<PAGE> 1
SCHEDULE 14 A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14 A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by Registrant [X]
Filed by a Party other than Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule 14a-
6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TELE-COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) and 0-11.
(1) Tile of each class of securities to which transaction applied:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- -------------------------------------------------------------------------------
(5) Total fee paid:
- -------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials:
- -------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.: Schedule 14A
- -------------------------------------------------------------------------------
(3) Filing Party: Tele-Communications, Inc.
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(4) Date Filed: December 19, 1996
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<PAGE> 2
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
Dear Stockholder: , 1997
You are cordially invited to attend a special meeting of stockholders
of Tele-Communications, Inc. (the "Company"), which will be held at the TCI
National Digital Television Center, 4100 E. Dry Creek Road, Littleton,
Colorado, on , 1997 starting at 10:00 a.m., local time. A notice
of the special meeting, a proxy card and a Proxy Statement containing important
information about the matters to be acted upon at the special meeting are
enclosed.
At the special meeting, you will be asked to consider and vote upon a
proposal (the "Telephony Group Stock Proposal"), which would authorize two new
series of the Company's Common Stock, par value $1.00 per share (the "Common
Stock"), (and a corresponding increase in the total number of authorized shares
of Common Stock) to be designated Tele- Communications, Inc. Series A Telephony
Group Common Stock ("Series A Telephony Group Common Stock") and Tele-
Communications, Inc. Series B Telephony Group Common Stock ("Series B Telephony
Group Common Stock" and, together with the Series A Telephony Group Common
Stock, the "Telephony Group Common Stock"). The Telephony Group Common Stock,
if issued, would be intended to reflect the separate performance of the
Telephony Group, which would initially consist of the Company's investments in
certain entities engaged in the domestic wireline and wireless telephony
distribution and communications businesses. A total of 750 million shares of
Series A Telephony Group Common Stock and 75 million shares of Series B
Telephony Group Common Stock would be authorized under the Telephony Group
Stock Proposal.
Currently the Company has four authorized series of Common Stock:
Tele-Communications, Inc. Series A TCI Group Common Stock (the "Series A TCI
Group Common Stock"), Tele-Communications, Inc. Series B TCI Group Common Stock
(the "Series B TCI Group Common Stock" and, together with the Series A TCI
Group Common Stock, the "TCI Group Common Stock"), Tele-Communications, Inc.
Series A Liberty Media Group Common Stock (the "Series A Liberty Media Group
Common Stock") and Tele-Communications, Inc. Series B Liberty Media Group
Common Stock (the "Series B Liberty Media Group Common Stock" and, together
with the Series A Liberty Media Group Common Stock, the "Liberty Media Group
Common Stock"). The TCI Group Common Stock presently is intended to reflect the
separate performance of the TCI Group, which is comprised of the Company's
domestic cable and telephony distribution and communications businesses,
international cable, telephony and programming businesses and
technology/venture capital business. The investments attributed to the
Telephony Group are currently included in the TCI Group. The Liberty Media
Group Common Stock is intended to reflect the separate performance of the
Liberty Media Group, which is comprised of the Company's businesses that are
engaged in two principal lines of business: (i) production, acquisition and
distribution through all available formats and media of branded entertainment,
educational and informational programming and software including multimedia
products and (ii) electronic retailing, direct marketing, advertising sales
relating to programming services, infomercials and transaction processing. Upon
effectiveness of the Telephony Group Stock Proposal, the investments attributed
to the Telephony Group will no longer be included in the TCI Group; however,
until shares of Telephony Group Common Stock are issued, the TCI Group Common
Stock will continue to be intended to reflect all of the common stockholders'
equity value of the Company attributable to the Telephony Group, in addition to
the separate performance of the Company's domestic cable distribution business,
telephony distribution and communications business (other than the investments
attributed to the TCI Group), international cable, telephony and programming
businesses, technology/venture capital business, and any other business of the
Company not attributed to either the Liberty Media Group or the Telephony
Group. As shares of Telephony Group Common Stock are issued and distributed or
sold, the percentage of the common stockholders' equity value of the Company
attributable to the Telephony Group that is or is intended to be reflected in
the TCI Group Common Stock will be reduced accordingly. The composition of the
Liberty Media Group will not be affected by the Telephony Group Stock Proposal.
<PAGE> 3
The Telephony Group Stock Proposal is intended to provide the Company
greater flexibility with regard to raising capital and making acquisitions and
investments, including strategic partnering transactions, with equity
securities specifically related to the Telephony Group. The Board of Directors
believes that the Telephony Group Stock Proposal and the issuance of Telephony
Group Common Stock will result in greater market recognition of the value of
the Telephony Group, thereby enhancing stockholder value over the long term,
while at the same time enabling the Company's businesses to preserve the
benefits of being part of a consolidated enterprise. The Telephony Group Stock
Proposal would also provide security holders with the opportunity to invest in
separate securities intended specifically to reflect the Telephony Group and
would enable the Company to more effectively tailor employee benefits plans to
provide incentives to the employees in the Telephony Group.
Following approval by stockholders of the Telephony Group Stock
Proposal, but subject to prevailing market and other conditions, the Company
currently proposes to offer shares of Series A Telephony Group Common Stock for
cash in an initial public offering, in which event the proceeds of such
offering would be allocated to the Telephony Group to be used to fund a portion
of its anticipated capital requirements and for general corporate purposes. The
timing and size of any such public offering and the price at which such shares
would be sold will be determined by the Board of Directors, without further
approval of stockholders, prior to such offering based upon then prevailing
market and other conditions. Additional authorized shares of Telephony Group
Common Stock could be offered in the future at the discretion of the Board of
Directors.
IT IS IMPORTANT TO NOTE THAT HOLDERS OF TCI GROUP COMMON STOCK,
LIBERTY MEDIA GROUP COMMON STOCK AND TELEPHONY GROUP COMMON STOCK WHEN ISSUED
WILL BE COMMON STOCKHOLDERS OF THE COMPANY AND WILL BE SUBJECT TO RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMPANY AND ALL OF ITS BUSINESSES, ASSETS
AND LIABILITIES. THE COMPANY CAN PROVIDE NO ASSURANCE AS TO THE DEGREE TO WHICH
THE MARKET PRICE OF THE TELEPHONY GROUP COMMON STOCK WILL REFLECT THE SEPARATE
PERFORMANCE OF THE TELEPHONY GROUP OR AS TO THE IMPACT OF THE PROPOSAL ON THE
MARKET PRICE OF THE TCI GROUP COMMON STOCK OR THE LIBERTY MEDIA GROUP COMMON
STOCK. IN ADDITION, IMPLEMENTATION OF THE TELEPHONY GROUP STOCK PROPOSAL WILL
MAKE THE CAPITAL STRUCTURE OF THE COMPANY MORE COMPLEX AND MAY GIVE RISE TO
OCCASIONS WHEN THE INTERESTS OF THE HOLDERS OF THE SEPARATE SERIES OF COMMON
STOCK MAY DIVERGE OR APPEAR TO DIVERGE.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TELEPHONY GROUP
STOCK PROPOSAL, BELIEVES THE ADOPTION OF THE PROPOSAL IS IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS VOTE
IN FAVOR OF THE PROPOSAL.
Whether or not you are personally able to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to vote in person if you wish to attend the special meeting and vote
personally.
Sincerely yours,
John C. Malone
Chairman of the Board
-2-
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Time and Place; Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Voting Rights; Votes Required for Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
No Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE TELEPHONY GROUP STOCK PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Background and Reasons for the Telephony Group Stock Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Recommendation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Summary Description of Telephony Group Stock Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Factors to be Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management and Allocation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Description of Telephony Group Common Stock and Effects on Existing Common Stock . . . . . . . . . . . . . . . . 37
Inter-Group Interest in the Telephony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Stock Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Inclusion in Nasdaq National Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Description of Existing Common Stock And Other Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Anti-Takeover Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
ANNEX I--Glossary of Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
ANNEX II--Proposed Amendments to the Restated Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . II-1
ANNEX III--Description of Telephony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
ANNEX IV--Illustration of Certain Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
ANNEX V--Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-1
Tele-Communications, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-3
Telephony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-107
TCI Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V-162
</TABLE>
<PAGE> 5
TELE-COMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
NOTICE IS HEREBY GIVEN that a special meeting of stockholders
(including any adjournment or postponement thereof, the "Special Meeting") of
Tele-Communications, Inc., a Delaware corporation (the "Company"), will be held
at the TCI National Digital Television Center, 4100 E. Dry Creek Road,
Littleton, Colorado, starting at 10:00 a.m., local time, on ,
1997, for the following purposes:
1. To consider and vote upon a proposal (the "Telephony
Group Stock Proposal") to adopt amendments to the Company's Restated
Certificate of Incorporation which would (a) authorize two new series
of the Company's Common Stock, par value $1.00 per share, to consist
of 750 million newly authorized shares designated Tele-Communications,
Inc. Series A Telephony Group Common Stock and 75 million newly
authorized shares designated Tele-Communications, Inc. Series B
Telephony Group Common Stock (collectively, the "Telephony Group
Common Stock"), and a corresponding increase in the total number of
authorized shares of Common Stock, (b) change certain of the rights
and powers of the Tele-Communications, Inc. Series A TCI Group Common
Stock, par value $1.00 per share (the "Series A TCI Group Common
Stock") and the Tele-Communications, Inc. Series B TCI Group Common
Stock, par value $1.00 per share (the "Series B TCI Group Common
Stock"), the Tele-Communications, Inc. Series A Liberty Media Group
Common Stock, par value $1.00 per share (the "Series A Liberty Media
Group Common Stock") and the Tele-Communications, Inc. Series B
Liberty Media Group Common Stock, par value $1.00 per share (the
"Series B Liberty Media Group Common Stock"), and the qualifications,
limitations or restrictions thereof, to reflect the authorization of
the Telephony Group Common Stock and (c) provide for the voting powers
and relative, participating, optional and other special rights and
qualifications, limitations and restrictions of the Telephony Group
Common Stock.
2. To transact such other business as may properly come
before the Special Meeting.
Holders of record of the Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock and Convertible Preferred Stock, Series C, par value
$.01 per share (the "Series C Preferred Stock"), at the close of business on
, 1997, the record date for the Special Meeting, will be entitled to notice of
the Special Meeting. Holders of record of the Series A TCI Group Common Stock,
Series B TCI Group Common Stock, Series A Liberty Media Group Common Stock,
Series B Liberty Media Group Common Stock and Series C Preferred Stock at the
close of business on the record date will be entitled to vote together as a
single class on the Telephony Group Stock Proposal. In addition, holders of
record of the Series A TCI Group Common Stock and Series B TCI Group Common
Stock, and holders of record of the Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, will each be entitled to vote as
a separate class on the Telephony Group Stock Proposal.
To assure that your interests will be represented at the Special
Meeting, regardless of whether you plan to attend in person, please complete,
date and sign the enclosed proxy card and return it promptly in the enclosed
return envelope, which requires no postage if mailed in the United States. This
action will not limit your right to vote in person if you wish to attend the
Special Meeting and vote personally.
