes that both cost-of-
service proceedings justify rates in excess of those calculated using the
Benchmark Regulations. For further discussion of the impact of federal rate
regulation and of certain legislation pending in Congress on VII Cable, see
"Business of VII Cable--Regulation--Federal Regulation."
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BUSINESS OF VII CABLE
THE COMPANY
VII Cable currently owns and operates cable television systems in five
geographic regions, including the San Francisco and Northern California area,
Salem, Oregon, the Seattle, Washington and greater Puget Sound area,
Nashville, Tennessee and Dayton, Ohio. As of September 30, 1995, VII Cable was
approximately the tenth largest multiple cable television system operator in
the United States, with approximately 1.2 million basic subscribers in five
states.
VII CABLE'S SYSTEMS
The following tables set forth information relating to VII Cable's systems
as of September 30, 1995.
<TABLE>
<CAPTION>
VII CABLE
AS OF SEPTEMBER 30, 1995
----------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
HOMES IN HOMES NUMBER OF MILES OF
FRANCHISE PASSED BY PRIMARY PRIMARY PREMIUM PREMIUM CABLE
AREA(1) CABLE(2) CUSTOMERS(3) PENETRATION(4) UNITS(5) PENETRATION(6) DISTRIBUTION
----------- ----------- ------------ -------------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BAY AREA REGION
Marin(7)................ 81,000 77,700 62,700 81% 39,100 62% 646
Sonoma(7)............... 47,000 45,600 35,600 78% 23,000 65% 540
Napa.................... 33,000 32,600 24,000 74% 16,800 70% 321
East Bay/Castro
Valley(7).............. 89,000 88,200 74,200 84% 70,700 95% 683
Pittsburg/Pinole(7)..... 74,000 73,500 55,200 75% 56,600 103% 566
San Francisco........... 357,000 339,300 176,400 52% 149,600 85% 711
--------- --------- --------- --- ------- ---- ------
Total Bay Area Region... 681,000 656,900 428,100 65% 355,800 83% 3,467
ORE-CAL REGION
Redding(7).............. 58,000 55,400 36,300 66% 21,500 59% 663
Oroville................ 44,000 40,000 26,200 66% 12,200 47% 501
Salem................... 78,000 75,400 47,300 63% 30,700 65% 629
--------- --------- --------- --- ------- ---- ------
Total Ore-Cal Region.... 180,000 170,800 109,800 64% 64,400 59% 1,793
PUGET SOUND REGION(7)... 641,000 620,500 435,800 70% 315,700 72% 6,388
MIDWEST REGION
Nashville(7)............ 271,000 238,500 143,500 60% 146,200 102% 2,347
Dayton(7)............... 98,000 94,200 53,300 57% 63,100 118% 634
--------- --------- --------- --- ------- ---- ------
Total Midwest Region.... 369,000 332,700 196,800 59% 209,300 106% 2,981
TOTAL VII CABLE...... 1,871,000 1,780,900 1,170,500 66% 945,200 81% 14,629
========= ========= ========= === ======= ==== ======
</TABLE>
- --------
(1) Homes in franchise area represents VII Cable's estimate based upon local
sources such as city directories, chambers of commerce, public utilities,
public officials and house counts.
(2) Homes are deemed "passed by cable" if such homes can be connected
relatively inexpensively and without any further extension of the trunk
transmission lines.
(3) Represents the number of homes connected, rather than the number of
television outlets connected within such homes.
(4) Represents primary customers as a percentage of homes passed by cable.
(5) The premium unit count is based on the total number of premium services
subscribed to by primary customers.
(6) Represents premium units as a percentage of primary customers.
(7) Other cable television companies, while not competing with VII Cable for
subscribers, have franchises serving parts of these areas in which VII
Cable also has franchises. For further discussion of competition, see "--
Competition."
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The following table demonstrates the growth of VII Cable's systems during
the nine months ended September 30, 1995 and the five-year period ended
December 31, 1994, adjusted to eliminate the impact of the disposition of the
Milwaukee cable system in January, 1993.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Homes passed............ 1,780,900 1,757,700 1,729,900 1,697,500 1,658,100 1,165,200
Primary customers....... 1,170,500 1,139,100 1,094,100 1,069,100 1,041,700 1,013,700
Primary penetration..... 66% 65% 63% 63% 63% 63%
Premium units........... 945,200 875,200 718,100 752,700 744,700 697,700
Premium penetration..... 81% 77% 66% 70% 71% 69%
Average monthly
operating revenue per
primary customer....... $33.49 $31.90 $33.76 $32.28 $30.47 $27.63
</TABLE>
Under the Subscription Agreement, it is contemplated that VII Cable will
sell or exchange the Dayton and Nashville systems on or after the day
following the Exchange Date. See "Arrangements Among Viacom, Viacom
International, TCI and TCI Cable--Terms of the Subscription Agreement."
VII Cable's operations require, as do all cable systems, a large investment
in physical assets consisting primarily of receiving apparatus, trunk lines,
feeder cable and drop lines connecting the distribution network to the
premises of customers, electronic amplification and distribution equipment,
converters located in customers' homes and other components. Significant
expenditures are also required for maintenance and replacement of and
additions to such system assets as a result of technological advances,
ordinary wear and tear and changes in regulatory requirements. System
construction and operation and quality of equipment used must conform with
federal, state and local electrical and safety codes and certain regulations
of the FCC. Although management believes the equipment used in the cable
operations is in good operating condition, VII Cable invests significant
amounts each year to upgrade, rebuild and expand its cable systems. During the
last five years, VII Cable's capital expenditures were approximately as
follows: 1990: $46 million; 1991: $45 million; 1992: $55 million; 1993: $79
million; and 1994: $99 million. VII Cable's capital expenditures in 1995 are
estimated to be approximately $120 million. Under the Subscription Agreement,
if the Subscription Agreement terminates without the Exchange Offer having
been consummated, TCI Cable will reimburse VII Cable for certain capital
expenditures made after January 20, 1995. See "Arrangements Among Viacom,
Viacom International, TCI and TCI Cable--Terms of the Subscription Agreement."
In addition, VII Cable is analyzing potential business applications for its
broadband network, including telephony, the use of high-speed cable modems for
connection to on-line services, interactive video applications and video on
demand. These applications, either individually or in combination, will
require upgrading and rebuilding VII Cable's systems to replace or supplement
coaxial cable with fiber optic cable and incorporate two-way activation and
digital compression techniques. Significant additional capital expenditures
will be required in order to implement such technological advances.
FRANCHISES
VII Cable holds franchises authorizing it to engage in the delivery of
multi-channel programming to subscribers located in its franchise areas. These
franchises, all of which are nonexclusive, generally provide for the payment
of fees to the issuing authority. Annual franchise fees imposed on VII Cable's
systems generally average 5.0% of gross revenues (as defined in the relevant
franchise agreement). The 1984 Cable Act prohibits franchising authorities
from imposing annual franchise fees in excess of 5.0% of gross revenues. See
"--Regulation--State and Local Regulation."
The 1984 Cable Act guarantees cable operators due process rights in
franchise renewal proceedings and provides that franchises will be renewed
unless the cable operator fails to meet one or more of four enumerated
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<PAGE>
statutory criteria. VII Cable's current franchises expire on various dates
through 2017. VII Cable has never had a franchise revoked and, to date, all of
VII Cable's franchises have been renewed or extended at or prior to their
scheduled expirations. VII Cable has no reason to believe that its franchises
will not be renewed. See "--Regulation--State and Local Regulation."
SUBSCRIBER SERVICES AND RATES
In all but two of its local franchise areas, VII Cable offers at least two
tiers of primary service: "Limited Service," which consists generally of local
and distant broadcast stations and all public, educational and governmental
("PEG") channels required by local franchise authorities; and the "Satellite
Value Package," which generally provides additional channels of advertiser-
supported program services and, where applicable, commercial leased access
channels required by federal law. In addition, VII Cable has introduced a
third tier of non-premium service which qualifies as a non-regulated NPT under
FCC regulations in a number of its systems. Each such tier consists of at
least five channels of advertiser-supported program services. VII Cable also
offers premium program services to its customers for an additional monthly
fee. At September 30, 1995, the Company's cable television systems had
approximately 945,200 subscriptions to premium program services. In addition,
VII Cable offers, through certain of its addressable cable systems,
individually priced, stand-alone pay-per-view movies and events (some of which
are also offered on certain non-addressable systems).
The primary and premium program services and pay-per-view programming
offered to subscribers by VII Cable include programming supplied by Viacom
(including joint venture program services) as well as third-party programming.
Viacom programming is provided under affiliation agreements which will
continue in effect after the consummation of the Transaction. See
"Relationship between Viacom and VII Cable." For a discussion of future
programming arrangements between VII Cable and TCI and its affiliates, see
"Relationship between VII Cable and TCI."
The monthly service fees for Limited Service and the Satellite Value Package
constitute the major source of the systems' revenue and are regulated under
the 1992 Cable Act. See "--Regulation--Federal Regulation." Rates charged to
subscribers vary from system to system. At September 30, 1995, VII Cable's
fixed monthly fees charged to customers for primary services ranged from $8.58
to $15.12 per month for Limited Service, from $19.83 to $27.19 for the
combination of Limited Service plus the Satellite Value Package and up to
$12.95 per month for each premium service, in each case for all of an
individual's cable television connections, plus a charge for converter rental
ranging from $.10 to $3.93 per unit. An installation charge is levied in many
cases, which in the year ended December 31, 1994 constituted approximately 2%
of total revenues. Customers may discontinue service at will without
additional charge or downgrade service at a nominal charge. Although a number
of jurisdictions in which VII Cable is franchised have not, under the 1992
Cable Act, exercised their authority to regulate the rates charged to
subscribers for the Limited Service tier, none of VII Cable's systems in those
jurisdictions would be exempt from such rate regulation should such
jurisdictions exercise such authority in the future. All of VII Cable's
systems are subject to rate regulation by the FCC with respect to rates
charged to subscribers for the Satellite Value Package tier of service under
the 1992 Cable Act. The NPTs mentioned above are not rate regulated at the
present time, but the FCC has reserved the right to impose rate regulation for
NPTs in the future. See "--Regulation--Federal Regulation."
In addition to revenue derived from subscriber fees, VII Cable also sells
available advertising spots on advertiser-supported program services. Another
source of revenue is the sale of pay-per-view movies and events to VII Cable's
subscribers in systems where such service is offered. VII Cable also offers
home shopping services to its customers. All shopping services pay VII Cable a
share of revenue from sales of products in a system's service area. In
addition, VII Cable derives revenues from the lease of certain fiber optic
capacity in three of its franchise areas to partnerships engaged in
competitive access telephone services. VII Cable through certain of its
subsidiaries is a general partner in these partnerships and TCI through
certain of its affiliates is a general partner in two of such partnerships.
VII Cable markets its cable television services through a combination of
telemarketing, direct mail advertising, radio, television and local newspaper
advertising and door to door selling. In addition to marketing efforts to
attract new customers, VII Cable conducts periodic campaigns to encourage
existing customers to
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<PAGE>
purchase additional levels of primary and premium services. From time to time,
VII Cable also engages in cooperative marketing campaigns with other cable
operators and cable programmers. Following the consummation of the
Transaction, VII Cable expects that in the ordinary course of business it may
conduct marketing campaigns in cooperation with cable operators and
programmers affiliated with TCI.
PROGRAMMING
VII Cable provides satellite-delivered cable programming to its subscribers
pursuant to contracts with programming suppliers generally providing for per-
subscriber license fees payable to such suppliers. Primary program services
offered to subscribers are licensed for a periodic fee payable to such
suppliers generally calculated on the basis of the number of primary
subscribers. Premium program services are licensed for a fee payable to such
suppliers generally calculated on the basis of the number of subscribers to
the particular premium service. VII Cable's programming contracts are
generally for fixed periods of time ranging from 3 to 7 years. The costs to
VII Cable to provide cable programming have increased in recent years and are
expected to continue to increase due to additional programming being provided
to subscribers, increased costs to produce or purchase cable programming,
inflationary increases and other factors. Rate regulations adopted by the FCC
implementing the 1992 Cable Act permit cable operators to pass through to
subscribers increases in programming expenses for regulated tiers and to
increase rates to reflect an annual inflation factor. In addition, cable
operators may increase the charge to subscribers for regulated tiers of
service by a regulated per channel fee, plus license fees, for each new
channel added to a regulated tier, subject to certain price caps.
Under the 1992 Cable Act, local broadcasting stations may require cable
television operators to negotiate a fee for the right to continue to
retransmit their local television signals ("Retransmission Consent") or,
alternatively, may demand carriage under the 1992 Cable Act's "Must-Carry"
provisions. Under the 1992 Cable Act, agreements to carry television stations
expire every three years (the next expiration cycle is in October 1996),
whereupon the station may either renegotiate the terms for its Retransmission
Consent with the cable system for carriage or assert the station's "Must-
Carry" right. Despite the statutory three-year cycle, and in compliance with
the 1992 Cable Act, VII Cable's current retransmission agreements with
television stations are generally terminable at will by the stations upon
prior notice. See "--Regulation--Federal Regulation--Must Carry/Retransmission
Consent."
Cable television systems are subject to the Copyright Act of 1976 (the
"Copyright Act") which provides a compulsory license for carriage of
copyrighted material on broadcast signals. See "--Regulation--Federal
Regulation--Compulsory Copyright."
COMPETITION
VII Cable's cable systems currently compete for viewers with, or face
potential competition from, other distribution systems which deliver
programming by microwave transmission (through MMDS) and SMATV systems or
directly to subscribers via either DBS or TVRO technology. Local multipoint
distribution systems ("MLDS"), a newly developed microwave technology which to
date has been deployed only on a trial basis, may be competitive with cable in
the future. The FCC has concluded a proceeding aimed at eliminating a number
of technological and regulatory limitations applicable to, and thereby
supporting the potential growth of, MMDS as a competitive video technology.
The nature and extent of competition from such alternative distribution
systems varies among and within cable systems and depends, in part, upon
reliability, programming and pricing. Digital compression (a technology which
when deployed will enable cable systems to increase the number of channels of
programming available to subscribers without necessitating as extensive a
rebuild as would otherwise be required) may allow cable systems to
significantly increase the number of channels of programming they deliver and
thereby help cable systems meet competition from these other distribution
systems, particularly DBS (which already incorporates digital compression
techniques). SMATV, DBS and TVRO are the alternative delivery technologies
which currently offer competition to cable television systems. In the future,
greater competition can be expected from DBS and, as described below, local
telephone companies ("telcos").
55
<PAGE>
These competing video technologies are described in greater detail below:
DBS. DBS services transmit signals by satellite to receiving facilities
located on customers' premises. Newly deployed high-powered, digitally
compressed, direct-to-home satellites now offer delivery of programming
(including near video on demand ("NVOD")) to subscribers throughout the
United States using relatively small roof-top or wall-mounted antennas.
Companies offering DBS services use digital compression technology to
increase satellite channel capacity and to provide a package of movies and
other program services competitive to those of cable television systems.
Two companies, United States Satellite Broadcasting, Inc. ("USSB") and
Hughes DirecTV ("DirecTV") are currently offering DBS service using two
high-powered satellites (with a third such satellite expected to be placed
in service in the near future). Primestar Partners, L.P. ("Primestar"), in
which TCI has an equity interest, is offering DBS service using a medium-
powered satellite. Two other companies are expected to enter this
marketplace in the near future. USSB and DirecTV together offer more than
100 channels of service using digital compression technology, Primestar
currently offers approximately 80 channels of programming and other DBS
entities propose providing similar program packages.
SMATV. SMATV systems are privately owned, on-premises broadband
distribution systems which receive local broadcast television signals by
antenna as well as video programming by satellite. Each SMATV system then
delivers this programming to the condominium, apartment complex or other
multiple unit residential development at which it is located, often on an
exclusive basis. Due to the widespread availability of the reasonably-
priced earth stations through which SMATV systems operate, such systems can
offer improved reception of local television stations as well as many of
the same satellite-delivered services which are offered by franchised cable
television systems. Unlike a franchised cable television system, SMATV
systems generally require no local franchise approval in order to operate,
pay no franchise fees and confine their operations to small areas that are
easy to serve and more likely to be profitable.
MMDS/MLDS. MMDS systems, also known as wireless cable, deliver (and, when
deployed, MLDS systems will deliver) programming services over microwave
channels licensed by the FCC which are received by subscribers with special
antennas. These systems are less capital intensive, are not required to
obtain local franchises or to pay franchise fees and are subject to fewer
regulatory requirements than cable television systems. To date, the ability
of MMDS systems to compete with cable television systems has generally been
limited by channel capacity, the lack of two-way interactive capabilities
and the need for unobstructed line-of-sight over-the-air transmission. MLDS
is expected substantially to overcome these impediments, but thus far has
only been deployed on a trial basis. Additionally, the amount of spectrum
to be made available for use by MLDS has not yet been determined by the
FCC, and consequently it is not possible to predict the extent to which
MLDS will be commercially exploited. Certain telcos have recently acquired
or have options to purchase MMDS systems in furtherance of their strategy
to position themselves to enter into the video services business. In the
event the telcos make substantial additional capital investments in MMDS
systems and related technology, MMDS could be expected to become more
widely available to subscribers and therefore pose greater competition to
cable television systems in the future than they do currently.
The 1992 Cable Act prohibits a franchisor from granting exclusive franchises
and from unreasonably refusing to award additional competitive franchises.
Other cable operators have been franchised and may continue to apply for
franchises in certain areas served by VII Cable's cable systems. In 1986, the
U.S. Supreme Court held that cable system operations implicate First Amendment
rights and that local franchising authorities may violate those rights by
establishing franchise requirements, unless there is a legitimate government
purpose. Since this decision, various federal district and appellate courts
have issued contradictory opinions with respect to the enforceability of
specific franchise requirements. Depending on the resolution of these cases,
competitive entry by other operators into VII Cable's franchise areas and VII
Cable's entry into other franchise areas could be more easily achieved.
Telco video services. The entry of the telcos into the cable television
business may provide additional competition to the cable industry. The
Communications Act's prohibitions against telcos engaging in the
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<PAGE>
distribution of video services within their local service areas have been held
to be unconstitutional in a series of federal district court decisions.
Although appellate court rulings upholding certain of these decisions are
being appealed, on March 17, 1995, the FCC issued a public notice announcing
that, pending disposition of these appeals, it will not enforce its cross-
ownership rules in a manner inconsistent with these decisions.
Pending the outcome of this litigation, the FCC has in the interim adopted
and is currently refining video dial tone ("VDT") regulations which allow
delivery of video programming by telcos over telephone lines in their local
service areas. The programming may be provided by unaffiliated third party
programmers or programmers owned by or affiliated with the applicable telco.
In the former case, the telco need not obtain a franchise nor comply with
other requirements of the Communications Act applicable to cable operators. In
its current proceeding, the FCC is considering which, if any, of the
Communications Act's requirements (including the obligation to obtain a
franchise) should be imposed on telcos operating a VDT system which delivers
programming of an entity affiliated with the telco. If the within-service-area
telco-cable cross-ownership prohibitions are ultimately held to be
unconstitutional, telcos could own within-service-area cable systems as
traditional cable operators and would not have to comply with the FCC's VDT
rules, which impose certain common-carrier requirements on telcos (i.e., use
of the telco's facilities must be available to all programmers and program
packagers on a non-discriminatory, first-come first-served basis). Certain
telcos are already building such within-service-area cable systems. The FCC
has also decided to streamline the process by which it previously reviewed
telco proposals to build new communications facilities (including cable
television systems), thereby facilitating the direct provision by telcos of
cable television services. The FCC's VDT regulations will cease to be
effective in the event that legislation pending in Congress is enacted into
law in the form of the Conference Report which has been drafted but not yet
adopted by a Conference Committee of the House and Senate (the "Conference
Report") to reconcile separate telecommunications bills passed by the House
and Senate.
These bills, as well as the Conference Report, if enacted, would, among
other things, permit telcos to enter the cable business either as traditional
cable operators subject to the Communications Act's requirements applicable to
cable operators or on a common carrier basis. This legislation would also
permit cable systems to provide local exchange telephone service in
competition with the telcos, by eliminating most of the state and local
barriers to entry into the telephone business which currently exist. The
Senate and House bills, which deal with a variety of matters of
telecommunications policy, have been reconciled by the House/Senate Conference
Committee in the Conference Report. It is not possible to predict the timing
or the outcome of such proposed legislation. See "--Regulation--Federal
Regulation--Video Dialtone Regulations." In September 1995, VII Cable filed an
application with the California Public Utilities Commission to provide
telephone service in the greater San Francisco area. VII Cable has announced
its intention to commence offering such service on a limited trial basis in
the Castro Valley area in the first quarter of 1996. In addition, VII Cable is
a general partner in three partnerships providing commercial competitive
access telephone services which link business customers to long distance
carriers via private networks owned by the cable television company partners
and leased to the partnerships.
The FCC is currently considering allowing broadcasters to utilize additional
spectrum in new, digital transmission modes so that each currently licensed
broadcaster could, if the FCC proposals are adopted, broadcast several
additional channels of programming. If the FCC adopts its proposals, pending
legislation would require the FCC to also permit broadcasters to utilize
digitally transmitted signals for various purposes including, for additional
channels of programming. The aggregation of these additional broadcast signals
in a given market could pose additional competition for cable systems once
digital broadcast transmissions are implemented. Broadcast signals are
presently transmitted in analog rather than digital form. Full conversion from
analog to digital mode is expected to occur within 10 to 15 years after the
standards for digital transmissions are formally adopted by the FCC (and
potentially sooner). These standards may be adopted by the FCC in 1996.
VII Cable views the future success of its cable television distribution
business as being dependent on supplying additional programming and new
services to its customers and increasing primary and premium subscriber
penetrations.
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REGULATION
VII Cable's business is subject to regulation by federal, state and local
governmental authorities. The rules, regulations, policies and procedures
affecting the cable television business are constantly subject to change. The
descriptions which follow are summaries and should be read in conjunction with
the texts of the statutes, rules and regulations described herein. The
descriptions do not purport to describe all present and proposed federal,
state and local statutes, rules and regulations affecting VII Cable's
business.
FEDERAL REGULATION
1992 Cable Act. On October 5, 1992, Congress enacted the 1992 Cable Act,
substantially amending the regulatory framework under which cable television
systems have operated since the Communications Act was amended by the 1984
Cable Act. The FCC, through its rules and regulations, began implementing the
requirements of the 1992 Cable Act in 1993. The following is a summary of
certain significant issues:
Rate Regulation. The Benchmark Regulations established a "benchmark"
formula used to set a cable operator's "initial permitted rate" or
"transitional rate" for regulated tiers of cable service. Cable systems
whose rates exceeded the applicable benchmark were required to reduce their
rates either to the benchmark or by 17% from those charged on September 30,
1992, whichever reduction was less. These regulations also established the
prices that an operator may charge for subscriber equipment and
installation services, based on the operator's actual cost plus a permitted
11.25% margin of profit.
The FCC has also (1) adopted standards governing "cost-of-service"
proceedings pursuant to which a cable operator may attempt to prove that
its costs of providing regulated service justify initial permitted rates
that are higher than those produced under the benchmark approach, and (2)
established a regulatory scheme to adjust initial permitted rates on a
going-forward basis for inflation and certain "external" cost increases,
which provided (among other things) a pass-through of, and 7.5% mark-up
for, increases in an operator's programming expenses.
In its November 1994 Regulations, the FCC revised its "going forward"
rules to increase the price which could be charged for new channels. The
new rules allow operators to pass through to subscribers the costs, plus a
$0.20 per channel mark-up, for channels added to regulated tiers, other
than limited basic service, so long as the total increase does not exceed
$1.50 through 1996. For 1997, the November 1994 Regulations allow an
operator to recover all product costs for such new channels, plus $0.20 per
channel, up to a ceiling allowing recovery of all product costs plus $1.20.
In addition, operators may launch new services as optional NPTs on an
unregulated basis, although the FCC may in the future determine to regulate
NPTs. In September 1995, the FCC again liberalized its cable rate rules.
Among other things, the new rules permit the recovery of significant
upgrade costs on a cost-of-service basis without subjecting all of the
system's costs to a full cost-of-service review. There are positive and
negative effects to the new rules. They will change how often rate changes
can be made (once per year) but allow for full recovery of costs. However,
there is expected to be a delay between the incurrence of cost increases
and the collection of revenue.
The implementation of the Benchmark Regulations has had and is expected
to continue to have a negative effect on VII Cable's revenues and earnings
from operations. The reduction in revenues in 1994 was partially offset by
customer growth and subsequent permitted rate increases. On a going-forward
basis, the November 1994 Regulations have mitigated and are expected to
continue to mitigate a portion of the adverse impact of the reduction in
revenues of VII Cable. For example, VII Cable has launched multi-channel
NPTs in various systems. See "--Subscriber Services and Rates." Further,
VII Cable has made cost-of-service filings in two systems. While VII Cable
cannot predict the outcome of these filings, it believes that both cost-of-
service proceedings justify rates in excess of those calculated using the
Benchmark Regulations.
The 1992 Cable Act deregulated cable systems subject to "effective
competition" (as defined in such statute). Legislation passed by the Senate
on June 15, 1995 (the "Senate Bill") would, in addition, eliminate
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rate regulation of (a) all regulated tiers (other than the basic tier)
except for those cable operators whose rates substantially exceed the
national average, and (b) all cable systems which are subject to telco
video competition. Legislation passed by the House on August 4, 1995 (the
"House Bill") would, in addition, eliminate rate regulation of (i) all
regulated tiers (other than the basic tier) within 15 months of the House
Bill's enactment into law (and immediately for smaller systems, as defined
in the House Bill), and (ii) all cable systems in areas in which a telco is
authorized to provide cable services. Additionally, the House Bill would
substantially raise the minimum number of subscriber complaints which must
be filed with the FCC during the 15-month interim period with respect to
matters within the FCC's jurisdiction concerning regulated tiers of
programming in order to commence a rate proceeding. The differences between
the House Bill and the Senate Bill have been taken up in the House/Senate
Conference Committee in an attempt to reconcile them. The reconciled bills
as embodied in the Conference Report, if enacted, would eliminate rate
regulation for all regulated tiers of cable programming (other than the
basic tier) after March 31, 1999. The Conference Report also expands the
statutory definition of "effective competition" so that such competition is
deemed to exist in areas where a local telephone company, its affiliate, or
a multichannel video programming distributor using the facilities of the
telephone company or its affiliate offers programming to subscribers by any
means (other than direct-to-home satellites) in the franchise area of the
cable system, provided that the programming so offered is "comparable" to
the programming provided by the cable operator in that area. It is not
certain that the Conference Report will be adopted by the House and Senate
and VII Cable is unable to predict the timing or outcome of any such
proposed legislation.
Carriage of Affiliated Programming. The FCC's implementing regulations
limit the number of channels on a cable system which may be used to carry
the programming of such system's affiliated (as defined by FCC regulations)
cable programmers. These regulations (the "Channel Occupancy Rules")
generally provide that no more than 40% of such a system's channels can be
used to carry the programming of the system's affiliated cable programmers.
These channel occupancy limits apply to up to 75 channels of a given
system. To the extent that TCI and its affiliates supply VII Cable with
programming services after the consummation of the Transaction, the Channel
Occupancy Rules will affect the number of TCI-affiliated programming
services that VII Cable's systems distribute to their subscribers until
such time as VII Cable increases channel capacity on a system by system
basis beyond 75 channels. However, no program service currently carried by
VII Cable's systems is anticipated to be dropped because of the Channel
Occupancy Rules. Viacom is unable to predict the impact, if any, of the
Channel Occupancy Rules on the programming carried by VII Cable after the
consummation of the Transaction.
Must Carry/Retransmission Consent. Local broadcasting stations may
require cable television operators to negotiate a fee for the right to
continue to retransmit their local television signals or, alternatively,
may demand carriage under the 1992 Cable Act's "Must-Carry" provisions. See
"--Programming." In addition, a cable system may not carry any commercial
non-satellite-delivered television station which is "distant" to
communities served by such system, certain satellite-delivered television
stations which are distant to those communities or any radio station
without obtaining the consent of such station for such retransmission;
however, such television and radio stations do not have Must Carry rights.