By Order of the Board of Directors
Stephen M. Brett
Secretary
Englewood, Colorado
, 1997
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU
INTEND TO BE PRESENT AT THE SPECIAL MEETING.
-i-
<PAGE> 6
TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
-------------------------
PROXY STATEMENT
-------------------------
FOR SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement is being furnished in connection with the
solicitation by the Board of Directors of Tele-Communications, Inc., a
Delaware corporation (the "Company" or "TCI") of proxies for use at a special
meeting of the stockholders of the Company, or at any adjournment or
postponement thereof (the "Special Meeting"), for the purposes set forth in the
accompanying Notice of Meeting. Proxies are being solicited from the holders of
the following securities of the Company: (i) Tele-Communications, Inc. Series A
TCI Group Common Stock (the "Series A TCI Group Common Stock"), (ii)
Tele-Communications, Inc. Series B TCI Group Common Stock (the "Series B TCI
Group Common Stock" and, together with the Series A TCI Group Common Stock, the
"TCI Group Common Stock"), (iii) Tele-Communications, Inc. Series A Liberty
Media Group Common Stock (the "Series A Liberty Media Group Common Stock"),
(iv) Tele-Communications, Inc. Series B Liberty Media Group Common Stock (the
"Series B Liberty Media Group Common Stock" and, together with the Series A
Liberty Media Group Common Stock, the "Liberty Media Group Common Stock"), and
(v) Convertible Preferred Stock, Series C, par value $.01 per share (the
"Series C Preferred Stock").
THE SPECIAL MEETING
TIME AND PLACE; PURPOSES
The Special Meeting will be held at the TCI National Digital
Television Center, 4100 E. Dry Creek Road, Littleton, Colorado, on ________ __,
1997, starting at 10:00 a.m. local time. At the Special Meeting, the
stockholders of the Company will be asked to consider and vote upon (a) a
proposal (the "Telephony Group Stock Proposal") which would (i) authorize two
new series of the Company's Common Stock, par value $1.00 per share (the
"Common Stock"), to consist of 750 million newly authorized shares designated
Tele-Communications, Inc. Series A Telephony Group Common Stock (the "Series A
Telephony Group Common Stock") and 75 million newly authorized shares
designated Tele-Communications, Inc. Series B Telephony Group Common Stock
(the "Series B Telephony Group Common Stock" and, together with the Series A
Telephony Group Common Stock, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of Common
Stock, (ii) change certain of the rights and powers of the TCI Group Common
Stock and the Liberty Media Group Common Stock, and the qualifications,
limitations or restrictions thereof, to reflect the authorization of the
Telephony Group Common Stock and (iii) provide for the voting powers and
relative, participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock, and (b) such
other business as may properly come before the Special Meeting.
The Telephony Group Common Stock, if issued, would be intended to
reflect the separate performance of the Telephony Group, which would initially
consist of the Company's investments in certain entities engaged in the
domestic wireline and wireless telephony distribution and communications
businesses.
This Proxy Statement and the accompanying form of proxy are first
being mailed to the stockholders of the Company on or about ____________, 1997.
<PAGE> 7
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on
_____________, 1997 (the "Record Date") as the date for the determination of
holders of shares of the TCI Group Common Stock, Liberty Media Group Common
Stock and Series C Preferred Stock entitled to notice of and to vote at the
Special Meeting. Only holders of record of such shares at the close of business
on the Record Date are entitled to notice of and to vote at the Special
Meeting.
Holders of record of the TCI Group Common Stock, Liberty Media Group
Common Stock and Series C Preferred Stock at the close of business on the
Record Date will be entitled to vote together as a single class on the
Telephony Group Stock Proposal. In addition, holders of record of the TCI Group
Common Stock and holders of record of the Liberty Media Group Common Stock will
each be entitled to vote as a separate class on the Telephony Group Stock
Proposal. At the close of business on the Record Date, there were: (i)
___________ shares of Series A TCI Group Common Stock outstanding and entitled
to vote at the Special Meeting, (ii) _________ shares of Series B TCI Group
Common Stock outstanding and entitled to vote at the Special Meeting, (iii)
__________ shares of Series A Liberty Media Group Common Stock outstanding and
entitled to vote at the Special Meeting, (iv) _____ shares of Series B Liberty
Media Group Common Stock outstanding and entitled to vote at the Special
Meeting, and (v) __________ shares of Series C Preferred Stock outstanding and
entitled to vote at the Special Meeting.
The presence, in person or by proxy, of the holders of a majority of
the combined voting power of the outstanding shares of the TCI Group Common
Stock, Liberty Media Group Common Stock and Series C Preferred Stock entitled
to vote is necessary to constitute a quorum at the Special Meeting. The
affirmative vote of 66 2/3% of the combined voting power of the shares of TCI
Group Common Stock, Liberty Media Group Common Stock and Series C Preferred
Stock represented in person or by proxy and entitled to vote at the Special
Meeting, voting as a single class, and a majority of the combined voting power
of the TCI Group Common Stock, and a majority of the combined voting power of
the Liberty Media Group Common Stock, represented in person or by proxy and
entitled to vote at the Special Meeting, each voting as a separate class, is
required to approve the Telephony Group Stock Proposal. Each holder of record
as of the Record Date of: (i) the Series A TCI Group Common Stock and the
Series A Liberty Media Group Common Stock is entitled to cast one vote per
share of such series held, (ii) the Series B TCI Group Common Stock and the
Series B Liberty Media Group Common Stock is entitled to cast ten votes per
shares of such series held, and (iii) the Series C Preferred Stock is entitled
to cast 125 votes per share of such series held, on each matter on which
holders of shares of such class or series are entitled to vote at the Special
Meeting.
PROXIES
All shares of the TCI Group Common Stock, Liberty Media Group Common
Stock and Series C Preferred Stock represented by properly executed proxies
received prior to or at the Special Meeting, and not revoked, will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such proxies will be voted FOR the Telephony Group Stock
Proposal. So far as the Company's Board of Directors is aware, the Telephony
Group Stock Proposal is the only matter to be acted upon at the Special
Meeting. As to any other matter which may properly come before the Special
Meeting, the persons named in the accompanying proxy card will vote thereon in
accordance with their best judgment. A properly executed proxy marked
"ABSTAIN", although counted for purposes of determining whether there is a
quorum and for purposes of determining the aggregate voting power and number of
shares represented and entitled to vote at the Special Meeting, will not be
voted and, therefore, will have the same effect as a vote cast against the
matter to which such instruction is indicated. Shares represented by "broker
non-votes" (i.e., shares held by brokers or nominees which are represented at a
meeting but with respect to which the broker or nominee is not empowered to
vote on a particular proposal) will also be counted for purposes of determining
whether there is a quorum at the Special Meeting and will be deemed shares not
entitled to vote and will not be included for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote on
such matter.
A stockholder may revoke his or her proxy at any time prior to its use
by delivering to the Secretary of the Company a signed notice of revocation or
a later dated signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, officers and regular employees of the Company
may solicit proxies by telephone, telegram, in person or by other means. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other
2
<PAGE> 8
custodians will be requested to forward soliciting material to the beneficial
owners of shares held of record by them and will be reimbursed for their
reasonable out-of-pocket expenses in connection therewith.
NO APPRAISAL RIGHTS
Under applicable Delaware law, holders of the TCI Group Common Stock,
the Liberty Media Group Common Stock and the Series C Preferred Stock do not
have appraisal rights in connection with the Telephony Group Stock Proposal.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of October 31, 1996, information with
respect to the ownership of Series A TCI Group Common Stock, Series B TCI Group
Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty Media
Group Common Stock, Class B 6% Cumulative Redeemable Exchangeable Junior
Preferred Stock, par value $.01 per share, of the Company ("Class B Preferred
Stock"), Series C Preferred Stock, Redeemable Convertible TCI Group Preferred
Stock, Series G, par value $.01 per share, of the Company ("Series G Preferred
Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series
H, par value $.01 per share, of the Company ("Series H Preferred Stock"), by
each person known to the Company to own beneficially more than 5% of any such
class or series outstanding on that date. Shares issuable upon exercise of
options or conversion of convertible securities are deemed to be outstanding
for the purpose of computing the percentage of ownership and overall voting
power of persons beneficially owning such options or convertible securities,
but have not been deemed to be outstanding for the purpose of computing the
percentage ownership or overall voting power of any other person. Voting power
in the table is computed with respect to a general election of directors and,
therefore, the Class B Preferred Stock, the Series G Preferred Stock and the
Series H Preferred Stock are included in the calculation notwithstanding the
fact that the Class B Preferred Stock, the Series G Preferred Stock and the
Series H Preferred Stock do not generally vote with respect to matters
submitted to a vote of stockholders. The number of shares indicated as owned by
Dr. Malone include interests in shares held by the trustee of TCI's Employee
Stock Purchase Plan ("ESPP"). So far as is known to TCI, the persons indicated
below have sole voting and investment power with respect to the shares
indicated as owned by them except as otherwise stated in the notes to the table
and except for the shares held by the trustee of the ESPP for the benefit of
Dr. Malone, which shares are voted at the discretion of the trustee.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial of Voting
Title of Class of Beneficial Owner Ownership Class (1) Power(1)
------------------------------ ------------------------ -------------------- --------- --------
<S> <C> <C> <C> <C>
TCI Group Common Stock John C. Malone,
Series A President and a Director 2,172,366 (2) *
Series B 5619 DTC Parkway 25,332,083 (3)(4) 29.9% 17.7%
Englewood, Colorado
Liberty Media Group
Common Stock
Series A 542,983 (2) *
Series B 6,360,520 (3)(4) 30.0%
Preferred Stock
Class B 306,000 (3) 18.9%
Series C -- --
Series G -- --
Series H -- --
</TABLE>
3
<PAGE> 9
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial of Voting
Title of Class of Beneficial Owner Ownership Class(1) Power(1)
------------------------------ --------------------- ------------------------ ------ --------
<S> <C> <C> <C> <C> <C>
TCI Group Common Stock Kearns-Tribune
Series A Corporation 8,792,514 1.5% 6.9%
Series B 400 Tribune Building 9,112,500 (4) 10.8%
Salt Lake City, Utah
Liberty Media Group
Common Stock
Series A 2,198,128 1.5%
Series B 2,278,125 (4) 10.8%
Preferred Stock
Class B 67,536 4.2%
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock The Associated Group,
Series A Inc. 12,479,976 2.2% 5.8%
Series B 200 Gateway Towers 7,071,852 (5) 8.4%
Pittsburgh, Pennsylvania
Liberty Media Group
Common Stock
Series A 3,119,993 2.2%
Series B 1,767,963 (5) 8.3%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Estate of Betsy Magness
Series A 2,105,332 * 4.5%
Series B 6,346,212 7.5%
Liberty Media Group
Common Stock
Series A 526,333 *
Series B 1,586,553 7.5%
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial of Voting
Title of Class of Beneficial Owner Ownership Class(1) Power(1)
------------------------------ --------------------- ------------------------ ------ --------
<S> <C> <C> <C> <C> <C>
TCI Group Common Stock The Equitable Companies
Series A Incorporated 41,193,448 (6) 7.1% 3.1%
Series B 787 Seventh Avenue -- --
New York, New York; and
The Mutuelles AXA and
Liberty Media Group AXA
Common Stock 101-100 Terrasse
Series A Boieldieu 14,685,004 (7) 10.1%
Series B 92042 Paris La Defense -- --
France
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock The Capital Group
Series A Companies Inc. 39,546,870 (8) 6.8% 2.9%
Series B 333 South Hope Street -- --
Los Angeles, California
Liberty Media
Group Common Stock
Series A 13,037,740 (9) 9.0%
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Bill Daniels
Series A c/o Daniels & Associates 259 * *
Series B 3200 Cherry Creek Drive -- --
South
Denver, Colorado
Liberty Media Group
Common Stock
Series A 64 *
Series B -- --
Preferred Stock
Class B -- --
Series C 70,575 100%
Series G -- --
Series H -- --
</TABLE>
5
<PAGE> 11
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial of Voting
Title of Class of Beneficial Owner Ownership Class(1) Power(1)
------------------------------ --------------------- ------------------------ ------ --------
<S> <C> <C> <C> <C>
TCI Group Common Stock Lawrence Flinn, Jr. 1,102,344 * *
Series A 209 Taconic Road 24,000 *
Series B Greenwich, Connecticut
Liberty Media Group
Common Stock
Series A 275,611 *
Series B 6,000 *
Preferred Stock
Class B -- --
Series C -- --
Series G 6,186,647 92.4%
Series H 6,186,647 92.4%
TCI Group Common Stock Donne F. Fisher
Series A (individually and as Co- 4,111,817 (10)(11) * 21.7%
Series B Personal Representative 31,034,936 (4)(10) 36.7%
to the Estate of Bob
Magness)
Liberty Media Group Director
Common Stock 5619 DTC Parkway
Series A Englewood, Colorado 1,029,838 (10)(11) *
Series B 7,758,734 (4)(10) 36.6%
Preferred Stock
Class B 129,299 (10) 8.0%
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Daniel L. Ritchie
Series A (as Co-Personal 3,524,315 (10) * 21.6%
Series B Representative to the 30,785,864 (10) 36.4%
Estate of Bob Magness)
2199 South University
Denver, Colorado
Liberty Media Group
Common Stock
Series A 880,714 (10) *
Series B 7,696,466 (10) 36.3%
Preferred Stock
Class B 125,000 (10) 7.7%
Series C -- --
Series G -- --
Series H -- --
</TABLE>
6
<PAGE> 12
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial of Voting
Title of Class of Beneficial Owner Ownership Class(1) Power(1)
------------------------------ --------------------- ------------------------ ------ --------
<S> <C> <C> <C> <C> <C>
TCI Group Common Stock J.P. Morgan & Co., Inc.
Series A 60 Wall Street 31,322,458 (12) 5.4% 1.8%
Series B New York, New York -- --
Liberty Media Group
Common Stock
Series A 714,220 (12) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Salomon Inc.
Series A Seven World Trade Center -- -- *
Series B New York, New York -- --
Liberty Media Group
Common Stock
Series A -- --
Series B -- --
Preferred Stock
Class B 150,142 (13) 9.3%
Series C -- --
Series G -- --
Series H -- --
</TABLE>
7
<PAGE> 13
- -----------------------------
* Less than one percent.
(1) Based on 579,395,742 shares of Series A TCI Group Common Stock (after
elimination of shares held by subsidiaries of the Company), 84,663,501
shares of Series B TCI Group Common Stock, 144,815,842 shares of Series
A Liberty Media Group Common Stock, 21,191,669 shares of Series B
Liberty Media Group Common Stock, 1,620,026 shares of Class B Preferred
Stock, 70,575 shares of Series C Preferred Stock, 6,695,527 shares of
Series G Preferred Stock and 6,695,527 shares of Series H Preferred
Stock outstanding on October 31, 1996.
(2) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 1,000,000
shares of Series A TCI Group Common Stock and 250,000 shares of Series A
Liberty Media Group Common Stock. Options to acquire 600,000 and 150,000
shares of Series A TCI Group Common Stock and Series A Liberty Media
Group Common Stock, respectively, are exercisable as of October 31,
1996. Additionally assumes the exercise in full of stock options granted
in tandem with stock appreciation rights in December of 1995 to acquire
1,000,000 shares of Series A TCI Group Common Stock and 250,000 shares
of Series A Liberty Media Group Common Stock. Options to acquire 200,000
shares of Series A TCI Group Common Stock and 50,000 shares of Series A
Liberty Media Group Stock are exercisable as of October 31, 1996.
(3) Includes 1,173,000 shares of Series B TCI Group Common Stock, 293,250
shares of Series B Liberty Media Group Common Stock and 6,900 shares of
Class B Preferred Stock held by Dr. Malone's wife, Mrs. Leslie Malone,
but Dr. Malone has disclaimed any beneficial ownership of such shares.
(4) Mr. Bob Magness, prior to his death, and Kearns-Tribune Corporation
("Kearns"), pursuant to a letter agreement, dated June 17, 1988, each
agreed with Dr. Malone that prior to making a disposition of a
significant portion of their respective holdings of Series B TCI Group
Common Stock or Series B Liberty Media Group Common Stock, he or it
would first offer Dr. Malone the opportunity to purchase such shares.
(5) The number of shares in the table is based upon a Schedule 13D, dated
May 24, 1996, filed by The Associated Group, Inc. which reflects that
said corporation has shared voting and dispositive power over 7,071,852
shares of Series B TCI Group Common Stock and 1,767,963 shares of Series
B Liberty Media Group Common Stock.
(6) The number of shares in the table is based upon a Schedule 13G, dated
February 9, 1996, filed by The Equitable Companies Incorporated which
Schedule 13G indicates that such corporation has sole voting power over
30,729,443 shares and shared voting power over 1,002,725 shares of
Series A TCI Group Common Stock. No information is given with respect to
voting power over the remaining shares.
(7) The number of shares in the table is based upon a Schedule 13G, dated
January 9, 1996, filed by The Equitable Companies Incorporated which
Schedule 13G indicates that said corporation has sole voting power over
11,219,798 shares and shared voting power over 273,681 shares of Series
A Liberty Media Group Common Stock. No information is given with respect
to voting power over the remaining shares.
(8) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts
which held as of December 29, 1995, 39,546,870 shares of Series A TCI
Group Common Stock. Capital Guardian Trust Company, a bank, and one of
such operating companies, exercised investment discretion over 3,636,820
of said shares. Capital Research and Management Company, a registered
investment advisor, and Capital International Limited and Capital
International, S.A., other operating subsidiaries, had investment
discretion with respect to 35,565,750, 137,770 and 206,510 shares,
respectively, of the above shares. The information set forth above is
based upon a Schedule 13G, dated February 9, 1996, filed by The Capital
Group Companies, Inc.
(9) Certain operating subsidiaries of The Capital Group Companies, Inc.
exercised investment discretion over various institutional accounts
which held as of December 29, 1995, 13,037,740 shares of Series A
Liberty Media Group Common Stock. Capital Guardian Trust Company, a
bank, and one of such operating companies, exercised investment
discretion over 3,123,430 of said shares. Capital Research and
Management Company,
8
<PAGE> 14
a registered investment advisor, and Capital International Limited and
Capital International, S.A., other operating subsidiaries, had
investment discretion with respect to 9,825,430, 34,440 and 54,420
shares, respectively, of the above shares. The information set forth
above is based upon a Schedule 13G, dated February 9, 1996, filed by The
Capital Group Companies, Inc.
(10) Includes 3,524,315 shares of Series A TCI Group Common Stock, 30,785,864
shares of Series B TCI Group Common Stock, 880,714 shares of Series A
Liberty Media Group Common Stock, 7,696,466 shares of Series B Liberty
Media Group Common Stock and 125,000 shares of Class B Preferred Stock
held by the Estate of Bob Magness. Messrs. Fisher and Ritchie are each
deemed to have beneficial ownership over such shares as Co-Personal
Representatives to the Estate of Bob Magness. Included in such
beneficial ownership is the assumed exercise in full of stock options
granted in tandem with stock appreciation rights in November of 1992 to
Bob Magness to acquire 1,000,000 shares of Series A TCI Group Common
Stock and 250,000 shares of Series A Liberty Media Group Common Stock.
Additionally assumes the exercise in full of stock options granted in
tandem with stock appreciation rights in December of 1995 to Bob Magness
to acquire 1,000,000 shares of Series A TCI Group Common Stock and
250,000 shares of Series A Liberty Media Group Common Stock. All options
became fully vested upon the death of Bob Magness and, pursuant to the
stock incentive plan, must be exercised within one year.
(11) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1994 to acquire 200,000 shares
of Series A TCI Group Common Stock and 50,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 40,000 shares of Series A
TCI Group Common Stock and 10,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Additionally
assumes the exercise of stock options granted in January of 1996 to
acquire 50,000 shares of Series A TCI Group Common Stock and 12,500
shares of Series A Liberty Media Group Common Stock. None of these stock
options are exercisable as of October 31, 1996.
(12) The number of shares in the table is based upon Form 13F for the quarter
ended September 30, 1996, filed by J.P. Morgan & Co. Incorporated,
which reflects that said corporation has sole voting power over
19,594,984 shares and shared voting power over 403,438 shares of Series
A TCI Group Common Stock.
(13) The number of shares in the table is based upon a Schedule 13G, dated
July 31, 1996, filed by Salomon Inc. which reflects that said
corporation has shared voting power over 150,142 shares of the Class B
Preferred Stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of October 31, 1996, information with
respect to the ownership of: (i) Series A TCI Group Common Stock, Series B TCI
Group Common Stock, Series A Liberty Media Group Common Stock, Series B Liberty
Media Group Common Stock, Class B Preferred Stock, Series C Preferred Stock,
Series G Preferred Stock and Series H Preferred Stock and (ii) the voting
securities of Tele-Communications International, Inc., a majority owned
subsidiary of the Company ("International"), which consist of
Tele-Communications International, Inc. Series A Common Stock ("TINTA Series A
Stock") and Tele-Communications International, Inc. Series B Common Stock
("TINTA Series B Stock"), by all directors and each of the named executive
officers of TCI and by all executive officers and directors of TCI as a group.
Shares issuable upon exercise of options or conversion of convertible
securities and upon vesting of restricted shares are deemed to be outstanding
for the purpose of computing the percentage ownership and overall voting power
of persons beneficially owning such securities, but have not been deemed to be
outstanding for the purpose of computing the percentage ownership or overall
voting power of any other person. Voting power in the table is computed with
respect to a general election of directors. The number of shares of Series A
TCI Group Common Stock, Series B TCI Group Common Stock, Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock in the table
include interests of the named directors or executive officers or of members of
the group of directors and executive officers in shares held by the trustee of
TCI's ESPP and shares held by the trustee of United Artists Entertainment
Company's Employee Stock Ownership Plan for their respective accounts. So far
as is known to TCI, the persons indicated below have sole voting and investment
power with respect to the shares indicated as owned by them except as otherwise
stated in the notes to the table and except for the shares held by the trustee
of TCI's ESPP for the benefit of such person, which shares are voted at the
discretion of the trustee.