Stations having Retransmission Consent rights may require payment in
consideration for Retransmission Consent. VII Cable has negotiated
retransmission rights for a number of commercial local and distant
television stations which it carries. Some of these agreements are on an
interim basis and may be canceled by the stations. VII Cable also carries a
number of local stations pursuant to their exercise of their Must Carry
rights. Local non-commercial television stations have Must Carry rights,
but may not elect Retransmission Consent. The Must Carry rules were
challenged by cable program services and cable system operators. In April
1993, a District of Columbia three-judge federal district court upheld the
rules against a First Amendment attack. In June 1994, the U.S. Supreme
Court held that the rules were content-neutral rather than per se
unconstitutional, but vacated the federal district court's decision and
remanded the case back to the federal district court to determine whether
the Must Carry rules are drafted narrowly enough to satisfy constitutional
requirements applicable to legislative restrictions on cable operators'
First Amendment rights. On December 13, 1995, the district court again
upheld the rules in a 2-to-1 decision. This decision has been appealed to
the U.S. Supreme Court.
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Buy Through to Premium Services. Pursuant to the 1992 Cable Act, a cable
system may not require subscribers to purchase any tier of service other
than the basic service tier in order to obtain services offered by the
cable operator on a per channel (e.g., premium services) or pay-per-view
basis. A cable system which is not now fully addressable and which cannot
utilize other means to facilitate access to all of its programming will
have until October 2002 to comply with this provision through the
implementation of fully addressable technology. VII Cable's cable systems
have already substantially implemented compliance.
Compulsory Copyright. Cable television systems are subject to the
Copyright Act which provides a compulsory license for carriage of
copyrighted material on broadcast signals. Distant signals are licensed at
prescribed rates (the proceeds of which are divided among the various
copyright holders of the programs contained in such signals). No license
fee is payable to any copyright holder for retransmission of broadcast
signals which are "local" to the communities served by the cable system.
Various bills have been introduced into Congress from time to time that
would eliminate or modify the cable television compulsory license. Without
the compulsory license, VII Cable could incur additional costs for its
carriage of programming of certain broadcast stations and if some broadcast
stations are not carried, customer satisfaction with cable service could be
adversely affected until satisfactory replacement programming is found.
Copyrighted music performed in programming supplied to cable television
systems by premium program services and advertiser-supported program
services has generally been licensed by the networks through private
agreements with the American Society of Composers, Authors and Publishers
("ASCAP") and Broadcast Music, Inc. ("BMI"), the two major performing
rights organizations in the United States. ASCAP and BMI offer "through to
the viewer" licenses to the program services which cover the retransmission
of the program services' programming by cable television systems to their
customers. However, the performing rights organizations have claimed the
right to receive royalties from cable systems for their transmission of
music contained in other programming. Cable systems have not yet concluded
negotiations with respect to these licensing fees.
ASCAP has instituted suit against two named cable operators and unnamed
operators as a class claiming that these cable systems are violating
copyright of musical compositions contained in programming distributed by
the systems on a pay-per-view basis.
Ownership Limitation. Pursuant to the 1992 Cable Act, the FCC has imposed
limits on the number of cable systems which a single cable operator may
own. In general, no cable operator may hold an attributable interest in
cable systems which pass more than 30% of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or
more (unless there is another single holder of more than 50% of the voting
stock), officerships, directorships and general partnership interests. The
FCC has stayed the effectiveness of these rules pending the outcome of the
appeal of a federal district court decision holding this ownership
limitation provision of the 1992 Cable Act unconstitutional.
Judicial challenges have been filed regarding other provisions of the 1992
Cable Act, including the provisions relating to rate regulation, Must
Carry/Retransmission Consent, and the mandated availability of cable channels
for leased access and PEG programming and the treatment of indecent
programming distributed by cable systems on public and leased-access channels.
If enacted, the House and Senate Bills may affect the status of the rate
regulation lawsuits. See "Regulation--Federal Regulation."
Video Dialtone Regulations. A series of federal district court decisions has
declared unconstitutional and enjoined enforcement of the Communications Act's
ban (the "Video Programming Ban") on the direct provision of video programming
by a telco in its local service area. The U.S. Courts of Appeals for the
Fourth and Ninth Circuits (in which VII Cable operates cable systems) have
affirmed the district court rulings brought before them on appeal. Prior to
these court rulings, the FCC had reinterpreted and liberalized the Video
Programming Ban in its 1992 "video dialtone" decision, authorizing a role for
telco participation in video distribution where such participation had
previously been prohibited. The FCC's VDT policy is being challenged in court
by cable interests as violating the Communications Act. It is also being
challenged in court by telephone interests as not
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being liberal enough. The policy permits in-service-area delivery of video
programming by a telco and exempts telcos from the Communications Act's
franchising requirements so long as their facilities are capable of two-way
video and are used for transmission of video programming on a common carrier
basis. Under the FCC's VDT policy, telcos are also permitted to provide, on a
non-common carrier basis, additional "enhanced" services such as video
gateways, video processing services, customer premises equipment and billing
and collection.
In January 1995, in response to the court rulings discussed above striking
down the Video Programming Ban, the FCC issued a Notice of Proposed Rulemaking
seeking to craft rules to govern telco provision of video programming directly
to subscribers in instances where the telco distributes over its VDT system
programming which it or one of its affiliates owns. The FCC's pending
proceeding addresses the extent to which regulations applicable to common
carriers and/or regulations applicable to cable operators should govern telcos
that provide video programming directly to subscribers over their own VDT
systems, including the necessity of a telco obtaining franchises and paying
franchise fees. The FCC has already approved several VDT construction
applications for market trials and/or limited commercial deployment and has
granted, in part, the first tariff filed to govern the rates and terms of a
VDT offering. In response to the court rulings noted above, the FCC's more
recent VDT authorizations have also allowed telcos to serve as program
packagers on their VDT platforms. Pending legislation would, if enacted,
preempt the FCC's VDT rules and would allow a relatively permissive framework
for telco entry into the direct provision of video services, essentially
giving the telcos the option to choose between operating as a traditional
cable operator, subject to all of the cable provisions of the Communications
Act, or operating as a VDT system, in which case a telco would be regulated as
a common carrier, subject only to certain cable provisions of the
Communications Act.
At present, state and/or local laws do not prohibit cable television
companies from engaging in certain kinds of telephony business in many states,
but affirmative state approval must generally be obtained before a cable
operator can offer telephony services. Several states, including California
and Ohio (in which VII Cable operates), have recently reduced barriers to
entry into the telephone business, but substantial impediments still exist.
Pending legislation would, if enacted, generally eliminate state and local
entry barriers which currently either prohibit or restrict an entity's
(including a cable operator's) ability to offer telecommunications services
(including telephone exchange service) in competition with telcos and
interconnect on a non-discriminatory basis with telcos and utilize certain
telco facilities in order to provide service in competition with a telco after
the date of enactment of such legislation. VII Cable cannot predict the
outcome or impact of these legislative and regulatory efforts although it can
be anticipated that cable operators could benefit from the elimination of
barriers to the provision of competitive telephone access. If the pending
legislation does not become law, and the U.S. Supreme Court affirms the lower
court decisions holding the Communications Act's Video Programming Ban
unconstitutional, certain of the telcos have stated their intention to enter
the video programming business immediately. In the event that the pending
legislation is not enacted and the Video Programming Ban should ultimately be
held to be constitutional by the U.S. Supreme Court, the FCC's VDT policy will
continue to permit at least one method for the provision of video services by
telcos in their local service areas.
STATE AND LOCAL REGULATION
State and local regulation of cable is exercised primarily through the
franchising process under which a company enters into a franchise agreement
with the appropriate franchising authority and agrees to abide by applicable
ordinances. Local franchising authorities are also permitted to exercise rate
regulation authority over limited basic service within federal constraints and
to regulate customer service standards where permitted by state law. See "--
Federal Regulation."
In addition to the above, under the Communications Act, franchising
authorities may control only cable-related equipment and facilities
requirements and may not require the carriage of specific program services.
However, federal law (as implemented by FCC regulations) mandates the carriage
of both commercial television stations which elect to exercise their Must
Carry rights and noncommercial television broadcast stations if such stations
are "local" to the area in which a cable system is located. See "--Federal
Regulation" and "--Must Carry/Retransmission Consent."
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PROPERTIES
A cable television system consists of three principal operating components.
The first component, known as the headend, receives television, radio and
information signals by means of special antennas and satellite earth stations.
The second component, the distribution network, which originates at the
headend and extends throughout the system's service area, consists of
microwave relays, coaxial or fiber optic cables and associated electronic
equipment placed on utility poles or buried underground. The third component
of the system is a "drop cable," which extends from the distribution or trunk
network into each customer's home and connects the distribution system to the
customer's television set.
VII Cable leases premises in Pleasanton, California for its corporate
headquarters. Pursuant to the Implementation Agreement, the corporate
headquarters lease will be included in the Conveyance to Viacom Services. VII
Cable also owns and leases parcels of real property for signal reception sites
(antenna towers and headends), microwave facilities and business offices in
California, Ohio, Oregon, Tennessee and Washington (the locations of VII
Cable's franchises). Viacom International believes that such premises are in
good condition and are suitable and adequate for its business operations.
EMPLOYEES
At December 31, 1995, VII Cable had 2,248 employees. VII Cable is a party to
a collective bargaining agreement dated August 2, 1994 with Teamsters Local
856 covering approximately 50 employees in San Francisco, California. VII
Cable considers its relations with its employees to be good.
LEGAL PROCEEDINGS
VII Cable is a party to various legal proceedings that are ordinary and
incidental to its business. Management does not believe that any legal
proceedings currently pending will have a material adverse effect on the
consolidated financial position of VII Cable.
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MANAGEMENT
The following table sets forth certain information regarding each person who
will serve as a director and executive officer of VII Cable immediately
following the Stock Issuance.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bob Magness...................... 71 Director
John C. Malone................... 54 Director
Donne F. Fisher.................. 57 Director
Brendan R. Clouston.............. 42 President and Director
Barry P. Marshall................ 49 Executive Vice President
Stephen M. Brett................. 55 Senior Vice President and Secretary
Bernard W. Schotters............. 50 Senior Vice President and Treasurer
Gary K. Bracken.................. 56 Senior Vice President
</TABLE>
There are no family relations, of first cousin or closer, among any of the
foregoing persons, by blood, marriage or adoption.
During the past five years, none of the foregoing persons has had any
involvement in a legal proceeding that would be material to an evaluation of
his ability or integrity.
MANAGEMENT BIOGRAPHIES
Bob Magness has served as Chairman of the Board and as a director of TCI
since June 1994 and of TCI Cable since 1968.
John C. Malone has served as Chief Executive Officer and President of TCI
since January 1994. He also served as Chief Executive Officer of TCI Cable
from March 1992 to October 1994 and President of TCI Cable from 1973 to
October 1994. Dr. Malone is a director of TCI, TCI Cable, Tele-Communications
International, Inc., Turner Broadcasting System, Inc., BET Holdings, Inc. and
The Bank of New York.
Donne F. Fisher has served as Executive Vice President and Treasurer of TCI
since January 1994. From 1970 through October 1994, Mr. Fisher held various
executive positions with TCI Cable, including Executive Vice President, Senior
Vice President and Treasurer. Mr. Fisher is a director of TCI, TCI Cable and
General Communication, Inc.
Brendan R. Clouston has served as Executive Vice President of TCI since
January 1994 and President and Chief Executive Officer of TCI Cable since
October 1994. From March 1992 to October 1994, he served as TCI Cable's
Executive Vice President and Chief Operating Officer, and from December 1991
to March 1992, its Senior Vice President. Prior to joining TCI Cable in 1991,
Mr. Clouston held various executive positions with United Artists
Entertainment Company, including Executive Vice President and Chief Financial
Officer.
Barry P. Marshall has served as TCI Cable's Executive Vice President and
Chief Operating Officer since October 1994. From March 1992 to January 1994,
he served as Executive Vice President and Chief Operating Officer of TCI
Cable's primary operating subsidiary, where he directly oversaw all of TCI
Cable's regional operating divisions. From 1986 to March 1992, Mr. Marshall
was Vice President and Chief Operating Officer of TCI Cable's largest regional
operating division.
Stephen M. Brett has served as Executive Vice President, General Counsel and
Secretary of TCI since January 1994. He has also served as Senior Vice
President and General Counsel of TCI Cable since December 1991. From August
1988 to December 1991, Mr. Brett was Executive Vice President-Legal and
Secretary of United Artists Entertainment Company and its predecessor, United
Artists Communications, Inc.
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Bernard W. Schotters has served as Senior Vice President-Finance and
Treasurer of TCI Cable since December 1991. From 1981 to December 1991, he was
TCI Cable's Vice President-Finance and Treasurer. Mr. Schotters also serves as
Vice President and Treasurer of most of TCI's subsidiaries.
Gary K. Bracken has served as controller of TCI Cable since 1969 and as its
Senior Vice President since December 1991. He also serves as TCI Cable's chief
accounting officer, a position he has held since 1982.
BOARD OF DIRECTORS
Composition and Term. VII Cable's Restated Certificate of Incorporation will
provide for a Board of Directors (the "VII Cable Board") of not less than
three members, with the exact number of directors to be fixed by resolution of
the VII Cable Board. The VII Cable Board will initially consist of four
members, each of whom shall serve a one-year term or until his earlier death,
resignation or removal.
Committees. The VII Cable Board will have an Audit Committee consisting of
Messrs. Malone, Fisher and Clouston. The duties of the Audit Committee will be
to review and monitor VII Cable's financial reports and accounting practices
to ascertain that they are within acceptable limits of sound practice, to
receive and review audit reports submitted by VII Cable's independent auditors
and by its internal auditing staff and make such recommendations to the VII
Cable Board as may seem appropriate to the Committee to assure that the
interests of VII Cable are adequately protected and to review all related
party transactions and potential conflict-of-interest situations.
COMPENSATION OF THE BOARD OF DIRECTORS
VII Cable's directors will not be separately compensated by VII Cable for
serving on the VII Cable Board or any committee thereof.
INDEMNIFICATION
VII Cable will enter into indemnification agreements with each person who
will serve as a director of VII Cable immediately following the Stock
Issuance. The indemnification agreements will generally provide (i) for the
prompt indemnification to the fullest extent permitted by law against (a) any
and all expenses including attorneys' fees and all other costs paid or
incurred in connection with investigating, preparing to defend, defending or
otherwise participating in any threatened, pending or completed action, suit
or proceeding related to the fact that such indemnitee is or was a director,
officer, employee, agent or fiduciary of VII Cable or is or was serving at VII
Cable's request as a director, officer, employee, agent or fiduciary of
another entity, or by reason of anything done or not done by such indemnitee
in any such capacity and (b) any and all judgments, fines, penalties and
amounts paid in settlement of any claim, unless the "Reviewing Party" (defined
as one or more members of the VII Cable Board or appointee(s) of the VII Cable
Board who are not parties to the particular claim, or independent legal
counsel) determines that such indemnification is not permitted under
applicable law and (ii) for the prompt advancement of expenses to an
indemnitee as well as the reimbursement by such indemnitee of such advancement
to VII Cable if the Reviewing Party determines that the indemnitee is not
entitled to such indemnification under applicable law. In addition, the
indemnification agreements will provide (i) a mechanism through which an
indemnitee may seek court relief in the event the Reviewing Party determines
that the indemnitee would not be permitted to be indemnified under applicable
law (and would therefore not be entitled to indemnification or expense
advancement under the indemnification agreement) and (ii) indemnification
against all expenses (including attorneys' fees), and the advancement thereof,
if requested, incurred by the indemnitee in any action brought by the
indemnitee to enforce an indemnity claim or to collect an advancement of
expenses or to recover under a directors' and officers' liability insurance
policy, regardless of whether such action is ultimately successful or not.
Furthermore, the indemnification agreements will provide that after there has
been a "change in control" in VII Cable (as defined in the indemnification
agreements), other than a change in control approved by a majority of
directors who were directors prior to such change, then, with respect to all
determinations regarding rights to indemnification and the advancement of
expenses, VII Cable
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will seek legal advice as to the right of the indemnitee to indemnification
under applicable law only from independent legal counsel selected by the
indemnitee and approved by VII Cable.
The indemnification agreements will impose upon VII Cable the burden of
proving that an indemnitee is not entitled to indemnification in any
particular case and negate certain presumptions that may otherwise be drawn
against an indemnitee seeking indemnification in connection with the
termination of actions in certain circumstances. Indemnitees' rights under the
indemnification agreements are not exclusive of any other rights they may have
under Delaware law, the VII Cable Bylaws or otherwise. Although not requiring
the maintenance of directors' and officers' liability insurance, the
indemnification agreements require that indemnitees be provided with the
maximum coverage available for any VII Cable director or officer if there is
such a policy.
COMPENSATION OF EXECUTIVE OFFICERS
Each of the persons who will serve as an executive officer of VII Cable
immediately following the Stock Issuance is expected to continue to serve as
an officer of TCI and/or TCI Cable. None of the executive officers of VII
Cable is expected to be separately compensated by VII Cable for serving in
such capacity. For further discussion of the management services to be
provided to VII Cable by TCI and TCI Cable after the consummation of the
Transaction and the charges payable in respect thereof, see "Relationship
between VII Cable and TCI After the Exchange Offer--Services Agreement."
SECURITY OWNERSHIP OF VII CABLE COMMON STOCK
Viacom International is currently a wholly owned subsidiary of Viacom. After
the consummation of the Transaction, Viacom will not own any interest in VII
Cable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF VIACOM COMMON STOCK
Set forth below, as of January 1, 1996 (and without giving effect to the
Transaction), is certain information concerning beneficial ownership of Viacom
Common Stock by (i) each director of Viacom, (ii) each of the executive
officers named below, (iii) all executive officers and directors of Viacom as
a group, and (iv) holders of 5% or more of the outstanding shares of Viacom
Common Stock.
SHARES OF VIACOM COMMON STOCK BENEFICIALLY OWNED
<TABLE>
<CAPTION>
NUMBER
TITLE OF OF
EQUITY EQUITY OPTION PERCENT
NAME SECURITY SHARES SHARES(1) OF CLASS
- ---- -------------- ------- --------- --------
<S> <C> <C> <C> <C>
George S. Abrams.................. Class A Common -- (2) -- --
Class B Common 200(2) 16,500 (6)
Steven R. Berrard................. Class A Common 397 83,243 (6)
Class B Common 5,369 644,318 (6)
3 Year Warrant 1,206 -- (6)
5 Year Warrant 723 -- (6)
Frank J. Biondi, Jr............... Class A Common 453(3) 24,000 (6)
Class B Common 178,441(3) 294,000 (6)
Philippe P. Dauman................ Class A Common 1,060(3) -- (6)
Class B Common 8,445(3) 60,000 (6)
Thomas E. Dooley.................. Class A Common 2,120(3) 4,000 (6)
Class B Common 2,233(3) 77,666 (6)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TITLE OF NUMBER
EQUITY OF EQUITY OPTION PERCENT
NAME SECURITY SHARES SHARES(1) OF CLASS
- ---- -------------- ---------- --------- --------
<S> <C> <C> <C> <C>
Edward D. Horowitz............ Class A Common 281(3) 4,000 (6)
Class B Common 807(3) 88,000 (6)
George D. Johnson, Jr......... Class A Common 6,482(4) 68,706 (6)
Class B Common 49,298(4) 540,042 (6)
Ken Miller.................... Class A Common -- (2) -- --
Class B Common -- (2) 16,500 (6)
National Amusements, Inc...... Class A Common 45,547,214(5) -- 61.0%
200 Elm Street Class B Common 46,565,414(5) -- 15.9%
Dedham, MA 02026
Brent D. Redstone*............ -- -- -- --
Shari Redstone*............... -- -- -- --
Sumner M. Redstone............ Class A Common 45,547,294(5) -- 61.0%
Class B Common 46,565,494(5) -- 15.9%
Frederic V. Salerno........... Class B Common -- 6,500 (6)
William Schwartz.............. Class A Common -- (2) -- --
Class B Common -- (2) 16,500 (6)
Ivan Seidenberg............... -- -- -- --
Mark M. Weinstein............. Class A Common 392(3) 7,500 (6)
Class B Common 505(3) 91,500 (6)
All directors and executive
officers as a group other
than Mr. Sumner Redstone (22
persons)..................... Class A Common 16,844(3) 201,349 0.45%
Class B Common 259,126(3) 2,031,056 1.09%
3 Year Warrant 1,206 1,875 (6)
5 Year Warrant 723 1,125 (6)
</TABLE>
- --------
* Brent Redstone is the son of Sumner Redstone and Shari Redstone is Sumner
Redstone's daughter.
(1) Reflects shares subject to options to purchase such shares which on
January 1, 1996 were unexercised but were exercisable within a period of
60 days from that date. These shares are excluded from the column headed
"Number of Equity Shares."
(2) Messrs. Abrams, Miller and Schwartz participate in Viacom's Deferred
Compensation Plan in which their directors' fees are converted into stock
units. Messrs. Abrams, Miller and Schwartz have been credited with 4,482,
4,114 and 4,086 Class A Common Stock units, respectively, and 4,682, 4,285
and 4,254 Class B Common Stock units, respectively.
(3) Includes shares held through the Company's 401(k) plans as of November 30,
1995.
(4) Does not include 158,833 shares of Class A Common Stock and 803,473 shares
of Class B Common Stock transferred to irrevocable trusts, of which Mr.
Johnson and his wife are beneficiaries, for which Mr. Johnson disclaims
beneficial ownership. Also does not include 14,110 shares of Class A
Common Stock and 110,929 shares of Class B Common Stock held in trusts for
the benefit of Mr. Johnson's children for which Mr. Johnson disclaims
beneficial ownership.
(5) Except for 80 shares of each class of Common Stock owned directly by Mr.
Redstone, all shares are owned of record by NAI. Mr. Redstone is the
Chairman and the beneficial owner of the controlling interest in NAI and,
accordingly, beneficially owns all such shares.
(6) Less than 1%.
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ARRANGEMENTS AMONG VIACOM, VIACOM INTERNATIONAL, TCI AND TCI CABLE
The following is a summary of the material provisions of the Parents
Agreement, the Implementation Agreement and the Subscription Agreement, copies
of which are attached as exhibits to the Registration Statement and
incorporated herein by reference. The following summary does not purport to be
complete and is qualified in its entirety by reference to the full texts of
such exhibits.
TERMS OF THE PARENTS AGREEMENT
Transactions Occurring Prior to the Exchange Date
Under the Parents Agreement, Viacom has agreed to cause the
Recapitalization. Pursuant to the Recapitalization, VII Cable will amend and
restate its certificate of incorporation so as to, among other things, (i)
change the par value of its Class A Common Stock from $.01 to $100.00, (ii)
increase the number of authorized shares of Class A Common Stock to
shares (i.e., the total number of shares of VII Cable Class A Common Stock to
be issued to holders of Viacom Common Stock pursuant to the Exchange Offer),
such number of shares being equal to (x) the Estimated Asset Value of VII
Cable minus $1.7 billion, (y) divided by $100, and (iii) authorize 100 shares
of Class B Common Stock, $0.01 par value per share, and (iv) authorize a
number of shares of VII Cable Preferred Stock equal to the number of shares of
VII Cable Class A Common Stock authorized under (ii) above. The obligation of
Viacom to cause VII Cable to take such action is subject to, among other
conditions, the condition that Viacom shall have accepted shares of Viacom
Common Stock for exchange in the Exchange Offer.
The Exchange Offer
The Parents Agreement requires Viacom to make the Exchange Offer (subject to
the terms and conditions set forth in "The Exchange Offer--Terms of the
Exchange Offer" and "--Certain Conditions of the Exchange Offer").
Certain Other Agreements
Pursuant to the Parents Agreement, TCI and TCI Cable have agreed (i) to
execute and deliver the Subscription Agreement, (ii) that the documentation
for the Loan will not contain, and the Loan will not be made on, any terms or
conditions thereof that (x) are inconsistent with the terms of the Transaction
or the VII Cable Preferred Stock or (y) would require the grant of any
security interest in an asset of Viacom or any of its affiliates (other than
(a) a grant by Viacom International of a security interest in the cash
collateral account to be maintained by it at The Bank of New York into which
the Loan Proceeds will be deposited and in which the Lenders shall be granted
a security interest to secure the Loan subject to the further terms specified
in the Subscription Agreement (the "Cash Collateral Account") prior to the
Exchange Time, (b) the pledge by Viacom International or by certain cable
division subsidiaries which are identified in the Implementation Agreement
(each, a "Cable Division Subsidiary") of stock in a Cable Division Subsidiary
that is effective upon the release of all funds to Viacom International from
the Cash Collateral Account or (c) pursuant to certain provisions of the
Implementation Agreement (collectively, "Inconsistent Terms")), (iii) not to
permit Viacom International or any Cable Division Subsidiary to engage in any
transaction on the Exchange Date other than in the ordinary course of business
and other than transactions required to take place on the Exchange Date by the
Parents Agreement, Implementation Agreement or Subscription Agreement, and
(iv) to acknowledge that certain direct and indirect subsidiaries of Viacom
International (the "PCI Subsidiaries") which were formerly includable in the
consolidated federal income tax returns of the affiliated group of which
Paramount Communications Inc. was the common parent (the "PCI Group") intend
to apply to the IRS for permission to designate Paramount Pictures Corporation
or another PCI Subsidiary as the agent for the PCI Group pursuant to Treasury
Regulation 1.1502-77(d) and to cooperate in attempting to have such permission
granted.
TCI additionally has agreed not to consummate any transaction in which all
or a majority in value of its assets (as determined by TCI) are distributed
without fair consideration to its direct or indirect stockholders
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unless (x) the transferee of such assets assumes or, if such assets represent
principally an equity interest in an entity, such entity assumes, by
instrument reasonably satisfactory to Viacom, TCI's obligations pursuant to
the Transaction to which TCI is a party and (y) the equity of such transferee
or entity has a fair market value immediately following such transaction of at
least $1.5 billion.
Pursuant to the Parents Agreement, Viacom has agreed to cause Viacom
International and Viacom Services to execute and deliver the Implementation
Agreement to each other and to cause Viacom International to execute and
deliver to TCI and TCI Cable the Subscription Agreement.
Right of First Offer. Pursuant to the Parents Agreement, Viacom has agreed
that, in the event the Parents Agreement is terminated solely as a result of
the failure of the condition precedent relating to Viacom's satisfaction with
the treatment of the Transaction for federal income tax purposes, then if at
any time during the period commencing on the date of such termination and
ending on the date which is eighteen months after the date of such termination
(the "Offer Period") Viacom intends to sell all or substantially all of the
Cable Business, or all or substantially all of the Bay Area system or the
Puget Sound system, or all or substantially all of the stock of any subsidiary
or subsidiaries the assets of which consist primarily of all or substantially
all of the Cable Business, the Bay Area system or the Puget Sound system (in
any such case, an "Offered Business"), Viacom shall deliver to TCI a written
notice to such effect. If TCI notifies Viacom in writing of its desire to
conduct negotiations regarding such sale within five Business Days of its
receipt of such notice from Viacom, Viacom and TCI shall negotiate in good
faith during the period ending on the sixtieth day after the date of such
notice by Viacom (the "Negotiation Period") to reach an agreement for the sale
of the Offered Business to TCI. During the Negotiation Period, Viacom shall
notify TCI of the amount, and material terms, of the consideration Viacom
would be willing to accept for a sale of the Offered Business (a "Price
Notice") on one or more occasions. If a binding agreement for a sale of the
Offered Business is not reached by the end of the Negotiation Period, for a
period of 120 days following the termination of the Negotiation Period, Viacom
may sell (or enter into a binding agreement to sell) the Offered Business for
an aggregate consideration equal to or greater than the fair market value of
the consideration set forth in the Price Notice delivered by Viacom during the
Negotiation Period reflecting the lowest fair market value consideration, and,
if such sale is consummated, TCI shall have no further rights of first offer
under the Parents Agreement. If (i) at the end of such 120-day period, a
binding agreement for a sale of the Offered Business has not been reached or
(ii) such a binding agreement has been reached and is terminated prior to its
consummation during the Offer Period, Viacom shall not, for the remainder of
the Offer Period, if any, sell or negotiate to sell any Offered Business
without complying with the procedures described above, as fully set forth in
the Parents Agreement.