9
<PAGE> 15
<TABLE>
<CAPTION>
Amount and
Nature of Voting
Name of Beneficial Percent of Power
Title of Class Beneficial Owner Ownership Class (1)(2) (1)(2)
----------------------- ------------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
TCI Group Common Stock John C. Malone
Series A 2,172,366 (3) * 17.7%
Series B 25,332,083 (3) 29.9%
Liberty Media Group
Common Stock
Series A 542,983 (3) *
Series B 6,360,520 (3) 30.0%
Preferred Stock
Class B 306,000 (3) 18.9%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000 (16) * *
TINTA Series B Stock -- --
TCI Group Common Stock Donne F. Fisher
Series A 4,111,817 (4) * 21.7%
Series B 31,034,936 (4) 36.7%
Liberty Media Group
Common Stock
Series A 1,029,838 (4) *
Series B 7,758,734 (4) 36.6%
Preferred Stock
Class B 129,299 (4) 8.0%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 450,000 * *
TINTA Series B Stock -- --
TCI Group Common Stock John W. Gallivan
Series A 52,124 (5)(15) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 13,031 (5)(15) *
Series B -- --
Preferred Stock
Class B 14 (15) *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
</TABLE>
10
<PAGE> 16
<TABLE>
<CAPTION>
Amount and
Nature of Voting
Name of Beneficial Percent of Power
Title of Class Beneficial Owner Ownership Class (1)(2) (1)(2)
----------------------- ------------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
TINTA Series B Stock -- --
TCI Group Common Stock Kim Magness
Series A 50,000 (6) * *
Series B 518,000 *
Liberty Media Group
Common Stock
Series A 12,500 (6) *
Series B 129,500 *
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 2,000 * *
TINTA Series B Stock -- --
TCI Group Common Stock Jerome H. Kern
Series A 2,050,000 (7) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 512,500 (7) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 50,000 (17) * *
TINTA Series B Stock -- --
TCI Group Common Stock Tony Coelho
Series A 152,800 (8) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 12,700 (8) *
Series B -- --
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,000 * *
</TABLE>
11
<PAGE> 17
<TABLE>
<CAPTION>
Amount and
Nature of Voting
Name of Beneficial Percent of Power
Title of Class Beneficial Owner Ownership Class (1)(2) (1)(2)
----------------------- ------------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
TINTA Series B Stock -- --
TCI Group Common Stock Robert A. Naify
Series A 23,688,860 (9) 3.9% 1.6%
Series B -- --
Liberty Media Group
Common Stock
Series A 5,922,192 (9) 3.9%
Series B -- --
Preferred Stock
Class B 1,000 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Common Stock Fred A. Vierra
Series A 581,473 (10) * *
Series B -- --
Liberty Media Group
Common Stock
Series A 141,260 (10) * *
Series B -- --
Preferred Stock
Class B 200 *
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 442,000 (11) * *
TINTA Series B Stock -- --
</TABLE>
12
<PAGE> 18
<TABLE>
<CAPTION>
Amount and
Nature of Voting
Name of Beneficial Percent of Power
Title of Class Beneficial Owner Ownership Class (1)(2) (1)(2)
----------------------- ------------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
TCI Group Common Stock Brendan R.
Series A Clouston 1,986,496 (12) * *
Series B 230 *
Liberty Media Group
Common Stock
Series A 221,623 (12) *
Series B 57 *
Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock -- -- --
TINTA Series B Stock -- --
TCI Group Common Stock All directors
Series A and executive 38,735,556 (1)(3)(4) 6.3% 41.1%
officers as a (5)(6)(7)
group (16 (8)(9)(10)
persons) (12)(13)
Series B 56,890,595 (1)(3)(4) 67.2%
Liberty Media Group
Common Stock
Series A 10,260,058 (1)(3)(4) 6.7%
(5)(6)(7)
(8)(9)(10)
(12)(13)
Series B 14,250,147 (1)(3)(4) 67.2%
Preferred Stock
Class B 439,719 (1)(4) 27.1%
Series C -- --
Series G -- --
Series H -- --
TINTA Series A Stock 1,103,200 (2)(11) 1.0% *
(14)(16)
(17)
TINTA Series B Stock -- --
</TABLE>
- -----------------------------
* Less than one percent.
(1) See note (1) to the table in "--Security Ownership of Certain Beneficial
Owners."
(2) Based on 106,960,873 shares of TINTA Series A Stock and 11,700,000
shares of TINTA Series B Stock outstanding on October 31, 1996.
(3) See notes (2), (3) and note (4) to the table in "--Security Ownership of
Certain Beneficial Owners."
(4) See notes (10) through (11) to the table in "--Security Ownership of
Certain Beneficial Owners."
13
<PAGE> 19
(5) Includes 1,524 shares of Series A TCI Group Common Stock and 381 shares
of Series A Liberty Media Group Common Stock held by Mr. Gallivan's
wife. Also, assumes the exercise in full of options granted to acquire
50,000 shares of Series A TCI Group Common Stock and 12,500 shares of
Series A Liberty Media Group Common Stock. Options to acquire 10,000
shares of Series A TCI Group Common Stock and 2,500 shares of Series A
Liberty Media Group Common Stock are exercisable as of October 31, 1996.
(6) Assumes the exercise in full of options granted to acquire 50,000 shares
of Series A TCI Group Common Stock and 12,500 shares of Series A Liberty
Media Group Common Stock. Options to acquire 10,000 shares of Series A
TCI Group Common Stock and 2,500 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996.
(7) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights to acquire 1,500,000 shares of Series A TCI
Group Common Stock and 375,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 700,000 shares and 175,000 shares of
Series A TCI Group Common Stock and Series A Liberty Media Group Common
Stock, respectively, are exercisable as of October 31, 1996.
Additionally, assumes the exercise in full of stock options granted in
tandem with stock appreciation rights to acquire 500,000 shares of
Series A TCI Group Common Stock and 125,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 100,000 shares of Series A
TCI Group Common Stock and 25,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Also assumes the
exercise in full of stock options granted to acquire 50,000 shares of
Series A TCI Group Common Stock and 12,500 shares of Series A Liberty
Media Group Common Stock. Options to acquire 10,000 shares of Series A
and 2,500 shares of Series A Liberty Media Group Common Stock are
exercisable as of October 31, 1996.
(8) Assumes the exercise in full of stock options granted to acquire 50,000
shares of Series A TCI Group Common Stock and 12,500 shares of Series A
Liberty Media Group Common Stock. Options to acquire 10,000 shares of
Series A TCI Group Common Stock and 2,500 shares of Series A Liberty
Media Group Common Stock are exercisable as of October 31, 1996.
Additionally assumes the exercise in full of stock options granted in
tandem with stock appreciation rights granted to acquire 100,000 shares
of Series A TCI Group Common Stock. Options to acquire 20,000 shares of
Series A TCI Group Common Stock are exercisable as of October 31, 1996.
(9) Mr. Robert Naify received notes, which are currently convertible into
22,446,926 shares of Series A TCI Group Common Stock and 5,611,731
shares of Series A Liberty Media Group Common Stock, as partial
consideration for the sale to TCI of the stock owned by him in United
Artists Communications, Inc. ("UACI"). Mr. Naify is also a co- trustee,
along with Mr. Naify's brother, Marshall, and their sister, of a trust
for the benefit of Marshall which holds additional notes convertible
into 341,606 shares of Series A TCI Group Common Stock and 85,401 shares
of Series A Liberty Media Group Common Stock. The number of shares
indicated as held by Mr. Naify assumes the conversion of these notes.
Also, assumes the exercise in full of options granted to acquire 50,000
shares of Series A TCI Group Common Stock and 12,500 shares of Series A
Liberty Media Group Common Stock. Options to acquire 10,000 shares of
Series A TCI Group Common Stock and 2,500 shares of Series A Liberty
Media Group Common Stock are exercisable as of October 31, 1996.
(10) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 100,000 shares
of Series A TCI Group Common Stock and 25,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 60,000 shares of Series A
TCI Group Common Stock and 15,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Also assumes the
exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1993 to acquire 100,000 shares of
Series A TCI Group Common Stock and 25,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 50,000 shares of Series A
TCI Group Common Stock and 12,500 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Additionally
assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1994 to acquire 200,000 shares
of Series A TCI Group Common Stock and 50,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 40,000 shares of Series A
TCI Group Common Stock and 10,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996.
14
<PAGE> 20
(11) Assumes the exercise in full of options granted in tandem with stock
appreciation rights in December of 1995 to acquire 400,000 shares of
TINTA Series A Stock. Options to acquire 80,000 shares of TINTA Series A
Stock are exercisable as of October 31, 1996. Additionally assumes the
vesting in full of 15,000 shares of TINTA Series A Stock which is
restricted. None of such stock is currently vested.
(12) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November of 1992 to acquire 300,000 shares
of Series A TCI Group Common Stock and 75,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 100,000 shares of Series A
TCI Group Common Stock and 25,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Additionally
assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November 1993 to acquire 375,000 shares of
Series A TCI Group Common Stock and 93,750 shares of Series A Liberty
Media Group Common Stock. Options to acquire 125,000 shares of Series A
TCI Group Common Stock and 31,250 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Also assumes the
exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 200,000 shares of
Series A TCI Group Common Stock and 50,000 shares of Series A Liberty
Media Group Common Stock. Options to acquire 40,000 shares of Series A
TCI Group Common Stock and 10,000 shares of Series A Liberty Media Group
Common Stock are exercisable as of October 31, 1996. Assumes the
exercise in full of stock options granted in tandem with stock
appreciation rights in December of 1995 to purchase 1,000,000 shares of
Series A TCI Group Common Stock. Options to acquire 200,000 shares of
Series A TCI Group Common Stock are exercisable as of October 31, 1996.
Additionally assumes the vesting in full of 100,000 shares of Series A
TCI Group Common Stock which is restricted. None of the stock is
currently vested.
(13) Certain executive officers and directors of TCI (10 persons, including
Messrs. Malone, Vierra and Clouston) hold options which were granted in
tandem with stock appreciation rights in November of 1992, to acquire an
aggregate of 3,025,000 shares of Series A TCI Group Common Stock and an
aggregate of 756,250 shares of Series A Liberty Media Group Common
Stock at purchase prices of $12.50 per share and $16.75 per share,
respectively. Options to acquire 1,735,000 shares of Series A TCI Group
Common Stock and 433,750 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996. Additionally certain
executive officers (8 persons including Messrs. Vierra and Clouston)
hold stock options granted in tandem with stock appreciation rights in
October and November of 1993 to acquire an aggregate of 1,100,000 shares
of Series A TCI Group Common Stock and an aggregate of 275,000 shares of
Series A Liberty Media Group Common Stock at purchase prices of $12.50
per share and $16.75 per share, respectively. Options to acquire 487,500
shares of Series A TCI Group Common Stock and 121,875 shares of Series A
Liberty Media Group Common Stock are exercisable as of October 31, 1996.
Also, certain executive officers and directors (10 persons including
Messrs. Fisher, Vierra and Clouston) hold stock options which were
granted in tandem with stock appreciation rights in November of 1994 to
acquire an aggregate of 1,450,000 shares of Series A TCI Group Common
Stock and an aggregate of 362,500 shares of Series A Liberty Media Group
Common Stock at purchase prices of $16.50 per share and 22.50 per share,
respectively. Options to acquire 290,000 shares of Series A TCI Group
Common Stock and 72,500 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996. Additionally, certain
executive officers and directors (11 persons, including Messrs.
Malone, Kern and Clouston) hold stock options which were granted,
pursuant to the 1994 Plan and the Incentive Plan, in tandem with stock
appreciation rights in December of 1995 to acquire an aggregate of
4,650,000 shares of Series A TCI Group Common Stock at $17.00 per share.
Options to acquire 930,000 shares of Series A TCI Group Common Stock are
exercisable as of October 31, 1996. Additionally, certain executive
officers and directors (6 persons, including Messrs. Malone and Kern)
hold stock options which were granted, pursuant to the 1994 Plan and the
Incentive Plan, in tandem with stock appreciation rights in December of
1995 to acquire an aggregate of 1,775,000 shares of Series A Liberty
Media Group Common Stock at a purchase price of $24.00 per share.
Options to acquire 355,000 shares of Series A Liberty Media Group Common
Stock are exercisable as of October 31, 1996. Also, certain executive
officers (7 persons, including Mr. Clouston) hold an aggregate of
240,000 shares of Series A TCI Group Common Stock which is restricted.
None of the shares are vested as of October 31, 1996. Certain executive
officers (2 persons) hold an aggregate of 20,000 shares of Series A
Liberty Media Group Common Stock which is restricted. None of the shares
are vested as of October 31, 1996. Mr. Kern holds an option to acquire
1,500,000 shares of Series A TCI Group Common Stock and 375,000 shares
of Series A Liberty Media Group Common Stock. Also, Messrs. Gallivan,
Kim Magness, Kern, Coelho and Naify hold options to purchase an
aggregate of 250,000 shares of Series A TCI Group Common Stock and an
aggregate of 62,500 shares of Series A Liberty Media Group Common Stock
at purchase prices of $16.50 per share and $22.50 per share,
respectively. Options to purchase 50,000 shares of Series A TCI Group
Common Stock and 12,500 shares of Series A Liberty Media Group Common
Stock are exercisable as
15
<PAGE> 21
of October 31, 1996. Also, Mr. Fisher holds options to purchase an
aggregate of 50,000 shares of Series A TCI Group Common Stock and an
aggregate of 12,500 shares of Series A Liberty Media Group Common Stock
at purchase prices of $19.25 per share and $25.25 per share,
respectively. None of such options are exercisable as of October 31,
1996. All of the aforementioned options with tandem stock appreciation
rights, options and restricted stock are reflected in this table
assuming the exercise or vesting in full of such securities.
(14) Two executive officers, including Mr. Vierra, hold options which were
granted in tandem with stock appreciation rights in December of 1995 to
acquire an aggregate of 450,000 shares of TINTA Series A Stock. Options
to acquire 90,000 shares of TINTA Series A Stock are exercisable as of
October 31, 1996. Additionally Mr. Vierra holds 15,000 shares of TINTA
Series A Stock which is restricted. None of the shares are currently
vested. Additionally, one executive officer holds options granted in
tandem with stock appreciation rights in December of 1995 by TCI to
acquire 50,000 shares of its TINTA Series A Stock. Options to acquire
10,000 shares of TINTA Series A Stock are exercisable as of October 31,
1996.
(15) The number of shares in the table does not include any shares held by
Kearns, of which Mr. Gallivan is an officer.
(16) Assumes the exercise in full of stock options granted in April of 1996
pursuant to the TINTA 1996 Nonemployee Director Stock Option Plan (the
"TINTA Director Stock Option Plan") to acquire 50,000 shares of TINTA
Series A Stock. None of these options are exercisable until April of
1997.
(17) Assumes the exercise in full of stock options granted in April of 1996
pursuant to the TINTA Director Stock Option Plan to acquire 50,000
shares of TINTA Series A Stock. None of these options are exercisable
until April of 1997.
No equity securities in any subsidiary of the Company, other than
directors' qualifying shares, are owned by any of the Company's executive
officers or directors, except for those shares of TINTA Series A Stock
reflected in the table above and except that Mr. Kim Magness, a director of the
Company, owns 31 shares of 12% Series C Cumulative Compounding Preferred Stock
("WestMarc Preferred Stock") of WestMarc Communications, Inc. ("WestMarc"), a
wholly-owned subsidiary of TCI. In addition, 948 shares of WestMarc Preferred
Stock are held in the Estate of Bob Magness, of which Donne Fisher, a director
of the Company, is a Co-Personal Representative. Dr. Malone, a director and an
executive officer of the Company, owns, as trustee for his children, 68 shares
of WestMarc Preferred Stock; Mr. Larry Romrell, an officer of the Company, owns
103 shares of WestMarc Preferred Stock and Mr. Jerome Kern, a director of the
Company, is deemed to have beneficial ownership over 116 shares of WestMarc
Preferred Stock owned by his wife, Diane D. Kern. In addition, in July 1996,
Brendan Clouston, an executive officer of the Company, was granted a restricted
stock award of 62 shares of WestMarc Preferred Stock.
16
<PAGE> 22
THE TELEPHONY GROUP STOCK PROPOSAL
GENERAL
The holders of the TCI Group Common Stock, the Liberty Media Group
Common Stock and the Series C Preferred Stock are being asked to consider and
approve the Telephony Group Stock Proposal, including adoption of the proposed
amendments to the Company's Restated Certificate of Incorporation (the "Company
Charter") set forth in Annex II hereto. The amendments would (i) authorize two
new series of Common Stock to consist of 750 million newly authorized shares
designated Series A Telephony Group Common Stock and 75 million newly
authorized shares designated Series B Telephony Group Common Stock, and a
corresponding increase in the total number of authorized shares of Common Stock
from 2,725,000,000 to 3,550,000,000, (ii) change certain rights and powers of
the TCI Group Common Stock and the Liberty Media Group Common Stock, and the
qualifications, limitations or restrictions thereof, to reflect the
authorization of the Telephony Group Common Stock and (iii) establish the
voting powers and relative, participating, optional and other special rights
and qualifications, limitations and restrictions of the Telephony Group Common
Stock. Capitalized terms used in the following description of the Telephony
Group Stock Proposal and not otherwise defined have the meanings ascribed to
them elsewhere in this Proxy Statement. See Annex I--Glossary of Certain
Defined Terms.
If the Telephony Group Stock Proposal is approved by stockholders, the
Company anticipates filing with the Secretary of State of the State of Delaware
a Certificate of Amendment to the Company Charter including the amendments in
the form set forth in Annex II hereto (the "Certificate of Amendment"). It is
currently anticipated that such filing will be made as promptly as practicable
after the Special Meeting. The Company Charter as proposed to be amended to
reflect the Telephony Group Stock Proposal is herein referred to as the
"Amended Charter." The Board of Directors may abandon the Telephony Group
Stock Proposal in whole, but not in part, without further action by the
stockholders, at any time prior to such filing. In addition, even if the
Certificate of Amendment is so filed, the Board of Directors may determine not
to authorize the issuance of any shares of the Telephony Group Common Stock, in
which case, in accordance with the provisions of the Certificate of Amendment,
the performance of the entire interest in the businesses comprising the
Telephony Group would continue to be reflected in the TCI Group Common Stock.
If the Telephony Group Stock Proposal is not approved, the Certificate of
Amendment will not be filed and no shares of Telephony Group Common Stock will
be authorized or issued.
The Telephony Group Common Stock, if issued, would be intended to
reflect the separate performance of the Telephony Group. The Telephony Group
would initially consist of the Company's interest in TCI Telephony Services,
Inc., a direct wholly owned subsidiary of the Company, its subsidiaries, their
respective assets, and all assets and liabilities of the Company and its
subsidiaries to the extent attributed to any of the foregoing assets, whether
or not such assets or liabilities are assets and liabilities of TCI Telephony
Services, Inc. (together with its consolidated subsidiaries (unless the context
indicates otherwise), "TCI Telephony"). The principal assets of TCI Telephony
are its investments in a series of partnerships formed to engage in the
business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residences
and businesses nationwide under the "Sprint" brand (the "PCS Ventures"), and
its investment in Teleport Communications Group, Inc., a Delaware corporation
("TCG"). The PCS Ventures include Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the partners of
each of which are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and the Company, and
PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries of
Sprint, Cox and the Company. The Company, through subsidiaries, has a 30%
interest as a partner in the Sprint PCS Partnerships and a 35.3% interest as a
partner in PhillieCo. TCG is a competitive local exchange carrier that offers a
wide range of local telecommunications services in major metropolitan markets
nationwide, primarily to businesses, long distance carriers and resellers, and
wireless communications companies. The Company has a 31.1% equity interest
(which represents a 36.5% voting interest) in TCG. Reference is made to Annex
III for a further description of the Telephony Group and to Annex V for the
combined financial statements of the Telephony Group. The Telephony Group would
also include such other assets of the TCI Group as the Board of Directors may
in the future determine to attribute to the Telephony Group and such other
businesses, assets and liabilities as the Company or any of its subsidiaries
may in the future acquire for the Telephony Group, as determined by the Board
of Directors. It is currently the intention of the Company that any businesses,
assets and liabilities so attributed to the Telephony Group in the future would
be businesses, assets and liabilities of, or related to, the interests of the
Company and its subsidiaries in the domestic wireless and wireline
communications businesses (the "Telephony Business").
As of the date of this Proxy Statement, the only interests of the
Company and its subsidiaries in the Telephony Business that are not attributed
to the Telephony Group are the business currently being conducted by the
Company's subsidiary, Western Tele-Communications, Inc. ("WTCI"), of providing
long-distance video, voice, data and other
17
<PAGE> 23
telecommunications services on a wholesale basis through its digital broadband
microwave network located in the Western United States (the "WTCI Business"),
and the Company's business, which is in the development stage, of providing
wireline residential telephony services to customers in certain of the
geographic areas served by the Company's cable television systems (the "ResTel
Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. TCI Telephony has the
right, but not the obligation, to acquire the ResTel Business from the Company
in whole or in part (by geographic area) for the appraised fair market value of
the ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that TCI Telephony is
at the time a subsidiary of the Company and the Company is then conducting such
business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or sales of
assets), in funds borrowed from the Company or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony
Group. Whether or not TCI Telephony will exercise its rights to acquire the
ResTel Business (in whole or in part) will depend upon a number of factors,
including the penetration rates for the service in the geographic area or areas
in which the service has been commercially launched (with the penetration rate
being the percentage that the number of subscribers to the service in such
geographic area represent of the homes technically capable of subscribing to
the service), the cost of providing the service at the penetration rate
achieved in that area, and the ability of TCI Telephony to fund the continued
development and ongoing operation of the ResTel Business in that area. With
regard to the WTCI Business, the Board of Directors has not yet determined
whether and for what consideration this business would be transferred to the
Telephony Group, other than that any such transfer would be at fair market
value (as determined by the Board of Directors).