Representations and Warranties
The Parents Agreement contains various representations and warranties of
Viacom relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): corporate existence and power, corporate and governmental
authorization of the Parents Agreement and the Transaction, third-party
consents, the binding effect of the Parents Agreement, the absence of finders'
fees with respect to the Parents Agreement, the absence of violations of,
among other things, certificates of incorporation, bylaws and certain
contracts and laws and that the Exchange Offer shall be conducted in
compliance with applicable laws.
The Parents Agreement contains various representations and warranties of TCI
and TCI Cable relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): corporate existence and power, corporate and governmental
authorization of the Parents Agreement and the Transaction, third-party
consents, the binding effect of the Parents Agreement, and the absence of
finders' fees with respect to the Parents Agreement and the absence of
violations of, among other things, certificates of incorporation, bylaws and
certain contracts and laws.
The representations and warranties contained in the Parents Agreement shall
terminate and be of no further force on and as of April 30, 1997.
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Conditions Precedent
The obligations of Viacom to commence the Exchange Offer and to recapitalize
VII Cable are subject to the satisfaction or, where legally permissible,
waiver of various conditions, including the following: (i) any applicable
waiting period (and any extension thereof) under the HSR Act shall have
expired or been terminated without the commencement or threat of any
litigation by a governmental authority of competent jurisdiction to restrain
the consummation of the Exchange Offer, the Subscription Agreement or other
material action contemplated by the Transaction in any material respect; (ii)
the number of Consented Subscribers (defined in the Subscription Agreement as
the number of subscribers as of a date within ten days prior to the Exchange
Date located in franchise areas in which VII Cable provides cable services as
to which either (i) the respective local authorities have granted the required
consents with respect to the Transaction or (ii) no consent of a local
authority is required with respect to the Transaction) shall be not less than
90% of the Estimated Exchange Date Basic Subscribers (defined in the
Subscription Agreement as the average of the aggregate number of private and
residential customer accounts and commercial and bulk-billed commercial
accounts determined on an equivalent basis receiving basic cable television
service ("Basic Subscribers") determined during a consecutive nine-week period
ending on or immediately prior to the Exchange Date); (iii) no order, stay,
judgment or decree shall have been issued by any court and be in effect
restraining or prohibiting the consummation of the Transaction in any material
respect; (iv) Viacom shall be satisfied with the treatment of the Transaction
for federal income tax purposes (as determined in the Letter Agreement (as
defined herein)); (v) the Subscription Agreement shall remain in full force
and effect and there shall be no condition to TCI's, TCI Cable's or Viacom
International's obligations thereunder that is incapable of being satisfied on
the Expiration Date; (vi) the documentation for the Loan shall have been duly
executed and delivered by all parties thereto and shall remain in full force
and effect and Viacom shall have received confirmation, in form and substance
satisfactory to it, that Viacom International shall be able to draw down the
Aggregate Loan Amount thereunder on the Expiration Date and (subject only to
Viacom being required to give notice that it will consummate the Exchange
Offer and that all Exchange Offer conditions set forth in the Parents
Agreement have been satisfied or waived) such Aggregate Loan Amount shall be
available for transfer as a contribution to Viacom Services; (vii) certain
cable-related consents of the FCC and all non-cable related authorizations of
the FCC shall have been obtained and shall remain in full force and effect;
and (viii) the Registration Statement and, if the TCI Registration Statement
is required by applicable law or the Commission to be effective prior to the
consummation of the Exchange Offer, the TCI Registration Statement, shall have
been declared effective, and no stop order suspending the effectiveness of the
Registration Statement or, if the TCI Registration Statement is required by
applicable law or the Commission to be effective prior to the consummation of
the Exchange Offer, the TCI Registration Statement, shall have been issued and
no proceeding for that purpose shall have been initiated or threatened by the
Commission. The obligation of Viacom to recapitalize VII Cable is subject to
the further condition that Viacom shall have accepted shares of Viacom Common
Stock for exchange in the Exchange Offer.
Termination
The Parents Agreement may be terminated at any time prior to the Expiration
Time: (a) by written consent of Viacom, TCI and TCI Cable; (b) by TCI or TCI
Cable, if any of certain conditions precedent contained in the Subscription
Agreement (see "Agreements Among Viacom, Viacom International, TCI and TCI
Cable--Terms of the Subscription Agreement--Conditions to the Obligations of
TCI and TCI Cable") has become incapable of satisfaction (other than by the
action or omission of TCI or TCI Cable in contravention of the terms and
conditions of the Transaction); (c) by Viacom, if any of the conditions
precedent contained in the Parents Agreement or certain conditions precedent
in the Subscription Agreement has become incapable of satisfaction (other than
by the action or omission of Viacom or its affiliates in contravention of the
terms and conditions of the Transaction); (d) by TCI or TCI Cable, (x) if the
Expiration Date has not occurred on or prior to July 24, 1996 (other than as a
result of any action or omission of TCI or TCI Cable that is in contravention
of the terms and conditions of the Transaction) or (y) if the Exchange Offer
has not commenced on or prior to June 24, 1996 (other than as a result of the
failure of certain conditions precedent to the Parents Agreement resulting
from an action or omission of TCI or TCI Cable that is in contravention of the
terms and conditions of the Transaction);
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(e) by Viacom, (x) if the Expiration Date has not occurred on or prior to July
24, 1996 (other than as a result of any action or omission of Viacom that is
in contravention of the terms and conditions of the Transaction) or (y) if the
Exchange Offer has not commenced on or prior to June 24, 1996 (other than as a
result of the failure of certain conditions precedent to the Parents Agreement
resulting from an action or omission of Viacom that is in contravention of the
terms and conditions of the Transaction); or (f) by TCI, TCI Cable or Viacom
if the Exchange Offer terminates or finally expires after one extension
thereof without any shares of Viacom Common Stock having been accepted for
exchange by Viacom. In addition, in the event that the Minimum Condition is
not met after an extension of the Exchange Offer made in accordance with the
terms of the Parents Agreement, TCI and Viacom each have the right to
terminate the Transaction.
In the event of termination of the Parents Agreement by TCI, TCI Cable or
Viacom, (i) the Parents Agreement will become null and void, (ii) such
termination will be the sole remedy with respect to any breach of any
representation, warranty, covenant or agreement contained therein and (iii)
there will be no liability or obligation on the part of TCI, TCI Cable or
Viacom other than under certain provisions of the Parents Agreement relating
to any breach of the Parents Agreement, the information provided for this
Offering Circular - Prospectus, the fees and expenses of the investment
bankers engaged in connection with the Transaction, and the right of first
offer. See "--Terms of the Parents Agreement--Certain Other Agreements--Right
of First Offer."
Expenses
Under the Parents Agreement, except as expressly set forth therein, the fees
and expenses (including the fees of any lawyers, accountants, investment
bankers or others engaged by a party thereto) incurred in connection with the
Parents Agreement and the transactions contemplated thereby, whether or not
the Transaction is consummated, will be paid by the party incurring such
expenses.
Amendment
Subject to applicable law, the Parents Agreement may be amended or modified
only by a writing signed by the party against whom enforcement of any such
amendment or modification is being sought. In addition, any party to the
Parents Agreement may, by written instrument, waive compliance with any term
or provision of the Parents Agreement on the part of such other party thereto.
TERMS OF THE IMPLEMENTATION AGREEMENT
Conveyance of Assets and Assumption of Liabilities
Pursuant to the Implementation Agreement, Viacom International and Viacom
Services have agreed to execute and deliver (and to cause the Cable Division
Subsidiaries (as defined in the Implementation Agreement) to execute and
deliver) the Bill of Sale, Instrument of Assumption and Provision of Benefits
Agreement (the "Bill of Sale"), pursuant to which Viacom International and the
Cable Division Subsidiaries shall convey to Viacom Services ownership of the
assets relating to the Non-Cable Businesses, the Loan Proceeds and certain
nonmaterial assets (including certain equity investments and marketable
securities) which have historically been reported as part of Viacom's Cable
Television segment and which from and after the First Distribution are deemed
included in the definition of Non-Cable Businesses (the "Conveyance of
Assets"), and Viacom Services will assume and agree to perform substantially
all of Viacom International's liabilities (including its existing public debt,
bank debt and the existing intercompany debt owed by Viacom International to
Viacom), other than the Loan and liabilities relating to the Cable Business
other than certain specified liabilities (the "Assumption of Liabilities").
Prior to the exchange of shares pursuant to the Exchange Offer, but after the
occurrence of the Conveyance of Assets and the Assumption of Liabilities,
Viacom International will distribute to Viacom all of the outstanding capital
stock of Viacom Services so that after such distribution Viacom Services will
be a direct wholly owned subsidiary of Viacom. VII Cable has further agreed,
prior to the exchange of shares pursuant to the Exchange Offer, to amend and
restate its certificate of incorporation in order to effectuate the
Recapitalization.
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Such obligations of Viacom International relating to the Conveyance of
Assets and Assumption of Liabilities are subject to the fulfillment of each of
the following conditions: (i) the conditions precedent to Viacom's obligations
in the Parents Agreement shall have been satisfied (see "--Terms of the
Parents Agreement--Conditions Precedent"), (ii) Viacom International shall
have received loan proceeds at least equal to the Aggregate Loan Amount, and
(subject only to Viacom being required to give notice that it will consummate
the Exchange Offer and that all Exchange Offer conditions set forth in the
Parents Agreement have been satisfied or waived) such proceeds shall be
available for transfer without condition as a contribution to Viacom Services
pursuant to the Conveyance of Assets and (iii) Viacom shall have accepted
shares of Viacom Common Stock for exchange in the Exchange Offer.
Consents and Approvals
If the Transaction requires regulatory approval or any other consent with
respect to a contract or cable franchise that is intended to remain with VII
Cable, and such approval or other consent has not been obtained prior to the
Exchange Time, VII Cable will use its best efforts to assign legal ownership
of such contract or franchise to Viacom Services, together with the related
equipment and other property, if necessary, under the applicable approval
procedure. Viacom Services will hold such assets for the benefit of VII Cable,
will enter into security arrangements with respect to such assets if requested
by VII Cable's lenders, and will retransfer, without additional consideration,
such assets to VII Cable promptly upon receipt of such approval or consent.
Viacom does not expect that there will be significant contracts (other than
certain franchises) for which consents are required. As of December 31, 1995,
local authorities for franchises representing 1,073,928 subscribers (or 91.7%
of total subscribers) had approved the Transaction (or were deemed to have
approved because their consent was not required). In the case of franchises
where approval or consent is ultimately denied pursuant to a final,
unappealable order or ruling, or at the election of VII Cable or Viacom
Services if such approval or consent is not obtained within two years after
the Exchange Date, beneficial ownership of the cable system will be
transferred in full to Viacom Services upon payment by Viacom Services to VII
Cable of an amount equal to the appraised value of such cable system, which
appraised value will be determined by multiplying the cash flow of such cable
system for the previous 12 months by 10, and adding capital expenditures made
following the Exchange Date. In the event that a local cable authority
exercises a right of first refusal to purchase a particular cable system after
the Exchange Date, Viacom Services will pay to VII Cable an amount equal to
the excess, if any, of the appraised value of such cable system (determined in
accordance with the preceding sentence) over the price paid by the local
authority. In the event of a natural disaster prior to the Exchange Date
causing more than 11,340 Basic Subscribers to be unable to receive service at
the Exchange Time, Viacom Services shall reimburse VII Cable for (i) VII
Cable's reasonable out-of-pocket cost to repair damage to the extent necessary
to reconnect service to such subscribers and (ii) the lost cash flow from such
subscribers up to a specified amount per subscriber (subject to adjustment as
provided in the Implementation Agreement).
Name Change
In connection with the Exchange Offer, Viacom International will change its
name to TCI Pacific Communications, Inc. and Viacom Services will change its
name to Viacom International Inc.
Post-Closing Adjustments
In accordance with the provisions of the Implementation Agreement, prior to
the commencement of the Exchange Offer, Viacom International estimated the
Adjustment Amounts (including (i) the Capital Expenditure Amount, (ii) the
Inventory Amount, (iii) the Telecom Amount, (iv) the Working Capital Amount,
and (v) the Fixed Amount) to determine the Estimated Asset Value. The
Estimated Asset Value was determined to be $ and is equal to (i) the
Fixed Amount, plus (ii) the Capital Expenditure Amount, plus (iii) the
Inventory Amount, plus (iv) the Telecom Amount, plus (v) an amount equal to
Working Capital, if Working Capital is a positive number, minus (vi) an
amount, if any, equal to the amount by which Working Capital is a negative
number, minus (vii) the amount of certain front-end loaded programming
payments specified in the
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Implementation Agreement, plus (viii) an amount equal to interest on the sum
of the foregoing amounts at one-month LIBOR plus 1 1/4% for the period from
September 1, 1995 to the Exchange Date. VII Cable is obligated to deliver to
Viacom Services within 60 days after the Exchange Date VII Cable's calculation
of the actual values for the Adjustment Amounts as of the Exchange Date (the
"Asset Value"). To the extent that the Net Asset Value is greater than the
Estimated Net Asset Value, VII Cable will pay to Viacom Services an amount in
cash equal to such excess, plus an amount equal to interest thereon from the
Exchange Date. If the Net Asset Value is less than the Estimated Net Asset
Value, Viacom Services will pay to VII Cable an amount in cash equal to such
deficiency plus an amount equal to interest thereon from the Exchange Date.
Viacom International also made certain representations and warranties with
respect to certain of the Adjustment Amounts.
Representations and Warranties
The Implementation Agreement contains various representations and warranties
of Viacom Services relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) the due organization, existence and good standing
of, and similar corporate matters with respect to, each of Viacom
International, Viacom Services and the Cable Division Subsidiaries, (ii)
corporate and governmental authorization on behalf of each of Viacom
International, Viacom Services and the Cable Division Subsidiaries of the
Implementation Agreement and the Transaction, (iii) Viacom International's
capital structure and ownership of each of the Cable Division Subsidiaries,
(iv) the binding effect of the Implementation Agreement on Viacom
International and Viacom Services, (v) third-party consents, (vi) the absence
of violations of, among other things, certificates of incorporation, bylaws
and certain contracts and laws, (vii) the accuracy of certain information,
including financial statements, provided in the Implementation Agreement,
(viii) the absence of certain changes having a material adverse effect on the
Cable Business of Viacom International, (ix) the marketability of Viacom
International's title to certain assets, (x) the absence of infringement by
Viacom International's Cable Business upon any patents, trademarks, tradenames
or other intellectual property rights that could cause a material adverse
effect, (xi) the absence of pending and threatened litigation having a
material adverse effect on the Cable Business of Viacom International, (xii)
compliance with applicable laws, (xiii) employee matters and employee
benefits, (xiv) the absence of any brokers, finders or other intermediaries
retained on behalf of Viacom International or any Cable Division Subsidiary in
connection with the Implementation Agreement and the Transaction, (xv)
material compliance with environmental laws and other environmental matters,
(xvi) compliance with certain requirements of the FCC and United States
Copyright Office, and (xvii) the absence of covenants not to compete, other
than those enumerated in the Implementation Agreement.
Viacom Services' obligations to make certain payments to VII Cable pursuant
to the terms of the Implementation Agreement shall rank no lower than pari
passu in right of payment with Viacom Services' obligations to repay its
senior unsecured bank debt.
The representations, warranties, covenants and agreements contained in the
Implementation Agreement shall terminate and be of no further force on and as
of April 30, 1997, except for certain representations and warranties made by
Viacom Services with respect to capitalization, assets, employee benefit
plans, environmental matters and covenants not to compete, which
representations and warranties shall survive indefinitely.
Release of VII Cable From Debt
Viacom Services will obtain the release of VII Cable from, or substitution
of Viacom Services as obligor under (so that VII Cable will have no obligation
under), all of Viacom International's obligations to repay any indebtedness of
Viacom International for borrowed money incurred prior to the Exchange Time
(other than the Loan), or shall cause the indenture pursuant to which such
debt was issued to be amended or supplemented so that VII Cable will no longer
be an obligor (so that VII Cable will have no obligation) thereunder, in each
case concurrently with the transfer of the Loan Proceeds to Viacom Services
pursuant to the Conveyance of Assets. See "--Terms of Subscription Agreement--
Certain Borrowings."
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Noncompetition
If the closing contemplated in the Subscription Agreement occurs, so long as
VII Cable, TCI, TCI Cable or any person to whom VII Cable initially transfers
the cable system in Nashville, Tennessee, or Dayton, Ohio, in accordance with
the Subscription Agreement (a "Specified Party") owns and operates a cable
television system in a Franchise Area (defined in the Implementation Agreement
to mean an area in which VII Cable provides cable television service under
authorization from the local authority or an area in which VII Cable provides
cable television service where a local authorization is not required), Viacom
Services has agreed that, with respect to each such Franchise Area, following
the Exchange Date until the earlier of (i) the third anniversary of the
Exchange Date or (ii) the date such Specified Party no longer owns and
operates such Franchise Area, Viacom Services, its subsidiaries and any
subsidiaries of Viacom shall not (x) directly engage in the cable television
distribution business in such Franchise Area or (y) indirectly engage in the
cable television distribution business in such Franchise Area through
ownership of an equity interest in any person 25% or more of whose revenues
are derived from the cable television distribution business within certain
territories or whose cable television business has an active plant passing
100,000 or more of the homes in the Franchise Areas in certain territories,
taken as a whole.
Termination
The Implementation Agreement shall automatically terminate upon any
termination of the Parents Agreement in accordance with its terms. Upon
termination of the Implementation Agreement, (i) the Implementation Agreement
will become null and void, (ii) termination will be the sole remedy with
respect to any breach of any representation, warranty, covenant or agreement
contained therein and (iii) there will be no liability or obligation on the
part of VII Cable or Viacom Services thereunder.
Indemnification
If the Exchange Offer is consummated, Viacom Services shall indemnify and
hold harmless VII Cable against and in respect of any and all losses (x)
constituting or arising out of certain liens attaching after the Exchange Date
on any franchise assets transferred to Viacom Services or any contract
relating to the Cable Business assigned to Viacom Services, in each case while
title to such franchise asset or contract is held by Viacom Services, (y)
which may be incurred by VII Cable by reason of (i) the breach of any
representation and warranty of Viacom Services contained in the Implementation
Agreement as if such representations and warranties were made as of the
Exchange Date (except to the extent a different date is specified therein in
which case such representation and warranty shall be deemed to be made as of
such date), or (ii) the breach of any covenant or agreement of Viacom Services
contained in the Implementation Agreement (other than with respect to tax
matters) or the Bill of Sale, or (iii) the breach at or prior to the Exchange
Date of any covenant or agreement of Viacom International contained in the
Implementation Agreement (other than with respect to tax matters) or (z)
constituting liabilities relating to the Non-Cable Businesses.
If the Exchange Offer is consummated, VII Cable shall indemnify and hold
harmless Viacom Services against any and all losses (w) constituting or
arising out of certain liens attaching after the Exchange Date on any non-
cable asset while it cannot be transferred to Viacom Services, (x) which may
be incurred by Viacom Services by reason of a breach after the Exchange Date
of a covenant or agreement of VII Cable contained in the Implementation
Agreement (other than with respect to tax matters) or the Bill of Sale, (y)
constituting Cable Business liabilities or (z) constituting accounts payable,
certain current liabilities or the new borrowings. See""--Terms of the
Subscription Agreement--Certain Borrowings."
The aggregate liability of an indemnifying party pursuant to the
Implementation Agreement (together with any liability of such indemnifying
party and its affiliates for breaches of other agreements relating to the
Transaction, other than with respect to (i) information provided for this
Offering Circular - Prospectus, (ii) indemnification of Viacom and its
affiliates following the Exchange Date with respect to any liability related
to the Commitments to Lend, the Loan or the Loan Proceeds and (iii)
indemnification by Viacom Services for
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liabilities relating to the Non-Cable Business) shall not exceed the Asset
Value, and no party shall be entitled to recover consequential damages.
Certain claims for indemnification are recoverable only after the losses that
would be recoverable under such claims aggregate in excess of 1/2 of 1% of the
Asset Value, and then only to the extent of such excess.
Certain Other Agreements
Prohibited Transactions. The Implementation Agreement prohibits Viacom
Services from consummating any transaction in which all or a majority in value
of its assets are distributed without fair consideration to its direct or
indirect stockholders unless (x) the transferee of such assets or, if such
assets represent principally an equity interest in an entity, such entity,
assumes Viacom Services' indemnification obligations under the Implementation
Agreement and (y) the equity of such transferee or entity has a fair market
value immediately following such transaction of at least $1.5 billion.
Employee Matters. Viacom International has agreed to terminate the
employment, prior to the Exchange Date, of each employee not intended to
remain as an employee of VII Cable. Many of the continuing employees of VII
Cable who are actively employed at the Exchange Date will be paid compensation
at the same, or substantially similar, rates as their compensation prior to
the Exchange Date, subject generally to terms and conditions substantially
similar to those of similarly situated employees of TCI, and no interruption
in employment shall be deemed to have occurred by virtue of the Transaction.
The Implementation Agreement includes equitable arrangements generally for
employee benefits, pension plans, 401(k) plans, sick leave, vacation and
welfare plans for continuing employees, and provides that VII Cable will have
no liability for severance obligations to non-continuing employees.
Tax Matters. Pursuant to the Implementation Agreement, Viacom Services has
agreed to assume, become liable for, and indemnify and hold harmless VII Cable
and its subsidiaries from and against, all tax liability of Viacom and its
affiliates for taxable years or portions thereof ending on or prior to the
Exchange Date on an after-tax basis, including any tax arising as a result of
the failure of the Transaction to qualify for tax-free treatment (except to
the extent that TCI and TCI Cable have agreed to indemnify Viacom pursuant to
the Tax Indemnity Letter (as defined herein)). VII Cable will pay all taxes of
the Cable Business for which Viacom Services does not have an indemnification
obligation pursuant to the Implementation Agreement, and VII Cable will be
liable for, and shall indemnify and hold harmless Viacom and its affiliates
from and against, all such liabilities on an after-tax basis.
The Implementation Agreement provides that any refunds of taxes or any
credit against taxes, to the extent actually used, of VII Cable or any of its
subsidiaries with respect to taxable years or portions thereof ending on or
prior to the Exchange Date will be for the account of Viacom Services, and any
other refunds of taxes or credits against taxes, to the extent actually used,
of VII Cable or any of its subsidiaries will be for the account of VII Cable.
In either case, the party entitled to such refund or credit will reimburse the
other party to the extent of any net tax cost imposed on such other party in
connection with the receipt of such refund or credit.
Expenses
Under the Implementation Agreement, except as expressly set forth therein,
the fees and expenses (including the fees of any lawyers, accountants,
investment bankers or others engaged by a party thereto) incurred in
connection with the Implementation Agreement and the transactions contemplated
thereby, whether or not the transactions contemplated thereby are consummated,
will be paid by the party incurring such expenses.
Amendment
Subject to applicable law and (in the case of amendments prior to the
Exchange Time) to TCI's consent, the Implementation Agreement may be amended
or modified only by a writing signed by the party against whom enforcement of
any such amendment or modification is being sought. Any party to the
Implementation
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Agreement also may, by written instrument, waive compliance with any term or
provision of the Implementation Agreement on the part of such other party
thereto.
TERMS OF THE SUBSCRIPTION AGREEMENT
Subscription and Purchase of Stock
On the terms and subject to the conditions set forth in the Subscription
Agreement, TCI Cable has subscribed for and has agreed to purchase, and VII
Cable has agreed to issue and sell, 100 shares of VII Cable Class B Common
Stock in consideration of the payment of the Subscription Payment.
Certain Borrowings
TCI and TCI Cable have agreed to cause to be delivered to Viacom
International commitments of commercial banks or other lending institutions or
other institutional investors reasonably acceptable to TCI Cable (the
"Lenders") to make the Loan to Viacom International on the Expiration Date
(the "Commitments to Lend"). TCI and TCI Cable will be responsible for and
will pay any and all fees and expenses (including, but not limited to,
commitment fees) arising from the Commitments to Lend.
Pursuant to the Subscription Agreement, not less than ten business days
prior to the date which Viacom shall have notified TCI to be the anticipated
commencement date of the Exchange Offer (the "Anticipated Commencement Date"),
there are required to be executed and delivered by the Lenders all agreements
and other documentation (i) containing terms and conditions that are
reasonably acceptable to TCI Cable, (ii) which do not contain any obligation
of Viacom or its affiliates other than Viacom International or, after the
Exchange Date, a wholly owned direct or indirect subsidiary of VII Cable and
(iii) containing no Inconsistent Terms (collectively, the "Loan
Documentation"). TCI Cable will be responsible for and will pay any and all
fees and expenses arising from the Loan Documentation.
Subject to the fulfillment of the conditions precedent to the obligations of
TCI and TCI Cable (see "--Terms of the Subscription Agreement--Conditions to
the Obligations of TCI and TCI Cable"), the Loan will be made to Viacom
International on the Expiration Date prior to the Conveyance of Assets. The
Loan Proceeds will be deposited into the Cash Collateral Account, the terms of
which shall provide that upon notice from Viacom that it will consummate the
Exchange Offer and that all Exchange Offer conditions set forth in the Parents
Agreement have been satisfied or waived, all funds held in the Cash Collateral
Account will be released without condition to Viacom International on the
Exchange Date immediately prior to the Conveyance of Assets and the Exchange
Time. If the closing of the Subscription Agreement does not occur within ten
business days after the Expiration Date, at the option of the Lenders, the
Loan will be repaid in full from the Cash Collateral Account. Upon release of
the funds in the Cash Collateral Account to Viacom International, the Loan
Proceeds will be conveyed to Viacom Services pursuant to the Conveyance of
Assets and VII Cable will retain responsibility for repayment of and will be
liable and responsible for the Loan. Following the Exchange Date, none of
Viacom, Viacom Services nor their affiliates will have any liability,
responsibility or obligation under or in connection with the Commitments to
Lend, the Loan Documentation or otherwise for or with respect to the Loan,
except in certain circumstances. TCI and TCI Cable have agreed to indemnify
and hold harmless Viacom Services and its affiliates from any such liability,
responsibility or obligation.
TCI and TCI Cable have further agreed that in the event the closing under
the Subscription Agreement does not occur, they will be responsible for and
will pay (or, in the case of fees already paid, reimburse Viacom International
for) any and all fees and expenses (including, but not limited to, commitment
fees, but not including principal and interest on principal) payable under or
in connection with the Commitments to Lend, the Loan Documentation, the Loan
or any action by Viacom International pursuant to the Loan or by TCI or TCI
Cable pursuant to the provisions of the Commitments to Lend. TCI and TCI Cable
will indemnify and hold harmless Viacom International from any and all such
fees and expenses. In the event that the Exchange Offer is not
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consummated as a result of the failure of the condition relating to the
treatment of the Transaction for federal income tax purposes, Viacom has
agreed to reimburse TCI for 50% of commitment fees payable in connection with
the Commitments to Lend, up to a maximum reimbursement obligation of $5
million.
Representations and Warranties
The Subscription Agreement contains various representations and warranties
of TCI and TCI Cable relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) corporate existence and power, (ii) corporate and
governmental authorization of the Subscription Agreement, the Transaction and
issuance of shares of TCI Stock to VII Cable upon exercise by the holders of
the VII Cable Preferred Stock of their exchange rights as specified in the
terms thereof, (iii) third-party consents, (iv) the binding effect of the
Subscription Agreement, (v) the absence of finders' fees with respect to the
Subscription Agreement, (vi) the absence of violations of, among other things,
certificates of incorporation, bylaws and certain contracts and laws and (vii)
that TCI is acquiring the shares of VII Cable Class B Common Stock for
investment and not with a present view or intention of distributing or selling
the shares of VII Cable Class B Common Stock.