The investments attributed to the Telephony Group are currently
included in the TCI Group, which also includes the Company's domestic cable
distribution business, telephony distribution and communications business
(other than the investments attributed to the Telephony Group), international
cable, telephony and programming businesses, technology/venture capital
business and any other business of the Company not attributed to the Liberty
Media Group. The following table presents selected financial data as of
September 30, 1996 and for the nine months then ended of the TCI Group
(inclusive of the businesses constituting the Telephony Group) and of the
Telephony Group, and the percentage of the TCI Group amounts represented by
those of the Telephony Group. The table should be read together with the more
detailed information and financial statements included in Annexes III and V.
<TABLE>
<CAPTION>
(amounts in millions)
Telephony
Tele- Group As A
Communications, Telephony Percentage of
Inc. TCI Group Group TCI Group
------------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1996:
Share of Losses
of Affiliates $ (308) (319) (111) 34.8%
Net Loss $ (438) (474) (64) 13.5%
SEPTEMBER 30, 1996:
Total Assets $30,575 28,160 1,120 4.0%
Debt $15,118 15,014 -- 0%
-------------------------------
</TABLE>
Upon effectiveness of the Telephony Group Stock Proposal, if approved,
the investments attributed to the Telephony Group will no longer be included in
the TCI Group; however, until shares of Telephony Group Common Stock are
issued, the TCI Group Common Stock will continue to be intended to reflect all
of the common stockholders' equity value of the Company attributable to the
Telephony Group, in addition to the separate performance of the Company's
domestic cable distribution
18
<PAGE> 24
business, telephony distribution and communications business (other than the
investments attributed to the Telephony Group), international cable, telephony
and programming businesses, technology/venture capital business and any other
business of the Company not attributed to either the Liberty Media Group or the
Telephony Group. The common stockholders' equity value of the Company
attributable to the Telephony Group that, at any relevant time, is attributed
to the TCI Group and, accordingly, not represented by outstanding Telephony
Group Common Stock is referred to as the "Inter-Group Interest." Prior to the
issuance of any shares of Telephony Group Common Stock, the Inter-Group
Interest of the TCI Group in the Telephony Group will be 100%. As shares of
Telephony Group Common Stock are issued and distributed or sold, the TCI
Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
If the Telephony Group Stock Proposal is approved, the Company does
not currently intend to distribute shares of Telephony Group Common Stock to
holders of either TCI Group Common Stock or Liberty Media Group Common Stock.
Instead, the Company presently proposes, subject to prevailing market and other
conditions, to file a registration statement with the Securities and Exchange
Commission ("SEC") for, among other financing options, the underwritten public
offering of shares of Series A Telephony Group Common Stock for cash. Any such
offering of shares of Series A Telephony Group Common Stock will be made only
by a prospectus included in such registration statement. Prior to the issuance
of any shares of Telephony Group Common Stock, the Board of Directors will
determine the number of shares of the aggregate 825 million authorized shares
of Telephony Group Common Stock that are deemed to represent the then Inter-
Group Interest (i.e., 100% of the common stockholders' equity value of the
Company attributable to the Telephony Group) and such number will represent the
initial Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest. The authorized but unissued shares of Telephony Group
Common Stock in excess of (i) the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest and (ii) any outstanding shares of
Telephony Group Common Stock as of any relevant time are referred to herein as
"Available Shares." It is currently contemplated that if shares of Series A
Telephony Group Common Stock are initially offered in a public offering, such
offering would be made from Available Shares and the net proceeds of such
offering would be allocated to the Telephony Group to be used to fund a portion
of its anticipated capital requirements and for general corporate purposes. The
timing and size of any such public offering and the price at which such shares
would be sold will be determined by the Board of Directors prior to such
offering, without further approval of stockholders, based upon then prevailing
market and other conditions.
Additional authorized shares of Telephony Group Common Stock could be
offered in the future, at the discretion of the Board of Directors, for cash in
one or more public offerings, with the proceeds credited either to the TCI
Group, to the extent of the Inter-Group Interest, in which case the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest would
be reduced accordingly and the Available Shares would be unaffected, or to the
Telephony Group, in which case the number of Available Shares would be reduced
accordingly and the Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be unaffected, or in part to the TCI Group (to
the extent of the Inter-Group Interest) and in part to the Telephony Group. See
"Inter-Group Interest in Telephony Group." For an illustration of certain
effects of the issuance of shares of Telephony Group Common Stock, see Annex
IV. The TCI Group's Inter-Group Interest in the Telephony Group would be
increased if a subsequent transfer of cash or other property from the TCI Group
to the Telephony Group is specifically designated by the Board of Directors as
being made to increase the Inter-Group Interest in the Telephony Group (in
contrast to transfers made for other consideration such as transfers as loans
or in purchase and sale transactions) or if outstanding shares of Telephony
Group Common Stock are retired or otherwise cease to be outstanding following
their purchase with funds attributed to the TCI Group. In addition to the
Inter-Group Interest, the Company holds $500 million of 6% cumulative
compounding redeemable preferred stock of TCI Telephony, which preferred stock
(the "Telephony Preferred Stock") is attributed to the TCI Group, and may
continue to advance funds to TCI Telephony in the form of loans.
The Company may from time to time, by action of its Board of
Directors, (i) offer shares of Telephony Group Common Stock for cash in one or
more public offerings, (ii) issue shares of Telephony Group Common Stock as
consideration for acquisitions or investments, (iii) issue shares of Telephony
Group Common Stock to employees of the Company pursuant to employee benefit
plans or (iv) issue shares of Telephony Group Common Stock for any other proper
corporate purpose. So long as sufficient authorized shares are available, the
timing, sequence, size and terms of such transactions would be determined by
the Board of Directors, without further approval of the stockholders, unless
deemed advisable by the Board of Directors or required by applicable law,
regulation or Nasdaq National Market requirements.
19
<PAGE> 25
BACKGROUND AND REASONS FOR THE TELEPHONY GROUP STOCK PROPOSAL
In late 1994, the Board of Directors of the Company determined to
restructure the Company's businesses into four separate business lines:
Domestic Cable and Communications; Programming; International Cable and
Programming; and Technology/Venture Capital (the "Business Line
Restructuring"). The Board of Directors believed that the division of the
Company's business into four distinct units would enable the Company to benefit
from the focused and entrepreneurial behavior which is more typical of a small
company, while also maintaining the benefits of scale which a large corporation
such as the Company is ordinarily able to achieve; would facilitate increased
investor understanding of the different lines of business; would enhance
opportunities to finance the operations of each division separately, where
appropriate, through financing tailored specifically to the capital needs of
the division in question; and could encourage strategic partnering with other
companies in the same line of business.
The Board of Directors also directed management to study various
methods of enhancing stockholder value. This directive resulted from the Board
of Directors' belief that the Company was undervalued by the capital markets,
in part because the market focused primarily upon the Company's dominant cable
television system business and did not give full value to the other diverse
assets held by the Company. The Board of Directors believed that overall
stockholder value would be enhanced if there were increased recognition in the
investment community of the Company's individual lines of business and the
value of the assets used in such businesses.
Management proceeded to review with its financial advisors potential
actions which the Company could undertake in order to increase market
recognition of the value of the Company's assets used in each of its lines of
business. Among the actions considered by management were a spin-off to the
Company's stockholders of all or part of one or more of its divisions, public
offerings of minority interests in one or more of the divisions and the
issuance of separate securities of the Company the economic attributes of which
would be defined by reference to the performance of one or more of its
divisions (commonly known as "tracking stock" or "targeted stock").
With respect to the Programming line of business, the Board of
Directors determined that the issuance of tracking stock came closest to
meeting the objectives of the Board of Directors. Accordingly, on February 8,
1995, the Board of Directors determined that the creation of the Liberty Media
Group Common Stock and the redesignation of the Company's then-existing common
stock into TCI Group Common Stock was in the best interests of the Company and
its stockholders and made a proposal to such effect to the Company's
stockholders (the "Liberty Media Group Proposal"). At the Company's annual
meeting held on August 3, 1995, the Company's stockholders approved the Liberty
Media Group Proposal, and shares of Liberty Media Group Common Stock were
distributed to holders of TCI Group Common Stock on August 10, 1995.
With respect to the Company's International Cable and Programming line
of business, which is included in the TCI Group, the Board of Directors
determined that a public offering of a minority interest in this division was
the appropriate course to take to achieve the Company's objectives. In July
1995, Tele-Communications International, Inc., the subsidiary of the Company
that holds the assets comprising the International Cable and Programming line
of business, completed an initial public offering of shares representing
approximately 18% of its common stock.
Consistent with the Board of Director's directive, management of the
Company has also been considering the applicability of certain of the
strategies proposed by its financial advisors to the Company's Domestic Cable
and Communications line of business. As an initial step, the operations of the
Domestic Cable and Communications line of business were further subdivided into
four strategic business units (each, an "SBU"): cable, telephony, internet
services and satellite. In November 1996, the Board of Directors declared a
distribution to the holders of TCI Group Common Stock of all of the outstanding
shares of common stock of TCI Satellite Entertainment, Inc., which then held
the assets of the satellite SBU. The distribution was effected on December 4,
1996, resulting in the spin off to stockholders of all of the Company's
interests in the business of distributing multichannel programming services
directly to consumers in the United States via digital medium power or high
power satellites, including the rental and sale of related customer premises
equipment (the "Digital Satellite Business"). Because the Digital Satellite
Business and the cable distribution business use distinct distribution networks
to provide the same or similar programming potentially to the same customer,
the separation of the two businesses through a spin off was both possible and
desirable.
In management's opinion, the businesses and investments included in
the telephony SBU do not pose the same competitive issues as those in the
satellite SBU; instead, they provide opportunities for packaging product
offerings that may attract new customers and assist in retaining existing
customers. In certain cases, such as the ResTel Business, the businesses
20
<PAGE> 26
included in the telephony SBU are intricately linked to the cable distribution
network and, with the exception of the WTCI Business and the investment in TCG,
such businesses and investments currently have large capital requirements and a
minimal amount of revenue. Management therefore proposed to the Board of
Directors that the Company issue a "tracking stock" or "targeted stock", the
economic attributes of which would be defined by reference to the performance
of the Telephony Group, which would initially be comprised of certain
investments of the telephony SBU, including the Company's interests in the PCS
Ventures and in TCG.