The Subscription Agreement contains various representations and warranties
of Viacom International relating to, among other things, the following matters
(which representations and warranties are subject, in certain cases, to
specified exceptions): (i) corporate existence and power, (ii) corporate and
governmental authorization of the Subscription Agreement and the Transaction,
(iii) third-party consents, (iv) the binding effect of the Subscription
Agreement, (v) the absence of finders' fees with respect to the Subscription
Agreement, (vi) the absence of violations of, among other things, certificates
of incorporation, bylaws and certain contracts and laws, (vii) that the shares
of VII Cable Class B Common Stock, when paid for by and issued to TCI Cable in
accordance with the terms of the Subscription Agreement will be duly and
validly issued, fully paid and non-assessable and will constitute all of the
issued and outstanding shares of VII Cable Class B Common Stock and (viii)
that Viacom International has delivered or made available to TCI Cable or RCS
Pacific, L.P., a California limited partnership, copies of all material
contracts, certain test tank reports and Immigration and Naturalization
Service Forms I-9 for all continuing employees.
Conduct of the Business Pending the Exchange Offer
Except for (u) certain actions with respect to the Telecom Partnerships, (v)
any increase in the Basic Subscriber Rate (defined in the Implementation
Agreement to mean the monthly fees and charges for the provision of basic
cable television service as such term is customarily used in the cable
television industry charged by VII Cable to customers served in its Franchise
Area) or any other rate charged Viacom International's subscribers or
otherwise contemplated by the Transaction, (w) the incurrence of the Loan, (x)
the amendment of Viacom International's Certificate of Incorporation
contemplated by the Transaction, (y) certain changes permitted explicitly by
the Subscription Agreement or (z) compliance with Viacom's obligations under
the Parents Agreement or Viacom International's obligations under the
Implementation Agreement or any other event or action contemplated by the
Transaction, from the date of execution of the Subscription Agreement until
the Exchange Date, Viacom International has agreed to conduct the Cable
Business only in the ordinary course of business consistent with past
practices. Without limiting the generality of the foregoing, Viacom
International has agreed not to do any of the following, without the consent
of TCI Cable:
(i) (w) enter into a negotiated settlement with the FCC resolving
regulated rate disputes or challenges which negotiated settlement imposes
any obligations on VII Cable after the Exchange Date, (x) materially amend
or, other than in accordance with its terms, terminate any material
contract, or enter into any material contract outside of the ordinary
course of business, (y) enter into any programming agreement with any
programming service owned or operated by Viacom or its subsidiaries or
affiliates, or (z) enter into any programming agreement that would require
carriage of programming or is not terminable at any time by VII Cable
without any out-of-pocket cost to VII Cable, in each case following the
date that is six months after the Exchange Date;
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(ii) enter into any employment agreement providing for a term of
employment other than as an employee at will, except as disclosed to TCI
Cable (or RCS Pacific, L.P. or InterMedia Partners IV, L.P.) on or prior to
July 24, 1995;
(iii) increase the rate of compensation or bonus payments to any Cable
Business-related employee of Viacom International, except in the ordinary
course of business and except for bonus payments in conjunction with the
Transaction where the cost is borne by Viacom Services or Viacom;
(iv) sell or dispose of assets relating to the Cable Business (other than
certain assets to be transferred to Viacom Services pursuant to the
Conveyance of Assets) except for sales or dispositions of assets in the
ordinary course of business, provided that such assets (other than certain
assets specified in the Implementation Agreement) are replaced with other
assets in the ordinary course of business;
(v) amend the certificate of incorporation or bylaws of Viacom
International or any Cable Division Subsidiary;
(vi) issue or sell any shares of the capital stock of Viacom
International or any Cable Division Subsidiary (except for shares of the
VII Cable Class A Common Stock which will be issued in the
Recapitalization);
(vii) incur any indebtedness for borrowed money outside the ordinary
course of business (other than the Loan); and
(viii) extend the term of (or fail to exercise a right of termination
with respect to) Viacom International's programming agreement with the SCI-
FI CHANNEL(TM) or COMEDY CENTRAL(TM).
Certain Other Agreements
Telecom Partnerships. Viacom International has further agreed, prior to the
Exchange Date, to make or cause to be made, when due and payable, all capital
contributions required to be made under, and otherwise to comply in all
material respects with all material terms and conditions of, the partnership
agreements entered into in respect of the Telecom Partnerships (the "Telecom
Partnership Agreements"). In addition, VII Cable has entered into agreements
with each Telecom Partnership covering the lease, license or use by such
Telecom Partnership of certain specified plant, property and equipment of
Viacom International, to the extent such lease, license or use is not
otherwise covered by the Telecom Partnership Agreements. Viacom International
has agreed not to sell, transfer or assign its interest in the Telecom
Partnerships.
Approved Capital Expenditure Plan. Viacom International will make or cause
to be made the capital expenditures called for by the 1995 capital expenditure
plan for the Cable Business (as amended by certain changes approved by TCI
Cable and/or RCS Pacific, L.P. since January 1, 1995) and (to the extent
agreed by VII Cable and TCI Cable) the 1996 capital expenditure plan for the
Cable Business (collectively, the "Approved Capital Expenditure Plan") in all
material respects except that Viacom International shall not be required to
make or cause to be made (i) expenditures which were required by law at the
time the Approved Capital Expenditure Plan was approved but are no longer so
required, (ii) expenditures which TCI Cable has agreed in writing do not have
to be made, (iii) expenditures which it is commercially unreasonable to make
because the assumptions used in developing and underlying the Approved Capital
Expenditure Plan prove to be incorrect in any material respect and (iv)
expenditures which cannot be made for reasons not within Viacom
International's control (including, without limitation, unavailability of
equipment, lack of access to real property, delays in orders being filled,
unavailability of pole attachment agreements and force majeure). In the event
clause (iii) above is applicable, Viacom International and TCI Cable will
cooperate and negotiate in good faith to amend the Approved Capital
Expenditure Plan to preserve the economic benefits originally intended to be
afforded by such expenditures.
Reimbursement of Capital Expenditures. If the Subscription Agreement
terminates without the exchange of shares having occurred, TCI Cable will
reimburse Viacom International for the amount of additional capital
expenditures made after January 20, 1995, as a result of complying with RCS
Pacific, L.P.'s or TCI Cable's rebuild standards as determined pursuant to the
Approved Capital Expenditure Plan and the Subscription
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Agreement. TCI Cable will promptly pay to Viacom International the amount of
all such expenditures as to which Viacom International has provided to TCI
Cable documentation establishing that such expenditures were made, provided
that no such payment shall be required earlier than the fifth business day
after the date of such termination, and the aggregate amount of such payments
shall not exceed $6,215,000 if the Exchange Date occurs on or prior to
December 31, 1995 or $11,495,000 if the Exchange Date occurs after December
31, 1995, unless TCI Cable shall have approved the capital expenditures to
which such reimbursements in excess of such amount relate. Viacom
International shall not be required to make any capital expenditure in order
to comply with RCS Pacific, L.P.'s or TCI Cable's rebuild standards if it
would not be reimbursed for the incremental cost upon the termination of the
Subscription Agreement without the exchange of shares having occurred pursuant
to the Exchange Offer.
Sale of Dayton and Nashville Systems. Viacom International will cooperate
with TCI Cable to facilitate the sale or exchange by VII Cable of the Dayton
and Nashville Systems on or after the day following the Exchange Date other
than to the extent such cooperation involves any out-of-pocket expenditure by
Viacom International or could reasonably be expected to delay the Exchange
Date.
1996 Capital Expenditure Plan. Viacom International and TCI Cable have
agreed to negotiate a capital expenditure plan for the Cable Business of
Viacom International for 1996 (the "1996 Capital Expenditure Plan"). If Viacom
International and TCI Cable cannot agree on a 1996 Capital Expenditure Plan by
December 31, 1995, the 1996 Capital Expenditure Plan will be prepared by
Viacom International and shall provide for quarterly aggregate capital
expenditures not in excess of the amount required to be spent pursuant to the
capital expenditure plan attached to the Implementation Agreement (the "1995
Plan") plus an amount equal to the percentage growth in the consumer price
index for 1995 multiplied by such amount, provided that such amount shall be
allocated among different categories of expenditures in a manner consistent
with the 1995 Plan with such changes as are consistent with the progress of
rebuilds and other projects reflected therein.
Preferred Stock Exchange. TCI will contribute to VII Cable or otherwise
cause VII Cable to have available sufficient shares to enable VII Cable to
deliver to holders of the VII Cable Preferred Stock, shares of TCI Stock upon
exercise by the holders of the VII Cable Preferred Stock of their exchange
rights as specified in the terms of the VII Cable Preferred Stock. TCI has
agreed to reserve and keep available at all times, out of its authorized and
unissued stock, sufficient shares of TCI Stock to satisfy its obligations to
VII Cable in connection with such exchange of the VII Cable Preferred Stock.
TCI has agreed that any such TCI Stock, when issued, will be registered under
the 1933 Act, and all state securities and blue sky laws applicable to such
issuance shall have been complied with in respect thereto.
Conditions to the Obligations of TCI and TCI Cable
The obligations of TCI and TCI Cable to take the action required to be taken
by them with respect to the Loan (see "--Certain Borrowings") shall be subject
to the satisfaction of each of the following conditions: (i) any applicable
waiting period (and any extension thereof) under the HSR Act shall have
expired or been terminated without the commencement or threat of any
litigation by a governmental authority to restrain the consummation of the
Transaction in any material respect; (ii) the number of Consented Subscribers
shall be not less than 90% of Estimated Exchange Date Basic Subscribers (as
such terms are defined in the Subscription Agreement); (iii) no order, stay,
judgment or decree shall have been issued by any court and be in effect
restraining or prohibiting the consummation of the Transaction in any material
respect; (iv) all conditions to the Exchange Offer (other than attainment of
the Trigger Amount and the bank borrowing condition) (see "The Exchange
Offer-- Certain Conditions of the Exchange Offer") shall have been satisfied
or waived; (v) no condition of TCI and TCI Cable with respect to the closing
of the Subscription Agreement shall have become incapable of satisfaction; and
(vi) Viacom International shall have delivered to TCI Cable a certificate in
which it certifies that to its knowledge the conditions to the obligations of
TCI and TCI Cable with respect to the closing of the Subscription Agreement
are reasonably likely to be satisfied.
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The obligations of TCI Cable required to be performed by it at the closing
of the Subscription Agreement are subject to the satisfaction, on or prior to
the Exchange Date, of the following conditions:
(i) (a) each representation and warranty of Viacom International
contained in the Subscription Agreement and each representation and
warranty of Viacom Services contained in the Implementation Agreement shall
(x) if qualified by a reference therein to "material adverse effect," be
true and correct as of the Expiration Date as though such representation
and warranty was made at and as of such date (except to the extent a
different date is specified therein, in which case such representation and
warranty will be true and correct as of such date), or (y) if not so
qualified, be true and correct as of the Expiration Date as though such
representation and warranty were made at and as of such date (except to the
extent a different date is specified therein, in which case such
representation and warranty will be true and correct as of such date), with
such exceptions that do not, individually or in the aggregate, result in a
material adverse effect, and except in the case of both clauses (x) and (y)
for changes occurring after July 24, 1995 (A) pursuant to the terms of the
Transaction, (B) not prohibited with respect to the operation of the Cable
Business pending consummation of the Exchange Offer (see "--Conduct of the
Business Pending the Exchange Offer") or (C) consented to by RCS Pacific,
L.P. prior to July 24, 1995, or by TCI Cable at any time;
(b) each material covenant and obligation of Viacom International and
Viacom Services required by the Subscription Agreement or the
Implementation Agreement to be performed by it at or prior to the
Expiration Date will have been duly performed and complied with in all
material respects as of the Expiration Date;
(c) VII Cable shall have delivered the stock certificate for 100 shares
of VII Cable Class B Common Stock to TCI Cable;
(d) TCI Cable shall have received a certificate to the effect that the
conditions with respect to the representations, warranties and material
covenants and obligations of Viacom International and Viacom Services have
been satisfied;
(ii) any applicable waiting period (and any extension thereof) under the
HSR Act will have expired or been terminated without the commencement or
threat of any litigation by a governmental authority of competent
jurisdiction to restrain the consummation of the transactions contemplated
by the Subscription Agreement in any material respect;
(iii) the number of Consented Subscribers shall be not less than 90% of
Estimated Exchange Date Basic Subscribers;
(iv) all consents required to be obtained by Viacom or Viacom
International in connection with the transactions contemplated by the
Subscription Agreement shall have been obtained and remain in full force
and effect, with such exceptions as would not have a material adverse
effect;
(v) no order, stay, judgment or decree shall have been issued by any
court and be in effect restraining or prohibiting the consummation of the
Transaction in any material respect;
(vi) certain legal opinions of counsel to Viacom International shall have
been delivered to TCI Cable;
(vii) the Exchange Time shall have occurred; and
(viii) Viacom International shall have delivered to TCI Cable the
resignation of each of its directors and corporate officers, effective as
of the closing of the Subscription Agreement.
Conditions to the Obligations of VII Cable
The obligations of VII Cable to be performed by it at the closing of the
Subscription Agreement are subject to the satisfaction, on or prior to the
Expiration Date (or in the case of the conditions relating to payment of the
Subscription Payment and the consummation of the Exchange Offer, the closing
of the Subscription Agreement) of each of the following conditions:
(i) (a) each representation and warranty of TCI and TCI Cable contained
in the Subscription Agreement will be true and correct in all material
respects as of the Expiration Date as though such representation and
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warranty was made at and as of such date (except to the extent that a
different date is specified therein, in which case such representation and
warranty will be true and correct as of such date);
(b) each material covenant and obligation of each of TCI and TCI Cable
required by the Subscription Agreement to be performed by it on or prior to
the Expiration Date will have been duly performed and complied with in all
material respects as of the Expiration Date;
(c) TCI Cable shall have paid the Subscription Payment to VII Cable;
(d) VII Cable will have received a certificate to the effect that the
conditions relating to the representations, warranties and material
covenants and obligations of TCI Cable have been satisfied;
(ii) any applicable waiting period under the HSR Act (and any extension
thereof), shall have expired or been terminated without the commencement or
threat of any litigation by a governmental authority of competent
jurisdiction to restrain the consummation of the transactions contemplated
by the Subscription Agreement in any material respect;
(iii) the number of Consented Subscribers shall not be less than 90% of
Estimated Exchange Date Basic Subscribers;
(iv) a certain legal opinion of counsel to TCI and TCI Cable shall be
delivered to VII Cable;
(v) all consents required to be obtained by TCI and TCI Cable in
connection with the transactions contemplated by the Subscription Agreement
shall have been obtained and remain in full force and effect, with such
exceptions as do not result in a material adverse effect on TCI's and TCI
Cable's ability to consummate such transactions;
(vi) no order, stay, judgment or decree will have been issued by any
court and be in effect restraining or prohibiting the consummation of the
Transaction in any material respect; and
(vii) the Exchange Time shall have occurred.
Termination
The Subscription Agreement shall automatically terminate upon any
termination of the Parents Agreement in accordance with its terms. Upon
termination of the Subscription Agreement, (i) the Subscription Agreement will
become null and void, (ii) such termination will be the sole remedy with
respect to any breach of any representation, warranty, covenant or agreement
contained therein and (iii) there will be no liability or obligation on the
part of TCI, TCI Cable or VII Cable other than under certain provisions of the
Subscription Agreement relating to certain breaches of the Subscription
Agreement, payment of the fees and expenses relating to the Commitments to
Lend, the Loan Documentation, the Loan, confidentiality and the reimbursement
of certain capital expenditures.
Expenses
Under the Subscription Agreement, except as expressly set forth therein, the
fees and expenses (including the fees of any lawyers, accountants, investment
bankers or others engaged by a party thereto) incurred in connection with the
Subscription Agreement and the transactions contemplated thereby, whether or
not the transactions contemplated thereby are consummated, will be paid by the
party incurring such expenses.
Amendment
Subject to applicable law, the Subscription Agreement may be amended or
modified only by a writing signed by the party against whom enforcement of any
such amendment or modification is being sought. Any party to the Subscription
Agreement also may, by written instrument, waive compliance with any term or
provision of the Subscription Agreement on the part of such other party
thereto.
Survival
The representations and warranties contained in the Subscription Agreement
shall terminate and be of no further force on and as of April 30, 1997, except
that the representations and warranties relating to finders' fees,
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the shares of VII Cable Class B Common Stock and the liability of TCI and TCI
Cable for fees and expenses arising from the Commitments to Lend shall survive
indefinitely.
TERMS OF CERTAIN ANCILLARY AGREEMENTS
Contemporaneously with the execution of the Parents Agreement, the
Implementation Agreement and the Subscription Agreement, Viacom, Viacom
International, Viacom Services and certain other Viacom affiliates entered
into certain other agreements with TCI, TCI Cable and certain other TCI
affiliates, including a letter agreement governing certain ancillary elements
of the Transaction (the "Letter Agreement"), a letter providing for
indemnification against certain tax liabilities (the "Tax Indemnity
Agreement"), and amendments to certain agreements entered into in connection
with the settlement of certain litigation among such parties (the "Settlement
Agreements") (collectively, the "Ancillary Agreements").
Letter Agreement
The Letter Agreement contains a number of provisions clarifying the Parents
Agreement, Implementation Agreement and Subscription Agreement. In particular,
the Letter Agreement provides that the satisfactory tax treatment condition to
closing the Parents Agreement will be fulfilled by receipt of the Ruling
Letter (as described below under "Certain Federal Income Tax Consequences").
The Letter Agreement also provides that, in the event any of the cable systems
is required, pursuant to a refund order of a local authority, the FCC or a
court of competent jurisdiction, to refund to subscribers (a "Refund") any
overpayment or excess charge paid during the period between September 1, 1993
and the Exchange Date (the "Applicable Period") for any basic service or
related equipment, any other regulated tier of service or related equipment or
any other charge for service or equipment, Viacom Services shall be obligated
to reimburse VII Cable an amount (the "Refund Amount"), computed on an after-
tax basis, equal to (x) the portion of the Refund required to be paid to such
subscribers that is attributable to the Applicable Period (after taking into
account any available offsets or credits actually realized by VII Cable) to
the extent actually paid, including any penalties, interest, forfeiture or
other payment ordered by such refund order and any other associated reasonable
costs (in each case, to the extent actually paid), net of the present value of
any refund, rebate or offset of franchise fees, copyright fees, savings in
taxes or other benefits to VII Cable and its affiliates actually realized as a
result of such Refund, less (y) an amount equal to the aggregate amount (on a
net after-tax basis) of any increases in revenue resulting from any rate
increases granted after the Exchange Date with respect to such subscribers, to
the extent that VII Cable is permitted to increase rates in order specifically
to recoup any amount previously refunded as described under (x) above to the
extent that such increases are actually realized by VII Cable net of any
accompanying increase in franchise, copyright or other fees actually paid by
VII Cable and have not been previously applied under (x) above to reduce the
Refund or pursuant to this (y). The Letter Agreement further provides that
Viacom Services shall have the right to assume control of the defense of and
settlement of any regulatory proceeding relating to rates charged to
subscribers during the applicable period which could result in a refund order
as to which the Refund Amount could exceed 50% of the Refund.
Tax Indemnity Letter
The Tax Indemnity Letter provides for indemnification on an after-tax basis
by TCI and TCI Cable, jointly and severally, of each member of the Viacom
consolidated group of companies in the event that any or all of the Ruling
Letter is withdrawn or otherwise not followed by the IRS and the Transaction
or any of the component steps of the Transaction gives rise to federal, state
or local income or franchise tax liability as a result of any misstatements or
omissions of material fact in certain representations made by TCI and TCI
Cable with regard to VII Cable and its subsidiaries.
Settlement Agreements
Pursuant to the Settlement Agreements, Viacom and its affiliates and TCI and
its affiliates have provisionally agreed to settle and dismiss certain
antitrust litigation instituted by Viacom International. This
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settlement is subject to certain conditions, including the consummation of the
Transaction. The Settlement Agreements relate to, among other things, the
carriage by Satellite Services, Inc., a TCI affiliate ("SSI"), and VII Cable
(after the Exchange Date) of SHOWTIME(R) and THE MOVIE CHANNEL(TM), which are
commercial-free premium subscription services owned by Viacom's subsidiary
Showtime Networks Inc. ("SNI").
Pursuant to the Settlement Agreements, SSI and other TCI affiliates are
required to continue to carry SHOWTIME and THE MOVIE CHANNEL through (at a
minimum) the year 2000 in each of their systems currently carrying each such
service and in each of the VII Cable cable systems. SSI is further required to
engage in certain marketing relating to SHOWTIME and THE MOVIE CHANNEL. SSI is
also provided with certain incentives to increase the number of SHOWTIME and
THE MOVIE CHANNEL subscribers.
The Settlement Agreements were originally entered into in January 1995. They
were amended on July 24, 1995 to become effective in accordance with their
terms only and immediately upon the consummation of the Stock Issuance.
DESCRIPTION OF CERTAIN INDEBTEDNESS OF VII CABLE
Viacom International anticipates that the Loan will be comprised of a
combination of term and revolving credit facilities and will be repayable in
part on the date of receipt by VII Cable of the Subscription Payment. Certain
terms of the Loan are currently under negotiation. Pursuant to the Parents
Agreement, TCI and TCI Cable have agreed that the Loan Documentation will not
contain any Inconsistent Terms. The execution and delivery of the Loan
Documentation and the ability of Viacom International to draw down the
Aggregate Loan Amount thereunder on the Expiration Date and transfer such
amount as a contribution to Viacom Services are conditions to commencement of
the Exchange Offer. See "Arrangements Among Viacom, Viacom International, TCI
and TCI Cable--Terms of the Subscription Agreement--Certain Borrowings."
DESCRIPTION OF VII CABLE CAPITAL STOCK
Set forth below is a general summary of the capital stock of VII Cable in
the form effective immediately after the Recapitalization. See "Business of
VII Cable--Recapitalization." The following summary does not purport to be a
complete description of such capital stock and is qualified in its entirety by
reference to the Restated Certificate of Incorporation (including the
definition therein of certain terms), the form of which has been filed as an
exhibit to the Registration Statement of which this Offering Circular-
Prospectus is a part. The definitive Restated Certificate of Incorporation
shall be filed by VII Cable with the Secretary of State of the State of
Delaware immediately prior to the Recapitalization.
GENERAL
Following the Recapitalization, the authorized capital stock of VII Cable
will consist of shares, of which shares shall be common stock and
shares shall be preferred stock (the "Preferred Stock"). The shares of
common stock shall be divided into two classes, of which shares shall
be VII Cable Class A Common Stock, and 100 shares shall be of a class
designated as VII Cable Class B Common Stock. Of the preferred stock,
shares shall be of a class designated as "Class A Senior Cumulative
Exchangeable Preferred Stock" and shares shall be of a class issuable
from time to time in series with such voting rights, if any, designations,
powers, preferences and other rights and such qualifications, limitations and
restrictions as may be determined by the VII Cable Board.
COMMON STOCK--GENERAL
Except as otherwise described below, shares of VII Cable Class A Common
Stock and VII Cable Class B Common Stock shall be identical in all respects
and shall have equal rights and privileges.
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Holders of VII Cable Class A Common Stock and holders of VII Cable Class B
Common Stock shall be entitled to one vote for each share of such stock held
on all matters presented to holders of common stock. Except as may otherwise
be required by the laws of the State of Delaware, the holders of shares of VII
Cable Class A Common Stock and the holders of shares of VII Cable Class B
Common Stock shall vote as one class with respect to the election of directors
and with respect to all other matters to be voted on by stockholders of VII
Cable.
The holders of common stock shall be entitled to receive dividends only as
and when declared by the Board of Directors of VII Cable out of funds legally
available therefor, subject to the rights of any preferred stock then
outstanding.
In the event of a liquidation, dissolution or winding up of VII Cable, after
payment or provision for payment of the debts and liabilities of VII Cable and
subject to the prior payment in full of the preferential amounts to which any
Preferred Stock is entitled, the holders of VII Cable Class A Common Stock and
VII Cable Class B Common Stock shall share ratably in the assets of VII Cable
remaining for distribution to its holders of common stock.
VII CABLE CLASS A COMMON STOCK
Upon the issuance of shares of VII Cable Class B Common Stock to TCI Cable
pursuant to the terms of the Subscription Agreement, each outstanding share of
VII Cable Class A Common Stock shall automatically convert into one share of
VII Cable Preferred Stock, without any action on the part of the holder
thereof. Holders of shares of Viacom Common Stock electing to tender such
shares in the Exchange Offer should not expect to take physical delivery of
shares of VII Cable Class A Common Stock which they will have the right to
receive in exchange for shares of Viacom Common Stock after the consummation
of the Stock Issuance. See "Arrangements Among Viacom, Viacom International,
TCI and TCI Cable--Terms of the Subscription Agreement." Effective as of such
date, the shares of VII Cable Class A Common Stock shall no longer be deemed
to be outstanding and all rights with respect to such shares shall thereupon
terminate, except the right of the holders thereof to receive the VII Cable
Preferred Stock issuable upon such automatic conversion of the VII Cable Class
A Common Stock.
VII CABLE CLASS B COMMON STOCK
Subject to the terms and conditions stated in the Subscription Agreement,
all of the authorized shares of VII Cable Class B Common Stock will be issued
to TCI Cable immediately following consummation of the Exchange Offer in
consideration of the payment of the Subscription Payment. See "Arrangements
Among Viacom, Viacom International, TCI and TCI Cable--Terms of the
Subscription Agreement."
VII CABLE PREFERRED STOCK
The shares of VII Cable Class A Common Stock received by Viacom stockholders
in exchange for their shares of Viacom Common Stock will automatically convert
into shares of VII Cable Preferred Stock upon the issuance to TCI Cable of VII
Cable Class B Common Stock pursuant to the Subscription Agreement. On ,
1996, the VII Cable Preferred Stock was approved for quotation on Nasdaq under
the symbol "TPACP."
RANKING
Each share of VII Cable Preferred Stock will have a par value of $100 (the
"Par Value") and will have a liquidation preference equal to the Par Value
plus an amount equal to all dividends (whether or not earned or declared)
accrued and unpaid thereon to the date of payment of the liquidation
preference (the "Liquidation Preference"), and no more. VII Cable Preferred
Stock will rank senior to VII Cable common stock with respect to the payment
of dividends and payments of amounts distributable upon dissolution,
liquidation or winding up
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of VII Cable. While any shares of VII Cable Preferred Stock are outstanding,
VII Cable may not create, and the VII Cable Board may not authorize, any class
or series of Senior Stock without the prior affirmative vote of the holders of
at least 66 2/3% of the then outstanding shares of VII Cable Preferred Stock,
voting as a separate class. See "Voting Rights" below. Immediately following
the Exchange Date, the only capital stock of VII Cable issued and outstanding
will be VII Cable Class B Common Stock and VII Cable Preferred Stock; no
shares of Parity Stock or Senior Stock will be authorized, issued or
outstanding.
DIVIDENDS
Payments of Dividends; Method of Payment. Holders of shares of VII Cable
Preferred Stock will be entitled to receive, when, as and if declared by the
VII Cable Board out of funds legally available therefor, cumulative accrued
dividends from the date (the "Issue Date") of initial issuance of the shares
of VII Cable Preferred Stock (upon conversion of the VII Cable Class A Common
Stock immediately following the Stock Issuance) at the rate per annum of
$ per share. The dividend rate was determined by two investment banking
firms as the rate that, in the opinion of such firms, will cause the VII Cable
Preferred Stock to trade at its initial Liquidation Preference of $100 per
share immediately following the Exchange Date. Dividends on VII Cable
Preferred Stock will be payable quarterly in arrears on each ,
, and (or, if any such date is not a business day,
on the next succeeding business day (each a "Dividend Payment Date")),
commencing , 1996 (and, in the case of any accrued but unpaid
dividends, at such additional times and for such interim periods, if any, as
may be determined by VII Cable Board). Dividends payable on any Dividend
Payment Date will be paid to holders of record as they appear on the stock
register of VII Cable at the close of business on such record dates (each a
"Record Date"), which shall not be more than 60 days or less than 10 days
preceding the Dividend Payment Dates corresponding thereto, as shall be fixed
by the VII Cable Board. Dividends on shares of VII Cable Preferred Stock will
accrue on a daily basis (without interest or compounding) whether or not there
are unrestricted funds legally available for the payment of such dividends and
whether or not such dividends are earned or declared.
Whenever a Redemption Date (as defined below) occurs during a dividend
period, the VII Cable Board may, at its option, declare accrued dividends to,
and pay such dividends on, such Redemption Date, in which case such dividends
will be payable on such Redemption Date to the holders of shares of VII Cable
Preferred Stock as of a special record date to be designated by the VII Cable
Board for such dividend payment.
Any dividends may be paid, at the election of VII Cable, (i) out of funds
legally available therefor, (ii) through the delivery of shares of TCI Stock
or (iii) through any combination of the foregoing forms of consideration
elected by the VII Cable Board in its sole discretion. If VII Cable elects to
pay any dividend payment, in whole or in part, by delivery of shares of TCI
Stock, the amount of such dividend payment to be paid per share of VII Cable
Preferred Stock in shares of TCI Stock (the "Stock Dividend Amount") will be
paid through the delivery to the holders of record of such shares of VII Cable
Preferred Stock on the Record Date for such dividend payment of a number of
shares of TCI Stock determined by dividing the dollar amount of the Stock
Dividend Amount by an amount (the "Cash Equivalent Amount") equal to 95% of
the Average Market Price (as defined below). No fractional shares of TCI Stock
will be delivered to a holder of shares of VII Cable Preferred Stock, but VII
Cable shall instead pay a cash adjustment determined as described under
"Adjustment for Fractional Shares" below. Any portion of a dividend that is
declared by the VII Cable Board and not paid through the delivery of TCI Stock
shall be paid in cash. If the VII Cable Board determines to pay a dividend and
VII Cable is prohibited from paying cash dividends pursuant to the Loan or if
VII Cable otherwise decides to pay dividends in TCI Stock, TCI Cable has
agreed to make available to VII Cable (i) funds in the form of an equity
contribution or a subordinated loan or (ii) sufficient shares of TCI Stock, in
each case to pay such dividends in cash, TCI Stock or a combination thereof,
with respect to any dividend payment.
The "Average Market Price" per share of TCI Stock on any date of
determination means the average of the daily closing sale prices of the TCI
Stock on Nasdaq for the ten consecutive dates on which Nasdaq is open for the
transaction of business (each a "Trading Day") ending on the Trading Day
preceding the date of
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determination (appropriately adjusted in such manner as the VII Cable Board in
good faith deems appropriate to take into account any stock dividend on the
TCI Stock, or any subdivision, split, combination or reclassification of the
TCI Stock that occurs, or the Ex-Dividend Date for which occurs, during the
period following the first Trading Day in such ten-Trading Day period and
ending on the last full Trading Day immediately preceding the date of payment
of any dividend or redemption with respect to which the Average Market Price
is being determined). The date of determination of Average Market Price (i)
for any dividend will be as of the related Record Date and (ii) for any
redemption payment will be as of the related Redemption Date. See "--
Redemption--Manner of Payment of Redemption Price."
The market price of the TCI Stock may vary from the Average Market Price
between the date of determination of such Average Market Price and the
subsequent delivery of shares of TCI Stock, in payment of a dividend, to
holders of VII Cable Preferred Stock. If the market value on the Dividend
Payment Date of the shares of TCI Stock delivered in payment of a dividend is
more than 5% lower than the Average Market Price as of the related Record Date
and the holder sells such shares of TCI Stock at such lower price, the
holder's actual dividend yield for the dividend period in respect of which
such dividend was paid would be lower than the stated dividend yield on the
VII Cable Preferred Stock. In addition, in connection with any such sale the
holder is likely to incur commissions and other transaction costs.
If VII Cable elects to make any dividend payment, in whole or in part,
through the delivery of shares of TCI Stock, it will give notice of such
determination (which shall include the number of shares of TCI Stock and cash,
if any, to be delivered in respect of each share of VII Cable Preferred Stock)
by publication, on the Record Date for such dividend payment, of such election
in a daily newspaper of national circulation.
CERTAIN RESTRICTIONS ON CAPITAL STOCK OF VII CABLE
Certain Limitations. As long as any shares of VII Cable Preferred Stock are
outstanding, (i) no dividends shall be paid or declared in cash or otherwise,
nor will any other distribution be made, on any shares of Junior Stock (as
defined below) and (ii) no shares of any Junior Stock may be purchased,
redeemed, or otherwise acquired by VII Cable or any Subsidiary (as defined
below), nor may any funds be set aside or made available for any sinking fund
for the purchase or redemption or other acquisition of any Junior Stock,
unless: (a) full dividends on all outstanding shares of VII Cable Preferred
Stock and any Parity Stock have been paid, or declared and set aside for
payment, for all dividend periods terminating on or prior to the date of such
Junior Stock dividend or distribution payment, to the extent such dividends
are cumulative; (b) VII Cable has paid or set aside all amounts, if any, then
or theretofore required to be paid or set aside for all purchase, retirement,
and sinking funds, if any, for any Parity Stock; and (c) VII Cable is not in
default on any of its obligations to redeem any VII Cable Preferred Stock or
any Parity Stock. "Junior Stock" means (i) the common stock of VII Cable, (ii)
each other class or series of capital stock of VII Cable hereafter created
(other than any class or series of Senior Stock or Parity Stock) and (iii) any
class or series of Parity Stock to the extent that it ranks junior to the VII
Cable Preferred Stock as to dividend rights, rights of redemption or rights on
liquidation, as the case may be. Immediately following the Exchange Date, VII
Cable will not have issued or outstanding any Senior Stock or Parity Stock and
VII Cable's common stock will represent the only Junior Stock of VII Cable.
As long as any shares of VII Cable Preferred Stock are outstanding,
dividends or other distributions may not be declared or paid on the VII Cable
Preferred Stock or on any Parity Stock, and VII Cable may not purchase, redeem
or otherwise acquire any VII Cable Preferred Stock or Parity Stock, unless
either: (a) (i) full dividends on the VII Cable Preferred Stock and any Parity
Stock have been paid, or declared and set aside for payment, for all dividend
periods terminating on or prior to the date of such VII Cable Preferred Stock
or Parity Stock dividend, distribution, purchase, redemption or other
acquisition payment, to the extent such dividends are cumulative; (ii) VII
Cable has paid or set aside all amounts, if any, then or theretofore required
to be paid or set aside for all purchase, retirement, and sinking funds, if
any, for any Parity Stock; and (iii) VII Cable is not in default on any of its
obligations to redeem any VII Cable Preferred Stock or Parity Stock; or (b)
with respect to the payment of dividends only, any such dividends are declared
and paid pro rata so that the amounts of any
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dividends declared and paid per share on shares of VII Cable Preferred Stock
and shares of any Parity Stock will in all cases bear to each other the same
ratio that accrued and unpaid dividends (including any accumulation with
respect to unpaid dividends for prior dividend periods, if such dividends are
cumulative) per share on shares of VII Cable Preferred Stock and shares of
Parity Stock bear to each other.
Notwithstanding the foregoing, nothing will prevent (i) the payment of
dividends or the making of distributions on any Junior Stock, Parity Stock or
VII Cable Preferred Stock solely in shares of Junior Stock and/or warrants,
rights or options exercisable for or convertible into shares of Junior Stock
(together with a cash adjustment for fractional shares, if any) or the
redemption, purchase or other acquisition of Junior Stock, Parity Stock or VII
Cable Preferred Stock solely in exchange for (together with a cash adjustment
for fractional shares, if any), or through the application of the proceeds
from the sale of, shares of Junior Stock and/or warrants, rights or options
exercisable for or convertible into Junior Stock or (ii) the conversion,
exchange or redemption of Parity Stock or VII Cable Preferred Stock at the
option of the holders into shares of any capital stock (other than Senior
Stock) in accordance with the terms of the instruments creating such
securities (together with a cash adjustment for fractional shares, if any).
In addition, as long as any shares of VII Cable Preferred Stock are
outstanding, VII Cable shall not, nor shall VII Cable permit any of its
Subsidiaries to, (i) pay or declare dividends, in cash or otherwise, or make
any other distribution on any Subsidiary Equity Interest (as defined blow) or
(ii) purchase, redeem, or otherwise acquire any Subsidiary Equity Interest, or
set aside any funds for any sinking fund for the purchase or redemption of any
Subsidiary Equity Interest, unless: (i) full dividends on all VII Cable
Preferred Stock have been paid, or declared and set aside for payment, for all
dividend periods terminating on or prior to the date of such Subsidiary Equity
Interest dividend or distribution payment and (ii) VII Cable is not in default
on any of its obligations to redeem or exchange any shares of VII Cable
Preferred Stock pursuant to the terms of the VII Cable Preferred Stock.
Notwithstanding the foregoing, nothing will prevent (i) the payment of
dividends on any Subsidiary Equity Interest of a Subsidiary solely in shares
of the same class or series as, or ranking junior to, such of Subsidiary
Equity Interest ("Permitted Subsidiary Equity Interest") of such Subsidiary
and/or warrants, rights or options exercisable for or convertible into such
Permitted Subsidiary Equity Interest (together with a cash adjustment for
fractional shares, if any) or the redemption, purchase or other acquisition of
any Subsidiary Equity Interest solely in exchange for (together with a cash
adjustment for fractional shares, if any), or through the application of the
proceeds from the sale of, shares of any Permitted Subsidiary Equity Interest
and/or warrants, rights or options exercisable for or convertible into such
Permitted Subsidiary Equity Interest; (ii) paying dividends or other
distributions on any Subsidiary Equity Interest if such dividends are required
to be made (there being no right of deferral) pursuant to the terms of any
charter document or any partnership, joint venture, stockholder, acquisition
or other agreement in effect on the Exchange Date, or (iii) purchasing,
redeeming or otherwise acquiring any Subsidiary Equity Interest solely in
exchange for securities of TCI (together with a cash adjustment for fractional
shares, if any) or if required to do so pursuant to the terms of any charter
document or any partnership, joint venture, stockholder, acquisition or other
agreement in effect on the Exchange Date.
A "Subsidiary" means (i) a corporation a majority of the capital stock of
which, having voting power under ordinary circumstances to elect directors, is
at the time, directly or indirectly, owned by VII Cable and (ii) any other
entity (other than a corporation) in which VII Cable, directly or indirectly,
has (x) a majority ownership interest and (y) the power to elect or direct the
election of a majority of the members of the governing body of such entity. A
"Subsidiary Equity Interest" means (x) capital stock of Subsidiary (other than
a wholly owned Subsidiary) that is a corporation or (y) a partnership or other
ownership interest of a Subsidiary that is not a corporation.
Payment of dividends or other distributions to the holders of VII Cable
Preferred Stock shall be subject to the prior preferences and other rights of
any future class or series of Senior Stock. See "Ranking" above.
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EXCHANGE AT OPTION OF HOLDER
Exchange Privilege. Each share of VII Cable Preferred Stock will be
exchangeable, in whole or in part, at the option of the holder thereof, at any
time after the fifth anniversary of the Issue Date, unless previously
redeemed, at an exchange rate (the "Exchange Rate"), to be determined by
dividing (i) $80.00 by (ii) the weighted average of the sales prices for all
trades of TCI Stock as reported on Nasdaq on each of the twenty consecutive
Trade Dates ending on the second business day prior to the Exchange Date,
including any extension thereof. The Exchange Rate will be subject to
adjustment as described under "Exchange Adjustments" below. VII Cable will
announce the initial Exchange Rate by 5:00 p.m., New York City time, on the
second business day prior to the Exchange Date by issuing a press release to
the Dow Jones News Service. Holders of Viacom Common Stock will also be able
to obtain the initial Exchange Date, following such press release, from the
Information Agent and the Dealer Manager at their respective telephone numbers
appearing on the back cover of this Offering Circular - Prospectus.
In connection with any exchange by a holder of VII Cable Preferred Stock,
TCI may be required under the Securities Act to deliver to such holder a
current prospectus relating to the TCI Stock. It is therefore a condition (the
"Prospectus Condition") to any exchange that TCI be able to deliver a current
prospectus if one is required under the Securities Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder,
and no exchanges of TCI Stock will be effected during any period in which the
Prospectus Condition cannot be met. TCI has agreed that if delivery of a
current prospectus is so required, for so long as the holders of shares VII
Cable Preferred Stock have the right to exchange such shares of VII Cable
Preferred Stock for shares of TCI Stock, TCI will use all reasonable efforts
to ensure that it will be able to deliver a current prospectus upon a
requested exchange by a holder of VII Cable Preferred Stock. The market value
of the TCI Stock may change during any period that a holder is unable to
effect an exchange due to the Prospectus Condition not being met.
In order to exchange shares of VII Cable Preferred Stock, the holder thereof
must surrender the certificates evidencing the shares of VII Cable Preferred
Stock to be exchanged at the office or agency to be maintained by VII Cable
for that purpose, duly endorsed to VII Cable or in blank (or accompanied by
duly executed instruments of transfer to VII Cable or in blank) with
signatures guaranteed (such endorsements or instruments of transfer to be in
form satisfactory to VII Cable), together with written notice of exchange
specifying the number of shares of VII Cable Preferred Stock to be exchanged
and specifying the name or names (with addresses) in which the certificate or
certificates representing the TCI Stock deliverable on such exchange are to be
registered and otherwise in accordance with exchange procedures established by
VII Cable. Initially such office will be the principal corporate trust office
of the Transfer Agent (as hereinafter defined). Each notice of exchange shall
be irrevocable and each exchange shall be deemed to have been effected
immediately prior to the close of business on the date (the "TCI Stock
Exchange Date") on which all of the requirements for such exchange (including
the satisfaction of the Prospectus Condition, if required) shall have been
satisfied. The exchange shall be at the Exchange Rate in effect immediately
prior to the close of business on the TCI Stock Exchange Date.
As promptly as practicable after the surrender by a holder of certificates
for shares of VII Cable Preferred Stock for exchange, together with any other
required documentation, VII Cable shall cause to be delivered at said office
or agency to such holder, or on his or her written order, a certificate or
certificates for the number of full shares of TCI Stock to which such holder
is entitled, together with a cash adjustment for any fractional shares
determined as described under "Adjustment for Fractional Shares" below.
Holders of shares of VII Cable Preferred Stock at the close of business on a
Record Date for any payment of declared dividends will be entitled to receive
the dividend payable on such shares of VII Cable Preferred Stock on the
corresponding Dividend Payment Date notwithstanding the effective exchange of
such shares following such Record Date and prior to the corresponding Dividend
Payment Date. However, shares of VII Cable Preferred Stock surrendered for
exchange after the close of business on a Record Date for any payment of
dividends and before the opening of business on the next succeeding Dividend
Payment Date must be accompanied by payment in cash of an amount equal to the
dividend thereon attributable to the current quarterly
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dividend period which is to be paid on such Dividend Payment Date (unless such
shares of VII Cable Preferred Stock are subject to redemption on a Redemption
Date falling between such Record Date and such Dividend Payment Date). A
holder of shares of VII Cable Preferred Stock called for redemption on any
Dividend Payment Date will (if such holder is the registered holder on the
applicable Record Date) receive the dividend on such shares payable on that
date and will be able to exchange such shares after the Record Date for such
dividend without paying an amount equal to such dividend to VII Cable upon
exchange. Except as provided above, upon any exchange of shares of VII Cable
Preferred Stock for shares of TCI Stock VII Cable will not make any payment or
allowance for unpaid dividends, whether or not in arrears, on exchanged shares
of VII Cable Preferred Stock or for previously declared dividends or
distributions on the shares of TCI Stock issued upon such exchange.
If the shares of VII Cable Preferred Stock represented by a certificate
surrendered for exchange are exchanged in part only, VII Cable will cause to
be issued and delivered to the holder, without charge therefor, a new
certificate or certificates representing in the aggregate the number of
unexchanged shares.
The right to exchange shares of VII Cable Preferred Stock called for
redemption will terminate immediately before the close of business on the
related Redemption Date. See "Redemption" below.
Exchange Adjustments. The Exchange Rate is subject to adjustment upon the
occurrence of certain events involving TCI including, without limitation: (i)
the payment by TCI of dividends (and other distributions) on outstanding
shares of TCI Stock in shares of TCI Stock; (ii) subdivisions or combinations
of TCI Stock; (iii) the payment by TCI of dividends (and other distributions)
on outstanding shares of TCI Stock in shares of TCI's capital stock (other
than TCI Stock); (iv) the issuance by TCI, in reclassification of its
outstanding shares of TCI Stock, of any other shares of capital stock of TCI;
(v) the distribution by TCI to all or substantially all holders of TCI Stock
of rights, warrants or options entitling holders of such rights, warrants or
options (for a period not exceeding forty-five days after the record date for
the determination of stockholders entitled to receive such distribution) to
purchase shares of TCI Stock (or securities exercisable for or convertible
into shares of TCI Stock, having a conversion or exercise price per share,
after adding thereto an allocable portion of the exercise price of the rights,
warrants or options to purchase such securities) less than the Current Market
Price on the applicable Determination Date and (vi) the distribution by TCI to
all or substantially all holders of TCI Stock of any assets or debt securities
or any rights, warrants or options to purchase securities (other than those
dividends, distributions, rights, warrants and options referred to above and
excluding cash dividends other than Extraordinary Cash Dividends (as defined
below). "Extraordinary Cash Dividends" means cash dividends on TCI Stock that,
when aggregated with all other cash dividends made on TCI Stock having an Ex-
Dividend Date occurring in the 365/366 consecutive day period ending on the
Ex-Dividend Date for the cash dividend in question (other than those dividends
or distributions for which a prior adjustment to the Exchange Rate was made),
equal or exceed on a per share basis 10% of the average of the Closing Prices
of the TCI Stock during the shorter of (i) such 365/366 day period or (ii) the
period beginning after the first Ex-Dividend Date in such period and ending on
the date prior to the Ex-Dividend Date for the cash dividend in question. In
the case of any such dividend or distribution on TCI Stock of shares of
capital stock, subdivision, combination or reclassification, the holder of
each outstanding share of VII Cable Preferred Stock will have the right to
exchange such share of VII Cable Preferred Stock into the kind and amount of
securities which such holder would have owned immediately after such event if
such share of VII Cable Preferred Stock had been exchanged immediately before
the record date for or effective date of, as the case may be, such event.
However, in the case of any dividend, distribution or reclassification in
which the VII Cable Preferred Stock becomes exchangeable for shares of more
than one class or series of TCI capital stock, any one of which is redeemable
or exchangeable at the election of TCI ("Redeemable Capital Stock"), and such
Redeemable Capital Stock may be redeemed or exchanged by TCI for consideration
that includes securities of an issuer other than TCI ("Redemption
Securities"), then such dividend, distribution or reclassification shall be
treated in the manner described in the next sentence as though it were a
distribution of assets by TCI. In the case of any such issuance of rights,
warrants or options which expire within 45 days after the record date for the
determination of stockholders entitled to receive such rights, warrants or
options, or any such distribution of assets, debt securities or certain
rights, warrants or options to purchase
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securities, the Exchange Rate will be adjusted pursuant to formulas contained
in the VII Cable Restated Certificate of Incorporation. In certain cases of
distributions of assets, debt securities or certain rights, warrants or options
to purchase securities to holders of TCI Stock, rather than being entitled to
an adjustment in the Exchange Rate, the holder of a share of VII Cable
Preferred Stock upon exchange thereof will be entitled to receive, in addition
to the shares of TCI Stock into which such share of VII Cable Preferred Stock
is exchangeable, the kind and amount of assets, debt securities, rights,
warrants or options comprising the distribution that such holder would have
received if such holder had exchanged such share of VII Cable Preferred Stock
immediately prior to the record date for determining the holders of TCI Stock
entitled to receive the distribution.
If the holders of VII Cable Preferred Stock would be entitled to receive upon
exchange thereof any Redeemable Capital Stock (other than Redeemable Capital
Stock that may be redeemed or exchanged for consideration that includes
Redemption Securities), and such Redeemable Capital Stock is redeemed,
exchanged or otherwise acquired in full, then, from and after such event (a
"Redemption Event"), the holders of VII Cable Preferred Stock then outstanding
shall be entitled to receive upon exchange of such shares, in lieu of shares of
such Redeemable Capital Stock, the kind and amount of securities, cash or other
assets receivable upon such Redemption Event by a holder of the number of
shares of Redeemable Capital Stock for which such shares of VII Cable Preferred
Stock could have been exchanged immediately prior to the effectiveness of such
Redemption Event (assuming that such holder failed to exercise any applicable
right of election with respect thereto and received per share of such
Redeemable Capital Stock the kind and amount of securities, cash or other
assets received per share by the holders of a plurality of the non-electing
shares thereof) and, thereafter, the holders of the VII Cable Preferred Stock
shall have no other exchange rights with respect to such Redeemable Capital
Stock.
All adjustments to the Exchange Rate will be calculated to the nearest
1/1000th of a share of TCI Stock. No adjustment in the Exchange Rate will be
required unless such adjustment would require an increase or decrease of at
least one percent therein; provided, however, that any adjustment which is not
required to be made will be carried forward and taken into account in any
subsequent adjustment. In addition to the foregoing adjustments, VII Cable may
make increases in the Exchange Rate that are necessary or advisable in order
that any event treated for federal income tax purposes as a dividend of stock
or stock rights will not be taxable to the holders of TCI Stock.
If an adjustment is required to be made in the Exchange Rate, VII Cable may,
in its sole discretion, elect to defer the following until after the occurrence
of the event requiring such adjustment: (i) delivering to the holder of any VII
Cable Preferred Stock surrendered for exchange the additional shares of TCI
Stock deliverable upon such exchange over the shares of TCI Stock deliverable
before giving effect to such adjustment and (ii) paying to such holder any
amount in cash in lieu of a fractional share of TCI Stock. In addition, no
adjustment need be made for rights to purchase shares of TCI Stock or for sales
of shares of TCI Stock which in either case are made pursuant to a plan
providing for reinvestment of dividends or interest or pursuant to a bona fide
employee stock option or stock purchase plan of TCI or any of its direct or
indirect wholly owned subsidiaries (including VII Cable).
Whenever the Exchange Rate is required to be adjusted, VII Cable will
forthwith compute such adjusted Exchange Rate and file with the transfer
agent(s) for the VII Cable Preferred Stock and the TCI Stock a certificate with
respect to such adjustment, and mail a notice to holders of VII Cable Preferred
Stock providing information with respect to such adjustment. At least 10 days
before the record date or other date set for definitive action, VII Cable will
notify holders of VII Cable Preferred Stock of (i) any action which would
require an adjustment to the Exchange Rate, (ii) certain mergers or
combinations involving TCI or (iii) the dissolution, liquidation or winding up
of TCI.
Adjustment for Consolidation or Merger of TCI. In case of (i) any
consolidation or merger to which TCI is a party, (ii) any sale or transfer to
another corporation of the property of TCI as an entirety or substantially as
an
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entirety or (iii) any statutory exchange of securities by TCI with another
corporation (other than in connection with a merger or acquisition), in each
case as a result of which shares of TCI Stock shall be converted into the
right to receive stock, securities or other property (including cash or any
combination thereof), each share of VII Cable Preferred Stock which is not
converted into the right to receive stock, securities or other property in
connection with such transaction will, after consummation of such transaction,
be subject to exchange at the option of the holder into the kind and amount of
securities, cash or other property receivable upon consummation of such
transaction by a holder of the number of shares of TCI Stock into which such
share of VII Cable Preferred Stock might have been exchanged immediately prior
to consummation of such transaction and assuming in each case that such holder
of TCI Stock failed to exercise rights of election, if any, as to the kind or
amount of securities, cash or other property receivable upon consummation of
such transaction (provided that if the kind or amount of securities, cash or
other property receivable upon consummation of such transaction is not the
same for each non-electing share, then the kind and amount of securities, cash
or other property receivable upon consummation of such transaction for each
non-electing share will be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). The kind and amount of
securities into which shares of VII Cable Preferred Stock will be exchangeable
after consummation of such transaction will be subject to adjustment, as
nearly as may be practicable, as described under "Exchange Adjustments" above
following the date of consummation of such transaction. TCI will agree not to
become a party to any such transaction unless the terms thereof are consistent
with the foregoing.
REDEMPTION
Mandatory Redemption. Each share of VII Cable Preferred Stock (if not
earlier exchanged or redeemed) will be subject to mandatory redemption by VII
Cable on the tenth anniversary of the Issue Date (the "Mandatory Redemption
Date"), at a redemption price (the "Mandatory Redemption Price") equal to the
Liquidation Preference.
Optional Redemption. Shares of VII Cable Preferred Stock are not redeemable
prior to 15 days after the fifth anniversary of the Issue Date (the "Initial
Redemption Date"). At any time and from time to time after the Initial
Redemption Date and until the Mandatory Redemption Date, VII Cable will have
the right to redeem, in whole or in part, the outstanding shares of VII Cable
Preferred Stock at the following per share call prices, together with accrued
but unpaid dividends (whether or not earned or declared) to the date fixed for
redemption (each an "Optional Redemption Price," such price and the Mandatory
Redemption Price being sometimes referred to collectively herein as a
"Redemption Price"), if redeemed during the twelve-month periods beginning on
the anniversary of the Issue Date in the years shown below.
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- -----------
<S> <C>
2001.......................................................... $
2002..........................................................
2003..........................................................
2004 and thereafter...........................................
</TABLE>
If fewer than all the outstanding shares of VII Cable Preferred Stock are to
be redeemed as of any date (an "Optional Redemption Date," such date and the
Mandatory Redemption Date being sometimes referred to collectively herein as a
"Redemption Date"), the shares of VII Cable Preferred Stock to be redeemed
will be selected by VII Cable from outstanding shares of VII Cable Preferred
Stock pro rata (as nearly as may be practicable) among all holders of
outstanding shares of VII Cable Preferred Stock.
Manner of Payment of Redemption Price. VII Cable may effect the redemption
of shares of VII Cable Preferred Stock upon the mandatory or optional
redemption thereof, at the election of VII Cable, (i) out of funds legally
available therefor, (ii) through the delivery of shares of TCI Stock or (iii)
through any combination of the foregoing forms of consideration elected by the
VII Cable Board in its sole discretion. If VII Cable elects to pay, in whole
or in part, the Redemption Price in respect of shares of VII Cable Preferred
Stock through the
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delivery of shares of TCI Stock, then VII Cable shall deliver to each holder
of shares of VII Cable Preferred Stock to be redeemed on the applicable
Redemption Date a number of shares of TCI Stock equal to the amount determined
by dividing (i) the aggregate Redemption Price (or designated portion thereof
to be paid through delivery of shares of TCI Stock) of such shares of VII
Cable Preferred Stock by (ii) the Cash Equivalent Amount. Any portion of a
Redemption Price that is not paid through the delivery of shares of TCI Stock
will be paid in cash. The market price of the TCI Stock may vary from the
Average Market Price between the date of determination of such Average Market
Price (for purposes of determining the Cash Equivalent Amount) and the
subsequent delivery of shares of TCI Stock, in payment of the Redemption
Price, to holders in respect of shares of VII Cable Preferred Stock called for
redemption. If the market value of the TCI Stock on the Redemption Date is
more than 5% lower than the Average Market Price as of such Redemption Date
and the holder sells such shares of TCI Stock at such lower price, the
holder's actual proceeds from the sale of such shares would be lower that the
stated Redemption Price for shares of VII Cable Preferred Stock. In addition,
in connection with any such sale the holder is likely to incur commissions and
other transaction costs.
No fractional shares of TCI Stock will be delivered to a holder upon
redemption of his shares of VII Cable Preferred Stock, but VII Cable will
instead pay a cash adjustment determined as described under "Adjustment for
Fractional Shares" below.