On December 4, 1996, the Board of Directors determined that the
Telephony Group Stock Proposal was in the best interests of the Company and its
stockholders and unanimously declared it advisable and recommended that the
Company's stockholders vote in favor of the Telephony Group Stock Proposal. The
Board of Directors believes that adoption of the Telephony Group Stock Proposal
is in the best interests of the Company and all of its stockholders for the
following reasons:
o It would provide the Company greater flexibility with regard to
raising capital for the Telephony Group's businesses and with
regard to making acquisitions and investments for the Telephony
Group, including strategic partnering transactions, independent of
the TCI Group, by using equity securities specifically related to
the Telephony Group.
o It would also provide the Company with additional means of
realizing value for the TCI Group from the businesses that
constitute the Telephony Group, through the sale of shares of
Telephony Group Common Stock attributed to the Inter-Group
Interest.
o The issuance and sale of Telephony Group Common Stock would result
in greater market recognition of the value of the Telephony Group,
thereby enhancing stockholder value over the long term.
o The issuance and sale of Telephony Group Common Stock would also
provide investors with the opportunity to invest in separate
securities intended specifically to reflect the Telephony Group and
would enable the Company to more effectively tailor employee
benefit plans to provide incentives to the employees in the
Telephony Group.
o The issuance and sale of Telephony Group Common Stock by the
Company would increase the equity of the Company, thus
strengthening its consolidated balance sheet and benefiting holders
of all series of Common Stock, including both TCI Group Common
Stock and Liberty Media Group Common Stock.
o It would permit the Company to obtain the foregoing benefits while
preserving the advantages of continued ownership of the businesses
of the Telephony Group by the Company and the benefits of being
part of a consolidated enterprise, including the absence of certain
costs associated with operation of separate, publicly held
corporations, and preserving certain restructuring options for the
Company in the future. Unlike the case with separate, publicly held
corporations, however, holders of Telephony Group Common Stock will
continue to be subject to all the risks associated with an
investment in the Company and all of its businesses, assets and
liabilities. See "Factors to be Considered--Stockholders of One
Company; Financial Effects on One Business Could Affect Other
Businesses."
The issuance of the Telephony Group Common Stock would change certain
of the rights, powers and privileges of the TCI Group Common Stock and the
Liberty Media Group Common Stock. See "Description of Telephony Group Common
Stock and Effects on Existing Common Stock."
In connection with its approval of the Telephony Group Stock Proposal,
the Board of Directors also evaluated the potentially adverse aspects of the
proposal, including the lack of assurance as to the degree to which the market
price of the Telephony Group Common Stock will reflect the separate performance
of the Telephony Group and the uncertainty as to the impact of the proposal on
the market price of the TCI Group Common Stock and the Liberty Media Group
Common Stock, as well as the fact that implementation of the Telephony Group
Stock Proposal will, to an extent, make the capital structure of the Company
more complex and may give rise to occasions when the interests of the holders
of TCI Group Common Stock, the holders of Liberty Media Group Common Stock and
the holders of Telephony Group Common Stock may diverge or appear to diverge.
See "Factors to be Considered--No Assurance as to Market Price" and "Factors to
be Considered--Potential Divergence of Interests; No Specific Procedures for
Resolution." The Board of Directors determined, however, that the positive
aspects of the Telephony Group Stock Proposal outweighed any potentially
adverse aspect.
21
<PAGE> 27
The Board of Directors will continue to review options that may be
available to the Company to realize additional value from the investments
attributed to the Telephony Group as well as the remaining businesses and
assets of the telephony SBU. In determining whether to pursue a particular
option, the Board of Directors, in exercising its business judgment, will
consider various factors, including market conditions, the financial and other
effects of any such option on the Company, the TCI Group, the Liberty Media
Group and the Telephony Group (each, a "Group" and, collectively, the "Groups")
and on the holders of the TCI Group Common Stock and the Liberty Media Group
Common Stock, and the preservation of its ability to engage in other
restructuring options at such time as such options become desirable.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TELEPHONY GROUP
STOCK PROPOSAL AND BELIEVES THAT ITS ADOPTION IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF THE TELEPHONY GROUP STOCK
PROPOSAL.
SUMMARY DESCRIPTION OF TELEPHONY GROUP STOCK PROPOSAL
The following summarizes the terms of the Telephony Group Common Stock
under the Amended Charter, the changes to the terms of the TCI Group Common
Stock and Liberty Media Group Common Stock under the Amended Charter and the
Inter- Group Interest. These summaries should be read together with the more
complete discussion set forth under "Description of Telephony Group Common
Stock and Effects on Existing Series of Common Stock", "Inter-Group Interest in
the Telephony Group" and the text of the Certificate of Amendment set forth in
Annex II.
TELEPHONY GROUP COMMON STOCK
Businesses . . . . . . . . . . . . . The Telephony Group consists of the
Company's investments, through TCI
Telephony, in certain entities engaged
in the domestic wireline and wireless
telephony distribution and
communications businesses, principally
its investments in the PCS Ventures and
in TCG. The Company could determine to
pursue future business opportunities
through one Group instead of the other
Groups, or jointly through more than one
of the Groups.
The Telephony Group Common Stock is
intended to reflect the separate
performance of the Telephony Group.
However, holders of Telephony Group
Common Stock will be subject to risks
associated with an investment in the
Company and all of its businesses,
assets and liabilities. There is no
assurance as to the degree to which the
market value of the Telephony Group
Common Stock will reflect the separate
performance of the Telephony Group.
Dividends and Share Distributions . . The Company's current policy of paying
no cash dividends on Common Stock would
also apply to the Telephony Group Common
Stock.
Dividends are payable out of the lesser
of assets of the Company legally
available therefor and the Telephony
Group Available Dividend Amount. If
dividends on the Telephony Group Common
Stock are paid, equivalent per share
dividends will be concurrently paid on
both the Series A Telephony Group Common
Stock and the Series B Telephony Group
Common Stock. For this purpose,
equivalent per share dividends include,
in the case of distributions of
securities, either distributions of
identical securities or distributions of
securities having differences in voting
rights and in certain related rights
(which differences are, in the case of
distributions of securities of the
Company or its subsidiaries (including
stock dividends consisting of Telephony
Group Common Stock), not greater than
the corresponding differences between
the Series A Telephony Group Common
Stock and the Series B Telephony Group
Common Stock).
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<PAGE> 28
Subject to the foregoing provisions,
dividends may be declared and paid on
the TCI Group Common Stock, the Liberty
Media Group Common Stock and/or the
Telephony Group Common Stock in equal or
unequal amounts, notwithstanding the
relationship between the TCI Group
Available Dividend Amount, the Liberty
Media Group Available Dividend Amount
and the Telephony Group Available
Dividend Amount, the respective amounts
of prior dividends paid on, or
liquidation rights of, the TCI Group
Common Stock, the Liberty Media Group
Common Stock or the Telephony Group
Common Stock or any other factor.
Any decision to pay dividends in the
future will depend on the financial
condition, results of operations and
business requirements of the Company as
a whole. In making a determination as to
the allocation of any future dividends
between the TCI Group Common Stock, the
Liberty Media Group Common Stock and the
Telephony Group Common Stock, the Board
of Directors expects to follow a policy
under which it will consider, among
other factors, the relative financial
condition, results of operations and
business requirements of the respective
Groups.
Dividend, Redemption and
Conversion Rights Applicable
on Disposition of Telephony
Group Assets . . . . . . . . . . . . . .If the Company disposes of all or
substantially all of the properties and
assets of the Telephony Group (i.e., 80%
or more on a current market value
basis), other than in a transaction in
which the Company receives primarily
equity securities of an entity engaged
or proposing to engage primarily in a
similar or complementary business and
other than in connection with the
disposition of all or substantially all
of the properties and assets of the
Company, the Company is required, at its
option, either to (i) distribute to
holders of the Telephony Group Common
Stock an amount in cash and/or
securities or other property equal to
their proportionate interest in the Net
Proceeds of such disposition, either by
special dividend or by redemption of all
or part of the outstanding shares of
Telephony Group Common Stock, or (ii)
convert each outstanding share of Series
A Telephony Group Common Stock and
Series B Telephony Group Common Stock
into a number (or fraction) of shares of
Series A TCI Group Common Stock or
Series B TCI Group Common Stock,
respectively, equal in each case to 110%
of the average daily ratio over the
ten-Trading Day period beginning on the
16th Trading Day after consummation of
the transaction of the Market Value of
one share of Series A Telephony Group
Common Stock to the Market Value of one
share of Series A TCI Group Common
Stock. The proportionate interest in the
Net Proceeds of a disposition that would
be distributed to holders of Telephony
Group Common Stock would be based on the
Telephony Group Outstanding Interest
Fraction (a measure of the percentage
interest in the Telephony Group
represented by outstanding shares of
Telephony Group Common Stock). Such a
partial redemption could be effected pro
rata among the holders of such shares or
by such other method as may be
determined by the Board of Directors to
be equitable.
Conversion at Option
of Holder . . . . . . . . . . . . . Shares of Series B Telephony Group
Common Stock will be convertible at any
time at the option of the holder only
into the same number of shares of Series
A Telephony Group Common Stock.
Conversion at Option
of Company . . . . . . . . . . . . . The Company may, in the sole discretion
of its Board of Directors, elect at any
time to convert each outstanding share
of Telephony Group Common Stock into
23
<PAGE> 29
a number (or fraction) of shares of TCI
Group Common Stock equal to the ratio of
the value (as determined on the basis of
appraisals performed by investment
banking firms) of one share of Telephony
Group Common Stock to the average Market
Value over a 20-Trading Day period prior
to the date such appraisal process is
initiated of one share of Series A TCI
Group Common Stock. In such a case,
shares of Series A Telephony Group
Common Stock would be converted into
Series A TCI Group Common Stock and
shares of Series B Telephony Group
Common Stock would be converted into
Series B TCI Group Common Stock.
Redemption in Exchange
for Stock of Subsidiary . . . . . . . The Company could at any time, in the
sole discretion of its Board of
Directors, redeem (without premium) all
outstanding shares of Telephony Group
Common Stock in exchange for a
proportionate interest in the
outstanding shares of any one or more
Qualifying Subsidiaries that hold all of
the assets and liabilities attributed to
the Telephony Group. The percentage of
the stock of the Qualifying Subsidiary
or Qualifying Subsidiaries owned by the
Company that is distributable in the
redemption would be based on the
Telephony Group Outstanding Interest
Fraction. In such a case, the Board of
Directors could elect to distribute,
with respect to each such subsidiary,
either a single class of subsidiary
stock or two classes of subsidiary stock
having relative voting rights and
differences in certain related rights
not greater than the corresponding
differences between the Series A
Telephony Group Common Stock and the
Series B Telephony Group Common Stock. A
"Qualifying Subsidiary" for this purpose
is a subsidiary of the Company that is
either wholly owned, directly or
indirectly, by the Company or in which
the Company's direct or indirect
ownership and voting interest is
sufficient to satisfy the requirements
of the Internal Revenue Service (the
"Service") for a tax free distribution
of the Company's interest in such
subsidiary to holders of Telephony Group
Common Stock.
Voting Rights . . . . . . . . . . . The Series A Telephony Group Common
Stock will be entitled to one vote per
share and the Series B Telephony Group
Common Stock will be entitled to ten
votes per share, voting as one class
with the TCI Group Common Stock, the
Liberty Media Group Common Stock and any
Preferred Stock entitled to vote, except
to the extent separate class or series
votes are required by law or the Amended
Charter. The Amended Charter does not
provide for any rights for the Telephony
Group Common Stock to vote separately
from the TCI Group Common Stock and the
Liberty Media Group Common Stock.