Dividends on shares of VII Cable Preferred Stock selected for redemption
will cease to accrue, and the right of the holders of such shares to exercise
their right to exchange such shares for TCI Stock will terminate immediately
prior to the close of business on the related Redemption Date.
Notice of Redemption. VII Cable will provide notice (a "Redemption Notice")
of any redemption of shares of VII Cable Preferred Stock to holders of record
of VII Cable Preferred Stock to be called for redemption not less than 15 nor
more than 60 days prior to the applicable Redemption Date. The Redemption
Notice will be provided by mail sent to each holder of record of shares of VII
Cable Preferred Stock to be redeemed, at such holder's address as it appears
on the stock register of VII Cable; provided, however, that neither failure to
give such notice nor any defect therein will affect the validity of the
proceeding for the redemption of any shares of VII Cable Preferred Stock to be
redeemed except as to the holders to whom VII Cable has failed to give said
notice or whose notice was defective.
Each Redemption Notice sent to a holder will include, without limitation,
the following information: (i) the Redemption Date; (ii) if less than all
outstanding shares of VII Cable Preferred Stock are to be redeemed, the number
of shares held by such holder to be redeemed; (iii) the Redemption Price and
the form or forms of consideration that VII Cable has elected to pay and/or
deliver upon such redemption and, if more than one form of consideration has
been elected by VII Cable, the designated portions of the Redemption Price to
be paid in each form of consideration so elected; (iv) if VII Cable has
elected to deliver shares of TCI Stock in payment of the Redemption Price (or
a designated portion thereof), the method of determining the number of shares
of TCI Stock so deliverable; (v) the place or places where certificates for
VII Cable Preferred Stock to be redeemed are to be surrendered for payment of
the Redemption Price; (vi) that dividends on the shares of VII Cable Preferred
Stock to be redeemed shall cease to accrue on the Redemption Date; and (vii)
the then current Exchange Rate and that the exchange privilege will terminate
immediately prior to the close of business on the Redemption Date.
On or after the Redemption Date, each holder of shares of VII Cable
Preferred Stock to be redeemed must present and surrender his certificate or
certificates for such shares to VII Cable at the place designated in the
Redemption Notice and thereupon the Redemption Price of such shares will paid
to or on the order of the person whose name appears on such certificate or
certificates as the record owner thereof, and each surrendered certificate
will be cancelled. Should fewer than all the shares represented by a
certificate be redeemed, a new certificate will be issued representing the
unredeemed shares.
If a Redemption Notice with respect to shares of VII Cable Preferred Stock
to be redeemed pursuant to a mandatory or optional redemption has been timely
given by VII Cable, and if on or before the applicable Redemption Date VII
Cable has deposited with the redemption agent for VII Cable Preferred Stock
(or, if there
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is no redemption agent, shall have set apart so as to be available for such
purpose and only such purpose) cash (including cash for any adjustment in lieu
of delivering fractional securities) and/or shares of TCI Stock, as applicable,
sufficient to pay in full the aggregate Redemption Price for such shares of VII
Cable Preferred Stock on such Redemption Date, then effective as of the close
of business on such Redemption Date the shares of VII Cable Preferred Stock to
be so redeemed will no longer be deemed outstanding (notwithstanding that any
certificate therefor may not have been surrendered for cancellation), dividends
with respect to the shares so called for redemption shall cease to accrue on
the Redemption Date (except that holders of shares of VII Cable Preferred Stock
at the close of business on a Record Date for any payment of dividends shall be
entitled to receive the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the redemption of such shares following
such Record Date and prior to such Dividend Payment Date) and all rights with
respect to the shares so called for redemption will forthwith after such date
cease and terminate, except the right of such holders, upon the surrender of
certificates evidencing the shares of VII Cable Preferred Stock so redeemed, to
receive the cash and/or TCI Stock, as applicable, payable or deliverable in
payment of the Redemption Price and the applicable cash adjustment, if any, in
lieu of fractional shares, without interest. Any cash and/or shares of TCI
Stock so deposited or set apart and unclaimed at the end of one year from such
Redemption Date will be repaid and released to VII Cable, after which the
holder or holders of such shares of VII Cable Preferred Stock so called for
redemption will look only to VII Cable for delivery of such cash and/or shares
of TCI Stock.
The ability of VII Cable to redeem VII Cable Preferred Stock shall be subject
to the prior preferences and rights of any future class or series of Senior
Stock. See "Ranking" above.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary dissolution, liquidation or
winding up of VII Cable, the holders of shares of VII Cable Preferred Stock
then outstanding will be entitled to receive, after payment or provision for
payment of the debts and other liabilities of VII Cable and payment or
provision for payment of any distribution on shares of any Senior Stock, an
amount per share equal to the Liquidation Preference, before any distribution
of assets is made to the holders of Junior Stock or any Parity Stock of VII
Cable ranking junior to the VII Cable Preferred Stock upon liquidation,
dissolution or winding up. After payment of the Liquidation Preference, holders
of shares of VII Cable Preferred Stock will not be entitled to any further
participation in any distribution of assets of VII Cable.
If, upon any dissolution, liquidation or winding up of VII Cable, the assets
of VII Cable available for distribution to the holders of the shares of VII
Cable Preferred Stock shall be insufficient to pay in full (i) the aggregate
Liquidation Preference payable to holders of VII Cable Preferred Stock and (ii)
the liquidation preference payable to holders of shares of all outstanding
classes and series of Parity Stock that rank pari passu with the VII Cable
Preferred Stock upon liquidation, dissolution or winding up (as set forth in
the instrument or instruments creating such Parity Stock), the holders of
shares of VII Cable Preferred Stock and such Parity Stock shall share ratably
in such distribution of assets in proportion to the amount which would be
payable on such distribution if the amounts to which the holders of outstanding
shares of VII Cable Preferred Stock and the holders of outstanding shares of
such Parity Stock were paid in full. The sale, lease, transfer or exchange of
all or substantially all of the assets of VII Cable, the consolidation or
merger of VII Cable with one or more other corporations (whether or not VII
Cable is the corporation surviving such consolidation or merger), and the
consummation of a statutory binding share exchange involving VII Cable will not
be deemed a liquidation, dissolution or winding up of VII Cable.
CONDITIONS TO DELIVERY OF SHARES OF TCI STOCK
FOR DIVIDEND AND REDEMPTION PAYMENTS
VII Cable's right to elect to make any dividend or redemption payment, in
whole or in part, through the delivery of shares of TCI Stock will be
conditioned upon: (i) the shares of TCI Stock to be so delivered being
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fully paid and nonassessable and free from any preemptive rights, liens or
adverse claims; (ii) the delivery of such shares being exempt from the
registration or qualification requirements of the Securities Act and
applicable state securities laws or, if no such exemption is available, the
delivery of such shares having been duly registered or qualified under the
Securities Act and applicable state securities laws; and (iii) the shares of
TCI Stock to be so delivered being listed, and upon delivery being eligible
for trading, on Nasdaq or on a national securities exchange. If such
conditions have not been satisfied prior to or on the date of any such
dividend or redemption payment, such payment shall be made solely in cash.
ADJUSTMENT FOR FRACTIONAL SHARES
No fractional shares or scrip representing fractional shares of TCI Stock
will be delivered upon the redemption or exchange of any shares of VII Cable
Preferred Stock or in connection with any dividend payment. Whether or not a
fractional share would be delivered to a holder of VII Cable Preferred Stock
shall be based upon (i), in the case of an exchange, on the total number of
shares of VII Cable Preferred Stock such holder is at the time exchanging into
TCI Stock and the total number of shares of TCI Stock otherwise deliverable
upon such exchange and (ii), in the case of the payment, in whole or in part,
of a dividend or redemption payment through the delivery of shares of TCI
Stock, on the total number of shares of VII Cable Preferred Stock at the time
held by such holder and the total number of shares of TCI Stock otherwise
deliverable in respect thereof. In lieu of the issuance of a fraction of a
share of TCI Stock or scrip, VII Cable shall pay instead an amount in cash
(rounded to the nearest whole cent) by its check equal to the same fraction of
the Closing Price of a share of TCI Stock on the Trading Day immediately
preceding the Exchange Date or the date of payment of the dividend or
redemption, as the case may be, in respect of which such cash adjustment is
being determined.
VOTING RIGHTS
The holders of shares of VII Cable Preferred Stock will have no voting
rights, except as otherwise required by law and except as set forth below.
When and if the holders of VII Cable Preferred Stock are entitled to vote,
each holder will be entitled to one vote per share.
If at any time accrued dividends payable on the shares of VII Cable
Preferred Stock are in arrears and unpaid in an aggregate amount equal to or
exceeding the aggregate amount of dividends payable thereon for six quarterly
dividend periods, the holders of the shares of VII Cable Preferred Stock,
voting separately as a class (with the holders of all other shares of Parity
Stock and Senior Stock upon which like voting rights have been conferred and
are exercisable), will have the right to vote for the election of two
directors (the "Preferred Stock Directors") to the VII Cable Board, such
directors to be in addition to the number of directors constituting the VII
Cable Board immediately prior to the accrual of such right. Such right of the
holders of shares of VII Cable Preferred Stock to vote for the election of two
Preferred Stock Directors will continue until all dividends in arrears on the
shares of VII Cable Preferred Stock have been paid in full. The term of office
of each Preferred Stock Director shall terminate on the earlier of (i) the
next annual meeting of stockholders of VII Cable at which a successor shall
have been elected and qualified (irrespective of whether the VII Cable Board
is divided into staggered classes) or (ii) the termination of the right of the
holders of shares of VII Cable Preferred Stock (and any such other shares of
Parity Stock and Senior Stock) to vote for Preferred Stock Directors.
For as long as any shares of VII Cable Preferred Stock remain outstanding,
the affirmative vote of the holders of at least 66 2/3% of such outstanding
shares (voting separately as a class) will be necessary: (i) before VII Cable
may amend, alter or repeal any of the provisions of VII Cable's Restated
Certificate of Incorporation which would adversely affect the powers,
preferences or rights of the holders of the shares of VII Cable Preferred
Stock then outstanding; provided, however, that (x) any such amendment,
alteration or repeal that would authorize, create or increase the authorized
amount of any Junior Stock or Parity Stock and (y) any such amendment that
would increase the number of authorized shares of Preferred Stock (other than
VII Cable Preferred Stock) or that would decrease (but not below the number of
authorized shares then outstanding) the number of authorized shares of
Preferred Stock (other than VII Cable Preferred Stock), will be deemed not to
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adversely affect such powers, preferences or rights and shall not be subject
to approval by the holders of shares of VII Cable Preferred Stock; (ii) before
VII Cable or the VII Cable Board may create or issue any class or series of
Senior Stock; or (iii) before VII Cable may effect any reclassification of VII
Cable Preferred Stock (other than a reclassification that solely seeks to
change the designation of the VII Cable Preferred Stock and does not adversely
affect the powers, preferences or rights of the holders of shares of VII Cable
Preferred Stock outstanding immediately prior to such reclassification). No
vote of the holders of VII Cable Preferred Stock in respect of an amendment,
alteration or repeal of any provision of VII Cable's Restated Certificate of
Incorporation or the creation or issue of any class or series of Senior Stock
will be required if, at or prior to the time when such amendment, alteration
or repeal or creation or issue is to take effect, as the case may be,
provision is made for the redemption of all shares of VII Cable Preferred
Stock at the time outstanding (except that no such provision may be made prior
to the Initial Redemption Date); provided, however, notwithstanding the
foregoing, in the event that VII Cable does not pay the Redemption Price to
holders of VII Cable Preferred Stock on the applicable Redemption Date, such
holders will be entitled to vote in respect of the matters described above on
which such holders would have been entitled to so vote but for the provision
for redemption which was made and any vote taken in respect of such matters
which does not include the vote of the VII Cable Preferred Stock shall be
void.
Except as required by law, the holders of VII Cable Preferred Stock will not
be entitled to vote on any merger or consolidation involving VII Cable or a
sale of all or substantially all of the assets of VII Cable.
CERTAIN COVENANTS
Transactions with Affiliates. As long as any shares of VII Cable Preferred
Stock are outstanding, VII Cable will not, and will not permit any Subsidiary
to, enter into any transaction with an Affiliate unless such transaction is on
terms that are no less favorable to VII Cable or such Subsidiary than those
that would have been obtained in a comparable transaction with a person that
is not an Affiliate; provided, however, that transactions between VII Cable
and its Subsidiaries or among such Subsidiaries shall not be subject to this
covenant. An "Affiliate" of VII Cable or any Subsidiary is defined as any
person or entity that directly or indirectly controls, is controlled by, or is
under common control with VII Cable or such Subsidiary.
SEC Reports. As long as any shares of VII Cable Preferred Stock are
outstanding, VII Cable shall timely file with the Commission copies of the
annual reports, quarterly reports and other reports, information and documents
which VII Cable is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act and, within 15 days after such filing is required
to be made with the Commission, mail copies of such reports, information or
other documents to the holders of the VII Cable Preferred Stock. If at any
time while shares of VII Cable Preferred Stock are outstanding VII Cable is
not required to, and does not, have, any class of securities registered under
the Exchange Act, then VII Cable shall prepare comparable reports, information
and documents and mail the same to holders of the VII Cable Preferred Stock
within 15 days after the date it would have been required to file such
reports, information or documents with the Commission if it had continued to
have securities registered under the Exchange Act.
TRANSFER AGENT AND REGISTRAR
(the "Transfer Agent") will act as paying, exchange and
redemption agent and registrar for the shares of VII Cable Preferred Stock.
MISCELLANEOUS
Upon issuance, the shares of VII Cable Preferred Stock will be fully paid
and nonassessable. Holders of shares of VII Cable Preferred Stock will have no
preemptive rights. TCI has agreed to at all times to reserve and keep
available out of its authorized and unissued TCI Stock and/or issued shares of
TCI Stock held in its treasury, solely for issuance upon the exchange of
shares of VII Cable Preferred Stock, such number of shares of TCI
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Stock as will from time to time be deliverable upon the exchange of all shares
of VII Cable Preferred Stock then outstanding (assuming for this purpose that
all of the shares of VII Cable Preferred Stock are held by one person). Shares
of VII Cable Preferred Stock redeemed by VII Cable will be retired and resume
the status of authorized and unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated as part of
a particular series of Preferred Stock by the VII Cable Board.
COMPARISON OF RIGHTS OF STOCKHOLDERS
OF VIACOM AND VII CABLE
The following is a summary of material differences between the rights of
holders of Viacom Common Stock and the rights of holders of VII Cable Class A
Common Stock and VII Cable Preferred Stock (after giving effect to the
Recapitalization). Because each of Viacom and VII Cable is organized under the
laws of Delaware, such differences arise principally from provisions of the
charter of each of Viacom and VII Cable. Assuming that the Stock Issuance
occurs in accordance with the terms and conditions of the Subscription
Agreement, shares of VII Cable Class A Common Stock issued to holders of shares
of Viacom Common Stock whose shares are accepted for exchange will
automatically convert into shares of VII Cable Preferred Stock on the Exchange
Date immediately after the consummation of the Stock Issuance. Accordingly,
holders of shares of Viacom Common Stock tendering such shares in the Exchange
Offer should expect to receive shares of VII Cable Preferred Stock in exchange
after the consummation of the Stock Issuance.
The following summaries do not purport to be complete statements of the
rights of Viacom stockholders under Viacom's Restated Certificate of
Incorporation as compared with the rights of VII Cable stockholders under VII
Cable's Restated Certificate of Incorporation and By-laws or a complete
description of the specific provisions referred to herein. The identification
of specific differences is not meant to indicate that other equal or more
significant differences do not exist. These summaries are qualified in their
entirety by reference to the Delaware General Corporation Law ("DGCL") and
governing corporate instruments of Viacom and VII Cable, to which stockholders
are referred. The terms of VII Cable's capital stock are described in greater
detail under "Description of VII Cable Capital Stock."
VOTING RIGHTS
Viacom Common Stock. Except as otherwise expressly provided below, all issued
and outstanding shares of Viacom Class A Common Stock and Viacom Class B Common
Stock are identical and entitle the holders to the same rights and privileges.
With respect to all matters upon which stockholders are entitled to vote,
holders of outstanding shares of Viacom Class A Common Stock vote together with
the holders of any other outstanding shares of capital stock of Viacom entitled
to vote, without regard to class, and every holder of outstanding shares of
Viacom Class A Common Stock is entitled to cast one vote in person or by proxy
for each share of Viacom Class A Common Stock outstanding in such stockholder's
name. Except as otherwise required by the DGCL, the holders of outstanding
shares of Viacom Class B Common Stock are not entitled to any votes upon any
questions presented to stockholders of Viacom.
VII Cable Class A Common Stock. VII Cable Class A Common Stock entitles
holders thereof to one vote for each share on each matter upon which
stockholders have the right to vote.
VII Cable Preferred Stock. VII Cable Preferred Stock does not entitle its
holders to voting rights with respect to general corporate matters, except as
provided by law and except (i) if dividends on the VII Cable Preferred Stock
are in arrears and unpaid for at least six quarterly dividend periods, in which
case the number of directors constituting the VII Cable Board will, without
further action, be increased by two to permit the holders of the shares of VII
Cable Preferred Stock, voting separately as a class (with the holders of all
other shares of Parity Stock upon which like voting rights have been conferred
and are exercisable), to elect by a plurality vote two directors, until such
time as all dividends in arrears on the VII Cable Preferred Stock are paid in
full or (ii) if VII Cable seeks to (a) amend, alter or repeal (by merger or
otherwise) any provision of the Amended and
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Restated Certificate of Incorporation so as to affect adversely the specified
rights, preferences, privileges or voting rights of holders of shares of the
VII Cable Preferred Stock, (b) create or issue any class or series of Senior
Stock or (c) effect any reclassification of the VII Cable Preferred Stock
(other than a reclassification that solely seeks to change the designation of
the VII Cable Preferred Stock and does not adversely affect the powers,
preferences or rights of the holders of shares or VII Cable Preferred Stock
outstanding immediately prior to such reclassification), in each of which
events specified in this clause (ii) the affirmative vote or consent of at
least 66 2/3% of the shares of VII Cable Preferred Stock then outstanding,
voting or consenting, as the case may be, separately as one class, would be
required.
DIVIDENDS
Viacom Common Stock. Viacom has not declared cash dividends on its common
equity and has no present intention of so doing.
VII Cable Class A Common Stock. The VII Cable Class A Common Stock is not
expected to be outstanding for any significant period of time, if at all, after
the consummation of the Stock Issuance. Accordingly, it is not anticipated that
any dividends will be declared or paid with respect to such stock.
VII Cable Preferred Stock. Holders of VII Cable Preferred Stock will be
entitled to receive, when, as and if declared by the Board of Directors, out of
funds legally available therefor, dividends on the Preferred Stock at a rate
per annum of $ per share, payable quarterly, and no more. All dividends
will be fully cumulative whether or not earned or declared and shall accrue on
a daily basis from the date of issuance of the VII Cable Preferred Stock and
will be payable quarterly in arrears on , ,
and of each year to holders of record as they
appear on the stock transfer books of VII Cable on such record dates, not more
than 60 days nor less than 10 days preceding the payment dates for such
dividends, as are fixed by the VII Cable Board.
All dividends may be paid, at VII Cable's option, in cash or in TCI Stock, or
in a combination of the foregoing forms of consideration. See "Description of
VII Cable Capital Stock--VII Cable Preferred Stock--Dividends."
LIQUIDATION PREFERENCE
None of the holders of Viacom Common Stock or VII Cable Class A Common Stock
are entitled to be paid any liquidation preference.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
VII Cable, holders of VII Cable Preferred Stock will be entitled to be paid,
out of the assets of VII Cable available for distribution, $100.00 per share,
plus an amount in cash equal to accumulated and unpaid dividends thereon to the
date fixed for liquidation, dissolution or winding-up, and no more, before any
payment shall be made or any assets distributed to the holders of any class or
series of Junior Stock, including, without limitation, any class or series of
common stock of VII Cable. If, upon any voluntary or involuntary liquidation,
dissolution or winding-up of VII Cable, the amounts payable with respect to the
VII Cable Preferred Stock and all other Parity Stock are not paid in full, the
holders of the VII Cable Preferred Stock and the Parity Stock will share
equally and ratably in any distribution of assets of VII Cable in proportion to
the full liquidation preference and accumulated and unpaid dividends to which
each is entitled. See "Description of VII Cable Capital Stock---VII Cable
Preferred Stock--Liquidation Preference."
RELATIONSHIP BETWEEN VIACOM AND VII CABLE
Viacom has provided VII Cable with certain administrative services, including
risk management, legal, financial and other corporate functions for which an
expense has been allocated in VII Cable's financial
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statements. In addition, VII Cable, through the normal course of business, is
involved in transactions with Viacom and its affiliated companies. VII Cable
has affiliation arrangements to distribute television program services of
companies owned by or affiliated with Viacom, including Showtime, MTV,
Nickelodeon, VH1, Comedy Central, USA Network, The Sci-Fi Channel, The Movie
Channel, Flix and Lifetime (in which Viacom had an equity participation until
April 1, 1994). These affiliation arrangements require VII Cable to pay
license fees based upon the number of subscribers receiving the programming.
Aggregate license fees incurred under such affiliation arrangements with
Viacom affiliates were $28.6 million in 1994, $23.8 million in 1993 and $24.6
million in 1992. See Note 6 of the Notes to Combined Financial Statements of
VII Cable.
RELATIONSHIP BETWEEN VII CABLE AND TCI AFTER THE EXCHANGE OFFER
OWNERSHIP OF CLASS B COMMON STOCK
Immediately following the Stock Issuance, TCI Cable will own 100 shares of
VII Cable Class B Common Stock, which at that time, will represent 100% of the
outstanding common equity securities of VII Cable. Consequently, TCI Cable
will have significant influence over the policies and affairs of VII Cable
and, subject only to the rights of holders of VII Cable Preferred Stock set
forth in VII Cable's Restated Certificate of Incorporation, will have the
power to control all matters (including the election of directors) requiring
the approval of stockholders of VII Cable. See "Risk Factors--Controlling
Stockholder" and "Description of VII Cable Capital Stock--VII Cable Preferred
Stock--Voting Rights."
SERVICES AGREEMENT
Upon consummation of the Stock Issuance, TCI and TCI Cable will provide
certain facilities, services and personnel to VII Cable. The scope of the
facilities, personnel and services to VII Cable and the respective charges
payable in respect thereof are set forth in a services agreement to be entered
into among TCI, TCI Cable and VII Cable (the "Services Agreement"). Pursuant
to the Services Agreement, TCI will provide to VII Cable administrative and
operational services necessary for the conduct of its business, including, but
not limited to, such services as are generally performed by TCI's accounting,
finance, corporate, legal and tax departments. In addition, TCI and TCI Cable
will make available to VII Cable such general overall management services and
strategic planning services as TCI, TCI Cable and VII Cable shall agree, and
shall provide VII Cable with such access to and assistance from TCI Cable's
engineering and construction groups and TCI's programming and
technology/venture personnel as VII Cable may from time to time request.
The Services Agreement will also provide that TCI, for so long as TCI
continues to beneficially own shares of VII Cable Common Stock representing at
least a majority in voting power of the outstanding shares of capital stock of
VII Cable entitled to vote generally in the election of directors, will
continue to provide in the same manner, and on the same basis as generally
provided from time to time to other participating TCI subsidiaries, benefits
and administrative services to VII Cable's employees. In this regard, VII
Cable will be allocated that portion of TCI's compensation expense
attributable to benefits extended to employees of VII Cable.
Pursuant to the Services Agreement, VII Cable will from time to time
reimburse TCI and TCI Cable for all direct expenses incurred by them in
providing such services and a pro rata share of all indirect expenses incurred
by them in connection with the rendering of such services, including a pro
rata share of the salary and other compensation of TCI and TCI Cable employees
performing services for VII Cable and general overhead expenses. The
obligations of TCI and TCI Cable to provide services under the Services
Agreement (other than TCI's obligation to allow the Company's employees to
participate in TCI's employee benefit plans) will continue in effect until
terminated by any party to the Services Agreement at any time on not less than
60 days' notice.
PROGRAMMING
SSI, an indirect wholly owned subsidiary of TCI Cable, purchases programming
services from program suppliers and then makes such services available to TCI
Cable's subsidiaries and certain of its affiliates at SSI's
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cost and, in some circumstances, an administrative fee. Following the Stock
Issuance, it is anticipated that the cable systems owned and operated by VII
Cable will purchase programming from SSI at SSI's cost.
OTHER
TCI, through certain of its affiliates, is a general partner in TCGSF and
TCGS. See Note 3 of the Notes to Combined Financial Statements of VII Cable for
the year ended December 31, 1994.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences relating to the Transaction and the ownership and disposition of
VII Cable Preferred Stock. The discussion contained in this Offering Circular -
Prospectus is based on the law in effect as of the date of this Offering
Circular - Prospectus. Viacom stockholders are urged to consult their own tax
advisors as to the particular tax consequences to them of the Transaction.
THE TRANSACTION
On , 1996, Viacom received a Ruling Letter from the IRS to the
effect that, for federal tax purposes, the Transaction will qualify as a tax-
free distribution to Viacom's stockholders under Sections 355 and 368 of the
Code (except with respect to cash received in lieu of fractional shares) and,
in general, is tax-free to Viacom. The Ruling Letter, while generally binding
on the IRS, is subject to certain factual representations and assumptions. If
any such factual representations or assumptions are incorrect or untrue in any
material respect, Viacom will not be able to rely on the Ruling Letter. Viacom
is not aware of any facts or circumstances which would cause any such
representations or assumptions to be incorrect or untrue in any material
respect. Nevertheless, if the Transaction is subsequently held to be taxable,
both Viacom and its stockholders could be subject to tax on the Transaction
(subject to the obligation of TCI and TCI Cable to indemnify Viacom under
certain circumstances pursuant to the Tax Indemnity Letter), which tax could be
material.
OWNERSHIP AND DISPOSITION OF VII CABLE PREFERRED STOCK
Dividends. Dividends paid on the VII Cable Preferred Stock out of VII Cable's
current or accumulated earnings and profits (if any) will be taxable as
ordinary income and should qualify for the 70% intercorporate dividends-
received deduction subject to the minimum holding period (generally at least 46
days) and other applicable requirements. The amount of any such dividends will
be the amount of cash distributed or, in the case of dividends paid in shares
of TCI Stock, the fair market value of such TCI Stock on the date it is
distributed. Dividends in excess of VII Cable's current and accumulated
earnings and profits will be taxed first as a tax-free return of capital to the
extent of the holder's basis in its VII Cable Preferred Stock, and thereafter
as capital gain from the sale or exchange of the VII Cable Preferred Stock.
Such gain will be long-term or short-term capital gain depending on the
holder's holding period for the VII Cable Preferred Stock.
Constructive Dividends. Under Section 305 of the Code and related Treasury
Regulations, if the redemption price of redeemable preferred stock exceeds its
issue price, and such redemption premium is not considered reasonable, such
premium may in certain circumstances be taxable as a constructive dividend
taken into account by the holder each year generally in the same manner as
original issue discount would be taken into account were the preferred stock
treated as a debt instrument for federal income tax purposes. Any such
constructive dividends would be subject to the same rules applicable to the
stated quarterly dividends, as described above. In the case where preferred
stock is subject to mandatory redemption or is puttable by the holder to the
issuer, a premium payable on such redemption or put will be considered
reasonable only if such premium does not exceed 0.25% of the redemption price
multiplied by the number of complete years to maturity or the time at which the
stock is assumed to be put, as the case may be (in either case, the "de minimis
amount").
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For purposes of these provisions, the issue price of the VII Cable Preferred
Stock should be its fair market value at the time of issuance. If this amount
is less than the mandatory redemption price by at least the de minimis amount,
the foregoing constructive dividend rules will be applicable with respect to
such premium. In addition, the VII Cable Preferred Stock will also be
considered puttable because of the holder's ability to exchange such shares
for TCI Stock. As a result, it is possible that the holder could be required
to take into account as a constructive dividend any additional redemption
premium resulting from such put right. Because the premium payable as a result
of such an exchange for TCI Stock will depend on the fair market value of the
TCI Stock received, the amount of any such premium is unclear. Moreover, it is
also unclear how any such constructive dividends as a result of any such
premium should be taken into account where the amount of such premium could
vary over time.
Sale or Exchange. Except as discussed below with respect to "section 306
stock", a holder will generally recognize gain or loss upon a sale or exchange
of VII Cable Preferred Stock measured by the difference (if any) between the
amount realized upon such sale or exchange and the holder's tax basis in the
VII Cable Preferred Stock. An exchange of VII Cable Preferred Stock for TCI
Stock will be treated as such a taxable exchange, and the amount realized upon
such exchange will equal the fair market value of such TCI Stock. Any such
gain or loss recognized upon a sale or exchange will be long-term or short-
term capital gain or loss depending on the holder's holding period for the VII
Cable Preferred Stock so sold or exchanged.
Under certain circumstances, a stockholder that receives "section 306 stock"
within the meaning of Section 306(c) of the Code is required to recognize as
ordinary income, in the case of a taxable disposition of such stock, or as
dividend income, in the case of a redemption of such stock, all or a portion
of the proceeds received by such stockholder from such disposition or
redemption, without regard to the stockholder's tax basis in its shares, and
may not recognize any loss therefrom. The VII Cable Preferred Stock received
by tendering holders is likely to be considered "section 306 stock" if,
immediately prior to the consummation of the Transaction, the receipt by such
holder of cash (in an amount equal to the fair market value of such VII Cable
Preferred Stock) in a redemption of the number of such holder's shares of
Viacom Common Stock exchanged in the Exchange Offer would have been treated as
a dividend under Section 302 of the Code. Under the circumstances, a
redemption for cash generally would not have been treated as a dividend with
respect to a holder under Section 302 if the redemption (i) results in a
"complete termination" of the holder's interest in Viacom, (ii) is
"substantially disproportionate" with respect to such holder, or (iii) is "not
essentially equivalent" to a dividend with respect to such holder. The
determination of whether these tests will be met will depend on the facts and
circumstances in each case, including the proportion of the Viacom Common
Stock exchanged by such holder in the Exchange Offer, and the constructive
stock ownership of such holder in Viacom under Section 318 of the Code. An
exception to the disposition and redemption rules described in the first
sentence of this paragraph is provided for a disposition or redemption in
complete termination of the stockholder's interest (subject to certain
ownership attribution rules); however, it is not clear whether such exception
would apply if the stockholder continued to own (directly or through
attribution) any stock of Viacom. Holders should consult their tax advisors
regarding the consequences of the acquisition and ownership of the VII Cable
Preferred Stock under Section 306 of the Code.
Adjustments to Exchange Ratio. In general, any adjustments to the Exchange
Rate for the exchange of VII Cable Preferred Stock into TCI Stock should not
be taxable to the holders thereof. However, adjustments to the Exchange Rate,
and adjustments to the property that the holder is entitled to receive upon an
exchange, to take into account indebtedness, cash or other property
distributed with respect to the TCI Stock or used to redeem or exchange any
Redeemable Capital Stock for which shares of VII Cable Preferred Stock could
have been exchanged will be taxable to the holder of the VII Cable Preferred
Stock. Such an adjustment will be treated as a constructive dividend and will
be taxable in the manner described above.
Backup Withholding
A holder of VII Cable Preferred Stock may, under certain circumstances, be
subject to backup withholding at the rate of 31% with respect to dividends or
the proceeds of sale, exchange or redemption of such shares unless
99
<PAGE>
such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. Any amount withheld under these
rules will be creditable against the holder's federal income tax liability. A
holder who does not provide a correct taxpayer identification number may be
subject to penalties imposed by the IRS.
THE SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS
BASED ON THE CODE, THE REGULATIONS PROMULGATED THEREUNDER BY THE UNITED STATES
TREASURY DEPARTMENT AND THE INTERPRETATIONS OF THE CODE AND REGULATIONS BY THE
COURTS AND THE IRS, ALL AS THEY EXIST AS OF THE DATE OF THIS OFFERING CIRCULAR
- - PROSPECTUS. THIS SUMMARY IS FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS
ALL TAX CONSIDERATIONS THAT MAY BE RELEVANT TO VIACOM STOCKHOLDERS IN LIGHT OF
THEIR PARTICULAR CIRCUMSTANCES, NOR DOES IT ADDRESS THE CONSEQUENCES TO CERTAIN
VIACOM STOCKHOLDERS SUBJECT TO SPECIAL TREATMENT UNDER THE UNITED STATES
FEDERAL INCOME TAX LAWS (SUCH AS TAX-EXEMPT ENTITIES, NON-RESIDENT ALIEN
INDIVIDUALS AND FOREIGN CORPORATIONS). IN ADDITION, THIS SUMMARY DOES NOT
ADDRESS THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO VIACOM
STOCKHOLDERS WHO DO NOT HOLD THEIR VIACOM COMMON STOCK AS A CAPITAL ASSET. THIS
SUMMARY DOES NOT ADDRESS ANY STATE, LOCAL OR FOREIGN TAX CONSEQUENCES. VIACOM
STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE TRANSACTION AND THE OWNERSHIP AND DISPOSITION OF
VII CABLE PREFERRED STOCK, INCLUDING THE APPLICATION OF STATE, LOCAL AND
FOREIGN TAX LAWS AND ANY CHANGES IN FEDERAL TAX LAWS THAT OCCUR AFTER THE DATE
OF THIS OFFERING CIRCULAR - PROSPECTUS.
For a description of an agreement pursuant to which Viacom and Viacom
International have provided for certain tax sharing and other tax-related
matters, see "Arrangements among Viacom, Viacom International, TCI and TCI
Sub--Terms of Certain Ancillary Agreements--Tax Indemnity Letter."
LEGAL MATTERS
The validity of the shares of VII Cable Class A Common Stock and the shares
of VII Cable Preferred Stock will be passed upon by Shearman & Sterling.
EXPERTS
The combined financial statements of VII Cable as of December 31, 1994 and
1993 and for each of the three years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The (i) consolidated financial statements of Viacom incorporated in this
Offering Circular - Prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 1994 and (ii) consolidated financial statements
of Paramount Communications Inc. ("Paramount") as of March 31, 1994 and for the
eleven months ended March 31, 1994 incorporated by reference from the Current
Report on Form 8-K of Viacom filed on April 14, 1995 (the "Viacom Form 8-K")
have been so incorporated in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Paramount at April 30, 1993 and at
October 31, 1992, and for the six-month period ended April 30, 1993, and for
each of the two years in the period ended October 31, 1992
100
<PAGE>
incorporated by reference in this Offering Circular - Prospectus from the
Viacom Form 8-K have been audited by Ernst & Young LLP, independent auditors,
as set forth in their reports thereon included therein, and incorporated herein
by reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements and schedules of Blockbuster
Entertainment Corporation and subsidiaries as of December 31, 1993 and 1992,
and for each of the three years in the period ended December 31, 1993
incorporated by reference in this Offering Circular - Prospectus have been
audited by Arthur Andersen LLP, independent certified public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
101
<PAGE>
VII CABLE
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................... F-2
Audited Combined Financial Statements:
Combined Statements of Operations for the years ended December 31,
1994, 1993 and 1992............................................... F-3
Combined Balance Sheets as of December 31, 1994 and 1993........... F-4
Combined Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992............................................... F-5
Notes to Combined Financial Statements............................. F-6
Unaudited Interim Combined Financial Statements:
Combined Statements of Operations for the three months and nine
months ended September 30, 1995 and 1994.......................... F-14
Combined Balance Sheets as of September 30, 1995 and December 31,
1994.............................................................. F-15
Combined Statements of Cash Flows for the nine months ended
September 30, 1995 and 1994....................................... F-16
Notes to Combined Financial Statements............................. F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
September 11, 1995
To the Board of Directors and
Stockholders of Viacom International Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, and of cash flows present fairly, in all
material respects, the financial position of VII Cable (as defined in Note 1
to the financial statements) at December 31, 1994 and 1993, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Viacom
International Inc.'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.
As discussed in the notes to the combined financial statements, effective
January 1, 1993, VII Cable adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Effective January 1, 1994, VII Cable
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
Our audits of the combined financial statements of VII Cable also included
an audit of the Financial Statement Schedule on page S-1. In our opinion, the
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
combined financial statements.
PRICE WATERHOUSE LLP
150 Almaden Boulevard
San Jose, CA 95113
F-2
<PAGE>
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $404,499 $414,786 $410,129
Expenses:
Operating (Note 6)............................. 170,779 156,270 152,764
Selling, general and administrative (Note 6)... 99,935 101,347 92,629
Depreciation and amortization.................. 76,343 73,354 67,218
-------- -------- --------
Total expenses............................... 347,057 330,971 312,611
-------- -------- --------
Earnings from operations......................... 57,442 83,815 97,518
Other income (expense):
Interest expense (Note 6)...................... (38,050) (33,417) (49,768)
Other items, net............................... 6,982 77,736 5,361
-------- -------- --------
Earnings from operations before income taxes..... 26,374 128,134 53,111
Provision for income taxes (Note 7)............ (17,680) (45,276) (28,077)
Equity in earnings of affiliated companies, net
of tax........................................ 452 997 759
-------- -------- --------
Net earnings before cumulative effect of change
in accounting principle......................... 9,146 83,855 25,793
Cumulative effect of change in accounting
principle..................................... -- 13,536 --
-------- -------- --------
Net earnings..................................... $ 9,146 $ 97,391 $ 25,793
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
VII CABLE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 3,011 $ 1,852
Receivables, less allowances of $1,251 (1994) and $1,791
(1993) (Note 6)......................................... 12,655 8,422
Marketable securities available-for-sale................. 24,730 99
Other current assets..................................... 3,065 2,116
---------- --------
Total current assets................................... 43,461 12,489
---------- --------
Property and equipment:
Land..................................................... 5,447 5,348
Buildings................................................ 19,479 17,657
Distribution systems..................................... 472,938 418,142
Equipment and other...................................... 147,680 124,119
---------- --------
645,544 565,266
Less accumulated depreciation............................ 280,511 239,186
---------- --------
Net property and equipment............................. 365,033 326,080
---------- --------
Intangibles, at amortized cost............................. 578,072 593,749
Other assets............................................... 53,868 33,930
---------- --------
$1,040,434 $966,248
========== ========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable (Note 6)................................ $ 24,975 $ 36,921
Accrued expenses (Note 6)................................ 32,623 27,765
Accrued compensation..................................... 10,154 7,440
Deferred taxes........................................... 19,904 6,357
Other current liabilities................................ 1,112 205
---------- --------
Total current liabilities.............................. 88,768 78,688
---------- --------
Deferred taxes............................................. 59,750 55,020
Long-term debt............................................. 57,000 57,000
Other liabilities.......................................... 10,976 10,009
Commitments and contingencies (Note 8)
Viacom equity investment (Note 5).......................... 823,940 765,531
---------- --------
$1,040,434 $966,248
========== ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings................................ $ 9,146 $ 97,391 $ 25,793
Adjustments to reconcile net earnings to net
cash flow from operating activities:
Depreciation and amortization............. 76,343 73,354 67,218
Gain on sale of Viacom Cablevision of
Wisconsin, Inc........................... -- (55,007) --
Gain on sale of investment held at cost... -- (17,437) --
Cumulative effect of change in accounting
principle................................ -- (13,536) --
Decrease (increase) in receivables........ (4,315) (3,005) 2,376
Increase (decrease) in accounts payable
and accrued expenses..................... (1,085) 14,895 (2,780)
Utilization of investment tax credit...... -- -- 13,141
Other, net................................ (2,197) 2,134 (11,098)
--------- --------- ---------
Net cash flow from operating activities. 77,892 98,789 94,650
--------- --------- ---------
Investing activities:
Capital expenditures........................ (99,198) (79,341) (54,778)
Proceeds from dispositions.................. 1,430 112,569 --
Investments in and advances to affiliated
companies.................................. (12,765) -- (248)
Other, net.................................. (315) 158 (17)
--------- --------- ---------
Net cash flow from investing activities. (110,848) 33,386 (55,043)
--------- --------- ---------
Financing activities:
Distributions to Viacom..................... (434,002) (508,257) (448,375)
Distributions from Viacom................... 392,896 317,078 301,529
Allocated charges from Viacom (Note 5)...... 75,221 105,390 107,267
Principal repayment of long-term debt....... -- (49,018) (18)
--------- --------- ---------
Net cash flow from financing activities. 34,115 (134,807) (39,597)
--------- --------- ---------
Net increase (decrease) in cash............... 1,159 (2,632) 10
Cash at beginning of period................... 1,852 4,484 4,474
--------- --------- ---------
Cash at end of period......................... $ 3,011 $ 1,852 $ 4,484
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution as defined below, "VII Cable"), a
wholly owned subsidiary of Viacom, and Viacom International Services Inc.
("New VII"), a wholly owned subsidiary of VII Cable, entered into certain
agreements (the "Transaction Agreements") with Tele-Communications, Inc.
("TCI") and a subsidiary of TCI ("TCI Sub"), providing for, among other
things, the conveyance of Viacom International Inc.'s non-cable assets and
liabilities to New VII, the distribution of all of the common stock of New VII
to Viacom (the "First Distribution"), the Exchange Offer (as defined below)
and the issuance to TCI Sub of all of the Class B Common Stock of VII Cable.
Viacom will commence an exchange offer (the "Exchange Offer") pursuant to
which Viacom stockholders may exchange shares of Viacom Class A or Class B
Common Stock for shares of VII Cable Class A Common Stock. The First
Distribution will not occur until the date of consummation of the Exchange
Offer.
Prior to the consummation of the Exchange Offer, Viacom International Inc.
will enter into a $1.7 billion credit agreement. Proceeds from such credit
agreement will be transferred by Viacom International Inc. to New VII as part
of the First Distribution. Viacom also entered into a definitive agreement
with TCI under which TCI Sub, through a capital contribution of $350 million
in cash, will purchase all of the shares of Class B Common Stock of VII Cable
immediately following the consummation of the Exchange Offer. At that time,
the shares of Class A Common Stock of VII Cable will convert into shares of
cumulative redeemable exchangeable preferred stock (the "Preferred Stock").
The Preferred Stock will be exchangeable after the fifth anniversary of
issuance at the holders' option for TCI Class A Common Stock.
National Amusements, Inc. ("NAI"), which owns approximately 26% of Viacom
Inc. Class A and Class B Common Stock on a combined basis, will not
participate in the Exchange Offer. The Exchange Offer and related transactions
are subject to several conditions, including regulatory approvals, receipt of
a tax ruling and consummation of the Exchange Offer.
The accompanying financial statements and related notes reflect the carve-
out historical results of operations and financial position of the cable
television business of Viacom. These financial statements are not necessarily
indicative of results that would have occurred if VII Cable had been a
separate stand-alone entity during the periods presented or of future results
of VII Cable.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements include the accounts of VII Cable and all
investments of more than 50% in subsidiaries. All significant intercompany
transactions with combined entities have been eliminated. Investments in
affiliated companies over which VII Cable has significant influence or
ownership of more than 20% but less than or equal to 50% are accounted for
under the equity method. Investments of 20% or less are accounted for under
the cost method. Investments in affiliates are included in "Other Assets."
Property and Equipment
Property and equipment, including construction in progress, is stated at
cost. Inventory, which consists primarily of construction material, is
recorded at the lower of weighted average cost or market. Construction in
progress and inventory are included in "Equipment and other." VII Cable
capitalizes interest costs associated with certain qualifying assets. The
total amount of interest costs capitalized was $839 (1994), $372 (1993) and
F-6
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
$502 (1992). Repairs and maintenance are charged to operations, and renewals
and additions are capitalized. Upon the normal retirement of distribution
system components, the cost is charged to accumulated depreciation with no
effect on net earnings. For all other retirements, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized.
Depreciation expense is computed principally on a straight-line method over
estimated useful lives of 9-15 years for distribution systems, 4-10 years for
machinery and equipment and 28-30 years for buildings. Depreciation expense
was $57,826 (1994), $54,754 (1993) and $49,107 (1992).
Intangibles
Intangible assets primarily consist of the cost of acquired businesses in
excess of the fair value of tangible assets and liabilities acquired
attributable to the NAI leveraged buyout of Viacom International Inc. in June
1987. Such assets are amortized on a straight-line method over estimated
useful lives of up to 40 years. In addition, VII Cable has franchise rights to
operate cable television systems in various towns and political subdivisions
within its service areas. The cost of successful franchise applications are
capitalized and amortized over the life of the related franchise agreement.
Franchise lives generally range from 10 to 25 years with various dates of
expiration. VII Cable evaluates the realizability of intangibles on an ongoing
basis in light of changes in business conditions, events or circumstances that
may indicate the potential impairment of intangible assets. Accumulated
amortization of intangible assets at December 31 was $138,739 (1994) and
$120,222 (1993).
Revenue Recognition
Subscriber fees are recognized in the period the service is provided.
Provision for Doubtful Accounts
The provision for doubtful accounts charged to expense was $6,178 (1994),
$7,250 (1993) and $6,428 (1992).
Financial Instruments
VII Cable's carrying value of financial instruments approximates fair value.
The most significant financial instruments are debt and marketable securities
available-for-sale.
During the first quarter of 1994, VII Cable adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Under SFAS 115, investments classified as
available-for-sale are carried at fair value and unrealized holding gains and
losses during the period are recorded as a component of equity. The cumulative
effect of the change in accounting principle is recorded, net of tax, as a
component of equity. Prior to the adoption of SFAS 115, marketable equity
securities held by VII Cable were reported at the lower of cost or market.
During February 1995, VII Cable sold its marketable securities available-for-
sale, resulting in a pre-tax gain of $27 million.
NOTE 3--EQUITY IN EARNINGS OF AFFILIATED COMPANIES
Equity in earnings of affiliated companies is primarily comprised of VII
Cable's general partnership interests in Northwest Cable Advertising (50%
owned), Bay Cable Advertising (33 1/3% owned), TCG San Francisco ("TCGSF")
(23% owned), TCG Seattle ("TCGS") (22% owned) and Prime Sports Northwest
Network ("Prime Sports") (40% owned).
F-7
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The principal business of Northwest Cable Advertising and Bay Cable
Advertising (the "Advertising Affiliates") is the sale of advertising on cable
television systems owned by VII Cable, its general partners and other cable
television operators. In exchange for providing advertising airtime, the
Advertising Affiliates pay VII Cable affiliate fees, calculated in accordance
with affiliation agreements. Revenues from Advertising Affiliates were $6,302
(1994), $5,225 (1993) and $4,343 (1992). Affiliate fees receivable were $1,293
and $1,033 at December 31, 1994 and 1993, respectively.
TCGSF and TCGS were formed on January 1, 1994 for the purpose of investing in
and operating communication facilities. Both TCGSF and TCGS lease communication
network facilities from VII Cable, which are financed and constructed by VII
Cable. TCI through certain of its affiliates is a general partner in these two
partnerships.
The principal business of Prime Sports is to provide a television sports
programming service in the northwest United States. In exchange for
programming, Prime Sports receives subscriber revenue from cable television
operators including its general partners. VII Cable incurred affiliate
subscriber fees of $1,962 (1994), $1,849 (1993) and $1,795 (1992). During
January 1995, VII Cable entered into an agreement to sell its 40% partnership
interest in Prime Sports to a subsidiary of Liberty Media Corporation
("Liberty"), an affiliate of TCI, for sales proceeds of approximately $9
million. Prime Sports is a partnership between VII Cable and Liberty. Net
assets of Prime Sports were approximately $3 million at December 31, 1994.
Summarized aggregated financial information for the affiliated companies
discussed above is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Results of operations:
Revenues................................. $49,142 $36,618 $31,878
Earnings from operations................. 13,381 15,427 13,059
Net earnings............................. 34 4,842 3,484
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------- -------
<S> <C> <C>
Financial position:
Current assets........................... $34,879 $14,051
Noncurrent assets........................ 54,118 7,764
Current liabilities...................... 12,262 5,930
Noncurrent liabilities................... 13,219 --
Partners' equity......................... 61,464 15,885
</TABLE>
NOTE 4--LONG-TERM DEBT
During 1994, Viacom International Inc. and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom
Cablevision of Dayton Inc. ("Dayton"), which is included in the combined
financial statements for VII Cable.
The Credit Agreement is an 8-year term loan maturing on July 1, 2002. Dayton
is required to pay interest on the borrowings based upon Citibank, N.A.'s base
rate or the London Interbank Offered Rate ("LIBOR") and is affected by Viacom's
credit rating. At December 31, 1994 and 1993, LIBOR (upon which the subsidiary
borrowing rate was based) was 6.25% and 3.3125%, respectively. Viacom
guarantees obligations under the Credit Agreement.
F-8
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Credit Agreement contains certain covenants which, among other things,
require that the Subsidiary Borrowers maintain certain financial ratios and
impose on the Subsidiary Borrowers certain limitations on substantial asset
sales and mergers with any other company in which an affiliate of Viacom is
not the surviving entity. The Credit Agreement contains certain customary
events of default and provides that it is an event of default if NAI fails to
own at least 51% of the outstanding voting stock of Viacom. The Company is in
compliance with all debt covenants.
In the event that Dayton ceases to be a wholly owned subsidiary of Viacom or
VII Cable, the $57 million of borrowings shall be due and payable on the date
on which Dayton ceases to be such a wholly owned subsidiary. As a result of
the transactions described in Note 1, New VII will assume Dayton's obligation
under the Credit Agreement.
Under a prior credit agreement with Viacom, $49 million of debt was entered
into by Viacom Cablevision of Wisconsin, Inc. This amount was repaid in
connection with the sale of this cable system on January 1, 1993.
NOTE 5--VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Balance as of the beginning of
the period................................ $765,531 $753,929 $767,715
Net earnings............................... 9,146 97,391 25,793
Cash distributions to Viacom............... (434,002) (508,257) (448,375)
Cash distributions from Viacom............. 392,896 317,078 301,529
Allocated charges from Viacom.............. 75,221 105,390 107,267
Unrealized holding gains on marketable
securities available-for-sale, net of tax. 15,148 -- --
-------- -------- --------
Balance as of the end of the period........ $823,940 $765,531 $753,929
======== ======== ========
</TABLE>
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to from Viacom
resulting from cash transfers and other intercompany activity. The following
is a summary of the allocated charges from Viacom that are reflected in the
foregoing analysis of Viacom equity investment activity:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- -------- --------
<S> <C> <C> <C>
Interest allocation............................ $35,681 $31,191 $44,646
Overhead allocation............................ 16,849 20,260 21,961
Income tax allocation.......................... 9,188 37,020 32,391
Salaries and benefits payments................. 11,625 10,103 10,315
Other.......................................... 1,878 6,816 (2,046)
------- -------- --------
Allocated charges from Viacom.................. $75,221 $105,390 $107,267
======= ======== ========
</TABLE>
F-9
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 6--RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including
insurance, legal, financial and other corporate functions. Charges for these
services have been made based on the average of certain specified ratios of
revenues, earnings from operations and net assets. Management believes that
the methodologies used to allocate these charges are reasonable. The charges
for such services were $16,849 (1994), $20,260 (1993) and $21,961 (1992) and
are included in selling and general and administrative expenses.
In addition to the interest expense recorded by VII Cable on the borrowings
under the credit agreements described in Note 4, Viacom allocated interest
expense of $35,681 (1994), $31,191 (1993) and $44,646 (1992) related to the
Viacom corporate debt. The additional interest is allocated based on a
percentage of VII Cable's average net assets to Viacom's average net assets.
VII Cable, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom. VII Cable has
agreements to distribute television programs of such companies, including
Showtime Networks Inc., MTV Networks, Comedy Central, USA Networks and
Lifetime (prior to its sale by Viacom on April 4, 1994). The agreements
require VII Cable to pay license fees based upon the number of customers
receiving the service. Affiliate license fees incurred under these agreements
were $28,582 (1994), $23,785 (1993) and $24,565 (1992). These amounts are
included in operating expenses. In addition, cooperative advertising expenses
charged to affiliated companies were $1,181 (1994), $597 (1993) and $559
(1992). Related party accounts receivable, included in receivables, were $562
and $320 at December 31, 1994 and 1993, respectively. Related party
liabilities, included in accounts payable, were $1,128 and $688 at
December 31, 1994 and 1993, respectively. Related party liabilities, included
in accrued expenses, were $2,508 and $2,150 at December 31, 1994 and 1993,
respectively.
NOTE 7--INCOME TAXES
Viacom International Inc. has been included in consolidated federal, state
and local income tax returns filed by Viacom. However, the tax expense
reflected in the Combined Statement of Operations and tax liabilities
reflected in the Combined Balance Sheets have been prepared on a separate
return basis as though VII Cable had filed stand-alone income tax returns. The
current income tax liabilities for the periods presented have been satisfied
by Viacom. These amounts have been reflected in Viacom equity investment in
the Combined Balance Sheets. In connection with the transactions described in
Note 1, Viacom has agreed to indemnify VII Cable against income tax
assessments, if any, arising from federal or state tax audits for periods in
which VII Cable was a member of Viacom's consolidated tax group.
During the first quarter of 1993, VII Cable adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") on a
prospective basis and recognized an increase to earnings of $13,536 in 1993 as
the cumulative effect of a change in accounting principle. SFAS 109 mandates
the liability method for computing deferred income taxes.
Earnings accounted for under the equity method of accounting are shown net
of tax on the Combined Statement of Operations.
F-10
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Federal:
Current......................................... $6,018 $31,381 $27,649
Deferred........................................ 8,534 8,366 (3,460)
State and local:
Current......................................... 2,868 4,975 4,236
Deferred........................................ 260 554 (348)
------- ------- -------
Provision for income taxes on
earnings from operations........................ 17,680 45,276 28,077
Provision for income taxes on
earnings of affiliated
companies....................................... 301 664 506
------- ------- -------
Total provision for
income taxes................................ $17,981 $45,940 $28,583
======= ======= =======
</TABLE>
A reconciliation of the U.S. Federal statutory tax rate to VII Cable's
effective tax rate on earnings from operations before income taxes is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
----------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate................................. 35.0% 35.0% 34.0%
Amortization of goodwill................................ 23.3 4.8 10.7
State and local taxes, net of federal tax benefit....... 8.1 3.0 4.7
Basis differential on assets sold....................... -- (8.7) --
Effect of change in tax rate............................ -- 1.1 --
Property and equipment basis difference................. -- -- 3.2
Other................................................... .6 .1 .3
---- ---- ----
Effective tax rate.................................. 67.0% 35.3% 52.9%
==== ==== ====
</TABLE>
F-11
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109 for the years ended December 31, 1994 and 1993:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Current deferred tax (assets) liabilities:
Property taxes....................................... $10,576 $ 7,283
Marketable securities available-for-sale............. 9,483 --
Other................................................ (155) (926)
------- -------
Net current deferred tax liabilities............... 19,904 6,357
------- -------
Noncurrent deferred tax (assets) liabilities:
Fixed asset basis differences........................ 59,902 60,848
Investment tax credits............................... -- (5,735)
Other................................................ (152) (93)
------- -------
Net noncurrent deferred tax liabilities............ 59,750 55,020
------- -------
Deferred tax liabilities............................... $79,654 $61,377
======= =======
</TABLE>
The following table identifies the deferred tax items which were part of VII
Cable's tax provision (benefit) under previously applicable accounting
principles for the year ended December 31, 1992:
<TABLE>
<S> <C>
Depreciation.................... $ 1,430
Property taxes.................. 1,967
Deferred revenue................ (6,800)
Other, net...................... (405)
-------
Total deferred tax benefit.. $(3,808)
=======
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments at December 31, 1994 under noncancellable
operating leases for office space and equipment are as follows:
<TABLE>
<S> <C>
1995............................. $ 4,402
1996............................. 3,856
1997............................. 3,013
1998............................. 2,660
1999............................. 2,222
Thereafter....................... 2,948
-------
Total minimum lease payments. $19,101
=======
</TABLE>
Rent expense was $7,670 (1994), $7,299 (1993) and $7,548 (1992).
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and
1995 the Federal Communication Commission (the "FCC") issued and subsequently
clarified regulations implementing the rate regulation provisions of the Cable
Act. As a result of the Cable Act, VII Cable's basic and tier service rates
and its equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the FCC.
Basic and tier service rates are set utilizing either FCC benchmarks and
increase formulas, or cost of service methodologies; equipment and
installation charges are based on actual costs.
F-12
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local franchise authorities or, if a
complaint is filed, the FCC. If as a result of such review a cable television
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund a portion of the
excess rates received. Management believes the amount of refund, if any, would
not have a material effect on VII Cable's combined financial position, results
of operations or cash flows.
During July 1991, VII Cable received reassessments from ten California
counties of its real and personal property, related to the June 1987
acquisition by NAI, which could result in substantially higher California
property tax liabilities. VII Cable is appealing the reassessments. At
December 31, 1994 and 1993, VII Cable had paid $36,581 and $29,049,
respectively, of real and personal property taxes which have been recorded as
an excess property tax receivable included in "Other Assets."
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position, results of
operations or cash flows.
In the ordinary course of business, VII Cable enters into long-term
affiliation agreements with programming services which require that VII Cable
continues to carry and pay for programming and meet certain performance
requirements.
NOTE 9--PENSION PLANS AND OTHER EMPLOYEE BENEFITS
Viacom has a noncontributory pension plan covering substantially all of its
employees, including the employees of VII Cable. Retirement benefits are based
principally on years of service and salary. Viacom has allocated charges for
pension expense of $1,574 (1994), $1,392 (l993) and $1,150 (1992). Information
on the amount of actuarial present value of benefit obligations, fair value of
plan assets and pension costs is not provided as such information is not
maintained separately for employees of VII Cable. Further, the obligation for
pension benefits earned prior to the consummation of the Exchange Offer will
be retained by Viacom. All employees of VII Cable will be fully vested upon
the Exchange Offer.
Viacom also provides other employee benefits to VII Cable's employees,
including certain medical and dental insurance costs and contributions to a
401(K) savings plan, at an allocated cost of $4,364 (1994), $4,387 (1993) and
$5,140 (1992). In addition, certain executives of VII Cable participate in
non-compensatory stock option plans of Viacom.
NOTE 10--OTHER ITEMS, NET
As part of the settlement of the antitrust lawsuit filed by Viacom against
Time Warner, Viacom sold all the stock of Viacom Cablevision of Wisconsin,
Inc. to Warner Communications Inc. ("Warner"). This transaction was effective
on January 1, 1993. As consideration for the stock, Warner paid the sum of $46
million plus repayment of debt under the then current Viacom credit agreement
in the amount of $49 million, resulting in a pre-tax gain of approximately
$55.0 million reflected in "Other items, net." Also reflected in this line
item is the net gain of $17.4 million on the sale of a portion of an
investment held at cost in 1993.
F-13
<PAGE>
VII CABLE
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $112,990 $100,117 $328,564 $303,595
Expenses:
Operating (Note 4)................... 47,960 43,189 142,109 127,217
Selling, general and administrative
(Note 4)............................ 23,333 24,314 65,608 76,050
Depreciation and amortization........ 20,591 19,219 61,040 57,643
-------- -------- -------- --------
Total expenses..................... 91,884 86,722 268,757 260,910
-------- -------- -------- --------
Earnings from operations............... 21,106 13,395 59,807 42,685
Other income (expense):
Interest expense (Note 4)............ (12,996) (9,080) (37,928) (27,951)
Other items, net..................... 1,702 1,506 32,234 5,441
-------- -------- -------- --------
Earnings from operations before income
taxes.................................. 9,812 5,821 54,113 20,175
Provision for income taxes........... (5,449) (3,862) (25,902) (13,517)
Equity in earnings (loss) of
affiliated companies, net of tax.... (120) (35) (357) 49
-------- -------- -------- --------
Net earnings........................... $ 4,243 $ 1,924 $ 27,854 $ 6,707
======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-14
<PAGE>
VII CABLE
COMBINED BALANCE SHEETS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash.............................................. $ 2,275 $ 3,011
Receivables, less allowances of $1,714 (1995) and
$1,251 (1994) (Note 4)........................... 13,545 12,655
Marketable securities available-for-sale.......... -- 24,730
Other current assets.............................. 4,362 3,065
---------- ----------
Total current assets............................ 20,182 43,461
---------- ----------
Property and equipment:
Land.............................................. 5,447 5,447
Buildings......................................... 19,977 19,479
Distribution systems.............................. 526,917 472,938
Equipment and other............................... 173,153 147,680
---------- ----------
725,494 645,544
Less accumulated depreciation..................... 321,849 280,511
---------- ----------
Net property and equipment...................... 403,645 365,033
---------- ----------
Intangibles, at amortized cost...................... 565,658 578,072
Other assets........................................ 64,409 53,868
---------- ----------
$1,053,894 $1,040,434
========== ==========
LIABILITIES AND VIACOM EQUITY INVESTMENT
Current liabilities:
Accounts payable (Note 4)......................... $ 29,104 $ 24,975
Accrued expenses (Note 4)......................... 29,413 32,623
Accrued compensation.............................. 11,489 10,154
Deferred taxes.................................... 12,238 19,904
Other current liabilities......................... 659 1,112
---------- ----------
Total current liabilities....................... 82,903 88,768
---------- ----------
Deferred taxes...................................... 60,843 59,750
Long-term debt...................................... 57,000 57,000
Other liabilities................................... 10,428 10,976
Commitments and contingencies (Note 5)
Viacom equity investment (Note 2)................... 842,720 823,940
---------- ----------
$1,053,894 $1,040,434
========== ==========
</TABLE>
See notes to combined financial statements.
F-15
<PAGE>
VII CABLE
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED; DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings........................................... $ 27,854 $ 6,707
Adjustments to reconcile net earnings to net cash flow
from operating activities:
Depreciation and amortization........................ 61,040 57,643
Gain on sale of marketable securities available-for-
sale................................................ (26,902) --
Decrease (increase) in receivables................... (890) 1,107
Increase (decrease) in accounts payable and accrued
expenses............................................ 1,801 (1,932)
Other, net........................................... (5,013) (6,638)
--------- ---------
Net cash flow from operating activities............ 57,890 56,887
--------- ---------
Investing activities:
Capital expenditures................................... (85,824) (78,129)
Proceeds from dispositions............................. 27,001 1,430
Investments in and advances to affiliated companies.... (5,166) (10,701)
Other, net............................................. (711) (845)
--------- ---------
Net cash flow from investing activities............ (64,700) (88,245)
--------- ---------
Financing activities:
Distributions to Viacom ............................... (380,842) (325,366)
Distributions from Viacom ............................. 305,446 302,803
Allocated charges from Viacom ......................... 81,470 54,187
--------- ---------
Net cash flow from financing activities............ 6,074 31,624
--------- ---------
Net increase (decrease) in cash.......................... (736) 266
Cash at beginning of period.............................. 3,011 1,852
--------- ---------
Cash at end of period.................................... $ 2,275 $ 2,118
========= =========
</TABLE>
See notes to combined financial statements.
F-16
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED; DOLLARS IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution as defined below, "VII Cable"), a
wholly owned subsidiary of Viacom, and Viacom International Services Inc.
("New VII"), a wholly owned subsidiary of VII Cable, entered into certain
agreements (the "Transaction Agreements") with Tele-Communications, Inc.
("TCI") and a subsidiary of TCI ("TCI Sub"), providing for, among other
things, the conveyance of Viacom International Inc.'s non-cable assets and
liabilities to New VII, the distribution of all of the common stock of New VII
to Viacom (the "First Distribution"), the Exchange Offer (as defined below)
and the issuance to TCI Sub of all of the Class B Common Stock of VII Cable.
Viacom will commence an exchange offer (the "Exchange Offer") pursuant to
which Viacom stockholders may exchange shares of Viacom Class A or Class B
Common Stock for shares of VII Cable Class A Common Stock. The First
Distribution will not occur until the date of consummation of the Exchange
Offer.
Prior to the consummation of the Exchange Offer, Viacom International Inc.
will enter into a $1.7 billion credit agreement. Proceeds from such credit
agreement will be transferred by Viacom International Inc. to New VII as part
of the First Distribution. Viacom also entered into a definitive agreement
with TCI under which TCI Sub, through a capital contribution of $350 million
in cash, will purchase all of the shares of Class B Common Stock of VII Cable
immediately following the consummation of the Exchange Offer. At that time,
the shares of Class A Common Stock of VII Cable will convert into shares of
cumulative redeemable exchangeable preferred stock (the "Preferred Stock").
The Preferred Stock will be exchangeable after the fifth anniversary of
issuance at the holders' option for TCI Class A Common Stock.
National Amusements, Inc. ("NAI"), which owns approximately 25% of Viacom
Inc. Class A and Class B Common Stock on a combined basis as of September 30,
1995, will not participate in the Exchange Offer. The Exchange Offer and
related transactions are subject to several conditions, including regulatory
approvals, receipt of a tax ruling and consummation of the Exchange Offer.
The accompanying combined financial statements and related notes reflect the
carve-out historical results of operations and financial position of the cable
television business of Viacom and have been prepared pursuant to the rules of
the Securities and Exchange Commission. The unaudited combined financial
statements reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position and results of
operations of VII Cable. These unaudited combined financial statements should
be read in conjunction with the more detailed financial statements and notes
thereto included on pages F-1-F-13. These combined financial statements are
not necessarily indicative of results that would have occurred if VII Cable
had been a separate stand-alone entity during the periods presented or of
future results of VII Cable.
NOTE 2--VIACOM EQUITY INVESTMENT
An analysis of the Viacom equity investment activity is as follows:
<TABLE>
<S> <C>
Balance as of December 31, 1994............................... $823,940
Net earnings.................................................. 27,854
Unrealized holding gains on marketable securities available-
for-sale..................................................... (15,148)
Cash distributions to Viacom.................................. (380,842)
Cash distributions from Viacom................................ 305,446
Allocated charges............................................. 81,470
--------
Balance as of September 30, 1995.............................. $842,720
========
</TABLE>
F-17
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS)
Viacom funds the working capital requirements of its businesses based upon a
centralized cash management system. Viacom equity investment includes
accumulated equity as well as any payables and receivables due to/from Viacom
resulting from cash transfers.
NOTE 3--LONG-TERM DEBT
During 1994, Viacom International Inc. and certain of its subsidiaries (the
"Subsidiary Borrowers") entered into a $311 million credit agreement (the
"Credit Agreement"), of which $57 million was entered into by Viacom
Cablevision of Dayton Inc. ("Dayton"), which is included in the combined
financial statements for VII Cable. In the event that Dayton ceases to be a
wholly owned subsidiary of Viacom or VII Cable, the $57 million of borrowings
shall be due and payable on the date on which Dayton ceases to be such a
wholly owned subsidiary. As a result of the transactions described in Note 1,
New VII will assume Dayton's obligation under the credit agreement.
NOTE 4--RELATED PARTY TRANSACTIONS
Viacom provides VII Cable with certain general services, including
insurance, legal, financial and other corporate functions. Charges for these
services have been made based on the average of certain specified ratios of
revenues, earnings from operations and net assets. Management believes that
the methodologies used to allocate these charges are reasonable. The charges
for such services were $10,114 (1995) and $14,124 (1994) and are included in
selling and general and administrative expenses.
In addition to the interest expense recorded by VII Cable on borrowings
under the credit agreement described in Note 3, Viacom has allocated interest
expense of $36,322 (1995) and $26,299 (1994) related to Viacom corporate debt
to VII Cable on the basis of a percentage of VII Cable's average net assets to
Viacom's average net assets.
VII Cable, through the normal course of business, is involved in
transactions with companies owned by or affiliated with Viacom. VII Cable has
agreements to distribute television programs of such companies, including
Showtime Networks Inc., MTV Networks, Comedy Central, USA Networks and
Lifetime (prior to its sale by Viacom on April 4, 1994). The agreements
require VII Cable to pay license fees based upon the number of customers
receiving the service. Affiliate license fees incurred under these agreements
were $25,401 (1995) and $22,757 (1994). These amounts are included in
operating expenses. In addition, cooperative advertising expenses charged to
affiliated companies were $779 (1995) and $806 (1994). Related party accounts
receivable, included in receivables, were $366 and $562 at September 30, 1995
and December 31, 1994, respectively. Related party liabilities, included in
accounts payable, were $2,464 and $1,128 at September 30, 1995 and
December 31, 1994, respectively. Related party liabilities, included in
accrued expenses, were $2,463 and $2,508 at September 30, 1995 and December
30, 1994, respectively.
NOTE 5--COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "Cable Act"). In 1993, 1994 and
1995 the Federal Communication Commission (the "FCC") issued and subsequently
clarified regulations implementing the rate regulation provisions of the Cable
Act. As a result of the Cable Act, VII Cable's basic and tier service rates
and its equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the FCC.
Basic and tier service rates are set utilizing either FCC benchmarks and
increase formulas, or cost of service methodologies; equipment and
installation charges are based on actual costs.
F-18
<PAGE>
VII CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED; DOLLARS IN THOUSANDS)
VII Cable believes that it has complied in all material respects with the
provisions of the Cable Act. However, VII Cable's rates for Regulated Services
are subject to review by appropriate local franchise authorities or, if a
complaint is filed, the FCC. If as a result of such review a cable television
system can not substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund a portion of the
excess rates received. Management believes the amount of refund, if any, would
not have a material effect on VII Cable's combined financial position, results
of operations or cash flows.
During July 1991, VII Cable received reassessments from ten California
counties of its real and personal property, related to the June 1987
acquisition by NAI, which could result in substantially higher California
property tax liabilities. VII Cable is appealing the reassessments. At
September 30, 1995 and December 31, 1994, VII Cable had paid $43,249 and
$36,581, respectively, of real and personal property taxes which have been
recorded as an excess property tax receivable included in "Other Assets."
VII Cable is involved in various claims and lawsuits arising in the ordinary
course of business, none of which, in the opinion of management, will have a
material adverse effect on VII Cable's financial position, results of
operations or cash flows.
In the ordinary course of business, VII Cable enters into long-term
affiliation agreements with programming services which require that VII Cable
continues to carry and pay for programming and meet certain performance
requirements.
F-19
<PAGE>
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. The Letter of Transmittal, certificates for shares of Viacom Common
Stock and any other required documents should be sent or delivered by each
stockholder of Viacom or his or her broker, dealer, commercial bank, trust
company or other nominee to the Exchange Agent at one of the addresses set
forth below:
[NAME OF EXCHANGE AGENT]
By Mail: Facsimile Transmission: By Hand or Overnight
Courier:
Confirmation of Facsimile
Transmission ONLY:
Questions and requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone
numbers set forth below. Additional copies of this Offering Circular--
Prospectus, the Letter of Transmittal and other Exchange Offer material may be
obtained from the Information Agent or the Dealer Manager as set forth below.
You may also contact your broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
The Information Agent for the Exchange Offer is:
GEORGESON & COMPANY INC.
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
The Dealer Manager for the Exchange Offer is:
WASSERSTEIN PERELLA & CO., INC.
31 West 52nd Street
New York, NY 10019
(212) 969-2700 (call collect)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is, or is threatened
to be made, a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided that such person acted in good faith and
in a manner such person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe his conduct was
unlawful. A Delaware corporation may indemnify such persons against expenses
(including attorneys' fees) in actions brought by or in the right of the
corporation to procure a judgment in its favor under the same conditions,
except that no indemnification is permitted in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and to the extent the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as the
Court of Chancery or other such court shall deem proper. To the extent such
person has been successful on the merits or otherwise in defense of any action
referred to above, or in defense of any claim, issue or matter therein, the
corporation must indemnify such person against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
The indemnification and advancement of expenses provided for in, or granted
pursuant to, Section 145 is not exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or
otherwise. Section 145 also provides that a corporation may maintain insurance
against liabilities for which indemnification is not expressly provided by the
statute.
Article VI of Viacom International's Certificate of Incorporation provides
for indemnification of the directors, officers, employees and agents of Viacom
International, to the full extent currently permitted by the DGCL.
In addition, Viacom International's Certificate of Incorporation, as
permitted by Section 102(b) of the DGCL, limits directors' liability to Viacom
International and its stockholders by eliminating liability in damages for
breach of fiduciary duty. Article VII of Viacom International's Certificate of
Incorporation provides that neither Viacom International nor its stockholders
may recover damages from Viacom International's directors for breach of their
fiduciary duties in the performance of their duties as directors of Viacom
International. As limited by Section 102(b), this provision cannot, however,
have the effect of indemnifying any director of Viacom International in the
case of liability (i) for a breach of the director's duty of loyalty, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) for unlawful payment of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
DGCL, or (iv) for any transactions for which the director derived an improper
personal benefit.
Viacom International has in effect liability insurance policies covering
certain claims against any of its respective officers or directors by reason
of certain breaches of duty, neglect, error, misstatement, omission or other
act committed by such person in his capacity as officer or director.
VII Cable will enter into indemnification agreements with each person who
will serve as a director of VII Cable immediately following the Stock
Issuance. The indemnification agreements will generally provide (i) for the
prompt indemnification to the fullest extent permitted by law against (a) any
and all expenses including
II-1
<PAGE>
attorneys' fees and all other costs paid or incurred in connection with
investigating, preparing to defend, defending or otherwise participating in
any threatened, pending or completed action, suit or proceeding related to the
fact that such indemnitee is or was a director, officer, employee, agent or
fiduciary of VII Cable or is or was serving at VII Cable's request as a
director, officer, employee, agent or fiduciary of another entity, or by
reason of anything done or not done by such indemnitee in any such capacity
and (b) any and all judgments, fines, penalties and amounts paid in settlement
of any claim, unless the "Reviewing Party" (defined as one or more members of
the VII Cable Board or appointee(s) of the VII Cable Board who are not parties
to the particular claim, or independent legal counsel) determines that such
indemnification is not permitted under applicable law and (ii) for the prompt
advancement of expenses to an indemnitee as well as the reimbursement by such
indemnitee of such advancement to VII Cable if the Reviewing Party determines
that the indemnitee is not entitled to such indemnification under applicable
law. In addition, the indemnification agreements will provide (i) a mechanism
through which an indemnitee may seek court relief in the event the Reviewing
Party determines that the indemnitee would not be permitted to be indemnified
under applicable law (and would therefore not be entitled to indemnification
or expense advancement under the indemnification agreement) and (ii)
indemnification against all expenses (including attorneys' fees), and the
advancement thereof, if requested, incurred by the indemnitee in any action
brought by the indemnitee to enforce an indemnity claim or to collect an
advancement of expenses or to recover under a directors' and officers'
liability insurance policy, regardless of whether such action is ultimately
successful or not. Furthermore, the indemnification agreements will provide
that after there has been a "change in control" in VII Cable (as defined in
the indemnification agreements), other than a change in control approved by a
majority of directors who were directors prior to such change, then, with
respect to all determinations regarding rights to indemnification and the
advancement of expenses, VII Cable will seek legal advice as to the right of
the indemnitee to indemnification under applicable law only from independent
legal counsel selected by the indemnitee and approved by VII Cable.
The indemnification agreements will impose upon VII Cable the burden of
proving that an indemnitee is not entitled to indemnification in any
particular case and negate certain presumptions that may otherwise be drawn
against an indemnitee seeking indemnification in connection with the
termination of actions in certain circumstances. Indemnitees' rights under the
indemnification agreements are not exclusive of any other rights they may have
under Delaware law, the VII Cable Bylaws or otherwise. Although not requiring
the maintenance of directors' and officers' liability insurance, the
indemnification agreements require that indemnitees be provided with the
maximum coverage available for any VII Cable director or officer if there is
such a policy.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<C> <S> <C>
4.3(a) -- Restated Certificate of Incorporation of Viacom
International Inc.*
4.3(b) -- By-Laws of Viacom International Inc.*
4.3(c) -- Form of Restated Certificate of Incorporation of VII
Cable**
4.4(a) -- Form of Certificate of VII Cable Class A Common Stock**
4.4(b) -- Form of Certificate of VII Cable Preferred Stock**
5 -- Opinion of Shearman & Sterling as to the validity of
the VII Cable Class A Common Stock and VII Cable Pre-
ferred Stock**
10.1 -- Parents Agreement*
10.2 -- Implementation Agreement*
10.3 -- Subscription Agreement*
12 -- Computation of Ratio of Earnings to Fixed Charges and
Combined Fixed Charges and Preferred Stock Dividends*
21 -- List of Subsidiaries of the Registrant*
23.1 -- Consent of Price Waterhouse LLP as to financial state-
ments of Viacom Inc. and Paramount Communications Inc.
23.2 -- Consent of Price Waterhouse LLP as to financial state-
ments of VII Cable
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
23.3 -- Consent of Ernst & Young LLP as to financial statements
of Paramount Communications Inc.
23.4 -- Consent of Arthur Andersen LLP as to financial state-
ments of Blockbuster Entertainment Corporation
23.5 -- Consent of Shearman & Sterling (included in their opin-
ion filed as Exhibit 5)**
24 -- Powers of Attorney*
27.1 -- Financial Data Schedule for Nine Months Ended September
30, 1995*
27.2 -- Financial Data Schedule for Year Ended December 31,
1994*
99.1 -- Form of Letter of Transmittal**
99.2 -- Form of Notice of Guaranteed Delivery**
99.3 -- Form of Letter from Wasserstein Perella & Co., Inc. to
Securities Dealers, Commercial Banks, Trust Companies
and Other Nominees**
99.4 -- Form of Letter to Clients for use by Securities Deal-
ers, Commercial Banks, Trust Companies and Other Nomi-
nees**
99.5 -- Form of Letter to Participants in Viacom Investment
Plan**
99.6 -- Form of Letter to Participants in Savings and Invest-
ment Plan for Employees of PVI Transmission Inc. and
Paramount (PDI) Distribution Inc.**
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
(b)Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown on the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrants of expenses incurred or
paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of their counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 2 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on January 18, 1996.
Viacom International Inc.
By /s/ Sumner M. Redstone
----------------------------------
Sumner M. Redstone
Chairman of the Board of
Directors, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed by the following persons
in the capacities indicated on January 18, 1996:
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
------------------ -----
<S> <C>
/s/ Sumner M. Redstone Chairman of the Board of Directors,
- ------------------------------------------- Chief Executive Officer
(Sumner M. Redstone)
/s/ George S. Smith, Jr. Senior Vice President,
- ------------------------------------------- Chief Financial Officer
(George S. Smith, Jr.)
/s/ Susan C. Gordon Vice President, Controller,
- ------------------------------------------- Chief Accounting Officer
(Susan C. Gordon)
* Director
- -------------------------------------------
(George S. Abrams)
* Director
- -------------------------------------------
(Steven R. Berrard)
/s/ Philippe P. Dauman Director
- -------------------------------------------
(Philippe P. Dauman)
Director
- -------------------------------------------
(Thomas E. Dooley)
* Director
- -------------------------------------------
(George D. Johnson, Jr.)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
* Director
___________________________________________
(Ken Miller)
* Director
___________________________________________
(Brent D. Redstone)
* Director
___________________________________________
(Shari Redstone)
* Director
___________________________________________
(Frederic V. Salerno)
* Director
___________________________________________
(William Schwartz)
* Director
___________________________________________
(Ivan Seidenberg)
</TABLE>
/s/ Philippe P. Dauman
*By _________________________________
Philippe P. Dauman,
Attorney-in-Fact
for the Directors
II-6
<PAGE>
VII CABLE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ---------- ------------------- -------------- ----------
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (A) PERIOD
----------- ---------- ---------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December
31, 1994............. $1,791 $6,178 -- $6,718 $1,251
Year ended December
31, 1993............. $1,463 $7,250 -- $6,922 $1,791
Year ended December
31, 1992............. $1,462 $6,428 -- $6,427 $1,463
</TABLE>
- --------
Note:
(A) Includes amounts written off.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO.
------- ----
<C> <S> <C>
4.3(a)- Restated Certificate of Incorporation of Viacom International
Inc.*
4.3(b)- By-Laws of Viacom International Inc.*
4.3(c)- Form of Restated Certificate of Incorporation of VII Cable**
4.4(a)- Form of Certificate of VII Cable Class A Common Stock**
4.4(b)- Form of Certificate of VII Cable Preferred Stock**
5- Opinion of Shearman & Sterling as to the validity of the VII
Cable Class A Common Stock and VII Cable Preferred Stock**
10.1- Parents Agreement*
10.2- Implementation Agreement*
10.3- Subscription Agreement*
12- Computation of Ratio of Earnings to Fixed Charges and Combined
Fixed Charges and Preferred Stock Dividends*
21- List of Subsidiaries of the Registrant*
23.1- Consent of Price Waterhouse LLP as to financial statements of
Viacom Inc. and Paramount Communications Inc.
23.2- Consent of Price Waterhouse LLP as to financial statements of
VII Cable
23.3- Consent of Ernst & Young LLP as to financial statements of Par-
amount Communications Inc.
23.4- Consent of Arthur Andersen LLP as to financial statements of
Blockbuster Entertainment Corporation
23.5- Consent of Shearman & Sterling (included in their opinion filed
as Exhibit 5)**
24- Powers of Attorney*
27.1- Financial Data Schedule for Nine Months Ended September 30,
1995*
27.2- Financial Data Schedule for Year Ended December 31, 1994*
99.1- Form of Letter of Transmittal**
99.2- Form of Notice of Guaranteed Delivery**
99.3- Form of Letter from Wasserstein Perella & Co., Inc. to Securi-
ties Dealers, Commercial Banks, Trust Companies and Other Nom-
inees**
99.4- Form of Letter to Clients for use by Securities Dealers, Com-
mercial Banks, Trust Companies and Other Nominees**
99.5- Form of Letter to Participants in Viacom Investment Plan**
99.6- Form of Letter to Participants in Savings and Investment Plan
for Employees of PVI Transmission Inc. and Paramount (PDI)
Distribution Inc.**
</TABLE>
- --------
*Previously filed.
**To be supplied by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Viacom
International Inc. of our reports dated February 10, 1995 appearing on pages
II-14 and F-2 of the Viacom Inc. Annual Report on Form 10-K for the year ended
December 31, 1994 and of our reports dated June 3, 1994 appearing on page F-2
and page 4 of Item 14(a) in the Paramount Communications Inc. Transition
Report on Form 10-K for the eleven month period ended March 31, 1994, as
amended by Form 10-K/A Amendment No. 1 dated July 29, 1994 and as further
amended by Form 10-K/A Amendment No. 2 dated August 12, 1994 included in the
Viacom Inc. Current Report on Form 8-K filed with the Securities and Exchange
Commission on April 14, 1995.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
January 16, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Viacom International Inc. of our report
dated September 11, 1995 relating to the financial statements of VII Cable,
which appears in such Prospectus. We also consent to the application of such
report to the Financial Statement Schedule for the three years ended December
31, 1994, which appears in such Prospectus when such schedule is read in
conjunction with the financial statements referred to in our report. The
audits referred to in such report also included this schedule. We also consent
to the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
150 Almaden Boulevard
San Jose, CA 95113
January 16, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 to this Registration Statement (Form S-4) and related
Prospectus of Viacom International Inc. and to the incorporation by reference
therein of our report dated August 27, 1993, except for Notes A and J, as to
which the date is September 10, 1993, with respect to the consolidated
financial statements of Paramount Communications Inc. included in the Viacom
Inc. Current Report (Form 8-K) filed with the Securities and Exchange
Commission on April 14, 1995.
/s/ Ernst & Young LLP
Ernst & Young LLP
New York, New York
January 16, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report dated
March 23, 1994 on Blockbuster Entertainment Corporation's 1993, 1992 and 1991
financial statements, included in Viacom Inc.'s Form 8-K dated April 13, 1995,
and to all references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Fort Lauderdale, Florida,
January 16, 1996.