Liquidation . . . . . . . . . . . Holders of shares of Series A Telephony
Group Common Stock and Series B
Telephony Group Common Stock will be
entitled to share (on an equal per share
basis) a portion of the funds of the
Company remaining for distribution to
its common stockholders based on the
average daily ratio over a period of 20
Trading Days prior to the announcement
of the liquidation event of the
aggregate Market Capitalization of the
Telephony Group Common Stock to the
aggregate Market Capitalization of the
TCI Group Common Stock, the Liberty
Media Group Common Stock and the
Telephony Group Common Stock.
Nasdaq National Market Symbols . . "______" and "______."
24
<PAGE> 30
EFFECTS ON TCI GROUP COMMON STOCK
AND LIBERTY MEDIA GROUP COMMON STOCK
Businesses . . . . . . . . . . . . Under the Telephony Group Stock
Proposal, the TCI Group will consist of
the Company's businesses and assets not
included in either the Liberty Media
Group or the Telephony Group, including
domestic cable distribution, the ResTel
Business and the WTCI Business,
international cable, telephony and
programming and technology/venture
capital. The TCI Group will also
include the Inter-Group Interest in the
Telephony Group and any Inter-Group
Interest that may hereafter be created
in the Liberty Media Group. The
businesses included in the Liberty
Media Group will not change under the
Telephony Group Stock Proposal.
Dividends and Share Distributions . Because the businesses included in the
Telephony Group are currently included
in the TCI Group, the Telephony Group
Stock Proposal will affect the
determination of, and could reduce the
amount available for dividends under,
the TCI Group Available Dividend
Amount. Under the Telephony Group Stock
Proposal, share distributions on the
TCI Group Common Stock consisting of
Telephony Group Common Stock are
permitted to the extent of the Number
of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest,
while share distributions on the
Liberty Media Group Common Stock
consisting of Telephony Group Common
Stock are not permitted.
Liquidation . . . . . . . . . . . Holders of shares of Series A TCI Group
Common Stock and Series B TCI Group
Common Stock are currently entitled to
share (on an equal per share basis) a
portion of the funds of the Company
remaining for distribution to its
common stockholders based on the
average daily ratio over a period of 20
Trading Days prior to the announcement
of the liquidation event of the
aggregate Market Capitalization of the
TCI Group Common Stock to the aggregate
Market Capitalization of the TCI Group
Common Stock and the Liberty Media
Group Common Stock. If the Telephony
Group Stock Proposal is approved and
shares of Telephony Group Common Stock
are issued, the formula basis on which
holders of shares of TCI Group Common
Stock share in the funds remaining for
distribution to common stockholders
will take into account the Market
Capitalization of the Telephony Group
Common Stock. Similarly, holders of
shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media
Group Common Stock will be entitled to
share (on an equal per share basis) a
portion of the funds of the Company
remaining for distribution to its
common stockholders based on the
average daily ratio over a period of 20
Trading Days prior to the announcement
of the liquidation event of the
aggregate Market Capitalization of the
Liberty Media Group Common Stock to the
aggregate Market Capitalization of the
TCI Group Common Stock, the Liberty
Media Group Common Stock and the
Telephony Group Common Stock.
INTER-GROUP INTEREST IN THE TELEPHONY GROUP
Currently, all of the investments attributed to the Telephony Group
are part of the TCI Group and the Company's equity in and share of losses of
the entities in which it holds such investments are reflected in their entirety
in the combined financial statements of the TCI Group. Upon effectiveness of
the Telephony Group Stock Proposal, these investments will cease to be included
in the TCI Group; however, until shares of Telephony Group Common Stock are
issued, the TCI Group Common Stock will continue to be intended to reflect all
of the common stockholders' equity value of the Company attributed to the
Telephony Group -- i.e., the Inter-Group Interest of the TCI Group in the
Telephony Group will initially be 100% -- in addition to the separate
performance of all businesses of the Company not included in the Liberty Media
Group or the Telephony Group. At such time as shares of Telephony Group Common
Stock are first issued, the share of losses of and the equity in the
investments attributed to the Telephony Group will be reflected in the separate
combined financial statements of the Telephony Group and will cease to be
reflected in the combined financial statements of the TCI Group, except to the
extent
25
<PAGE> 31
of the then Inter-Group Interest, as adjusted to reflect such issuance. Except
for the financial statements included in this Proxy Statement, the Company does
not intend to provide separate combined financial statements for the Telephony
Group until shares of Telephony Group Common Stock are first offered or sold.
The amount of the Inter-Group Interest in the Telephony Group at any
point in time would be expressed in terms of the "Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest," which is intended to
provide a measure of the Inter-Group Interest in the Telephony Group on a basis
comparable to an investment in shares of Telephony Group Common Stock. Prior to
the issuance of any shares of Telephony Group Common Stock, the Board of
Directors will designate the number of shares of the aggregate 825 million
authorized shares of Telephony Group Common Stock that are deemed to represent
the then Inter-Group Interest (i.e., 100% of the common stockholders' equity
value of the Company attributable to the Telephony Group), and such number will
represent the initial Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest. Authorized shares of Telephony Group Common Stock
in excess of the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest will be available for issuance as additional equity for
the Telephony Group. If shares of Telephony Group Common Stock are sold in an
initial public offering, it is currently the intention of the Company that the
shares offered would not include shares attributed to the Inter-Group
Interest. As shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock are offered and sold from time to time by the
Company, the Company will identify (i) the number of shares of Telephony Group
Common Stock offered and sold that represent the Inter-Group Interest, if any,
the sale of which shares will reduce the Number of Shares Issuable with Respect
to the Telephony Group Inter-Group Interest on a share-for-share basis and the
net proceeds of which sale will be reflected entirely in the combined financial
statements of the TCI Group, and (ii) the number of such shares that represent
an additional equity interest in the Telephony Group, the sale of which shares
will reduce the Available Shares and the net proceeds of which sale will be
reflected entirely in the combined financial statements of the Telephony Group.
See "Inter-Group Interest in the Telephony Group." In addition to the net
proceeds from the sale of the number of shares of Telephony Group Common Stock
deemed to constitute all or part of the Inter-Group Interest, the TCI Group
combined financial statements will be credited, and the Telephony Group
financial statements will be charged, with an amount equal to the product of
(i) the aggregate amount of any dividend or other distribution paid (other than
in shares of Telephony Group Common Stock as contemplated below) or distributed
in respect of outstanding Telephony Group Common Stock, times (ii) a fraction,
the numerator of which is the Telephony Group Inter- Group Interest Fraction
and the denominator of which is the Telephony Group Outstanding Interest
Fraction. For illustrations of the effects of the issuance of shares of
Telephony Group Common Stock, see Annex IV.
The TCI Group's Inter-Group Interest in the Telephony Group would be
increased if a subsequent transfer of cash or other property from the TCI Group
to the Telephony Group is specifically designated by the Board of Directors as
being made to increase the Inter-Group Interest in the Telephony Group (in
contrast to transfers made for other consideration such as transfers as loans
or in purchase and sale transactions) or if outstanding shares of Telephony
Group Common Stock are retired or otherwise cease to be outstanding following
their purchase with funds attributed to the TCI Group. In structuring the terms
of the Telephony Group Stock Proposal, the Board of Directors determined that
the Telephony Group should not be enabled to create an interest in either the
TCI Group or the Liberty Media Group corresponding to the Inter-Group Interest,
and that the Liberty Media Group should not be enabled to create an interest in
the Telephony Group corresponding to the Inter-Group Interest. In making these
determinations, the Board of Directors concluded that an interest corresponding
to the Inter-Group Interest held by the Telephony Group in either the TCI Group
or the Liberty Media Group could influence adversely the ability of the
Telephony Group Common Stock to reflect the separate performance of the
Telephony Group, and that an interest corresponding to the Inter-Group Interest
held by the Liberty Media Group in the Telephony Group could influence
adversely the ability of the Liberty Media Group Common Stock to reflect the
separate performance of the Liberty Media Group.
In general, if the TCI Group's Inter-Group Interest in the Telephony
Group is increased by a transfer of funds or other assets from the TCI Group to
the Telephony Group, the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would be increased by an amount determined
by dividing the amount of funds or value of the assets transferred by the
Market Value of a share of Series A Telephony Group Common Stock as of the date
of such transfer. Any decrease in the Number of Shares Issuable with Respect to
the Telephony Group Inter-Group Interest resulting from a transfer of funds or
other assets from the Telephony Group to the TCI Group determined by the Board
of Directors to be made in respect of such a decrease would be similarly
calculated. To the extent outstanding shares of Telephony Group Common Stock
are retired or otherwise cease to be outstanding following their purchase with
funds attributed to the TCI Group, the Number of Shares Issuable with Respect
to the Telephony Group Inter-Group Interest would increase on a share-for-share
basis. Shares of Telephony Group Common Stock purchased with funds attributed
to the TCI Group which remain outstanding (as a result
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<PAGE> 32
of being held by a subsidiary included in the TCI Group) would not increase its
Inter-Group Interest in the Telephony Group but would represent an outstanding
interest in the common stockholders' equity value of the Company attributable
to the Telephony Group. Similarly, shares of Telephony Group Common Stock
purchased with funds attributed to the Liberty Media Group which remain
outstanding would not create an interest in the Telephony Group corresponding
to the Inter- Group Interest, but would represent an outstanding interest in
the common stockholders' equity value of the Company attributable to the
Telephony Group. The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest will also (a) be adjusted from time to time as
appropriate to reflect (i) subdivisions (by stock split or otherwise) and
combinations (by reverse stock split or otherwise) of the Telephony Group
Common Stock, (ii) dividends or distributions payable in shares of Telephony
Group Common Stock to holders of Telephony Group Common Stock and (iii)
reclassifications of Telephony Group Common Stock and (b) be decreased by the
number of shares of Telephony Group Common Stock (i) issued upon conversion or
exercise of Convertible Securities that are not attributed to the Telephony
Group or (ii) issued by the Company as a dividend or distribution or by
reclassification or exchange to holders of TCI Group Common Stock. The Number
of Shares Issuable with Respect to the Telephony Group Inter-Group Interest
would not be represented by outstanding shares of Telephony Group Common Stock
and would have no voting rights. In addition to the Inter-Group Interest, the
Company holds $500 million of Telephony Preferred Stock, which is attributed to
the TCI Group, and may continue to advance funds in the form of loans to TCI
Telephony.
FACTORS TO BE CONSIDERED
Stockholders should consider the following factors, in addition to the
other information contained elsewhere in this Proxy Statement and the Annexes
hereto, in connection with the Telephony Group Stock Proposal.
STOCKHOLDERS OF ONE COMPANY; FINANCIAL EFFECTS ON ONE BUSINESS COULD AFFECT
OTHER BUSINESSES
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the Groups for the purpose of preparing the
combined financial statements of the TCI Group, the Liberty Media Group and the
Telephony Group, the change in the capital structure of the Company
contemplated by the Telephony Group Stock Proposal will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group Common
Stock and Telephony Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, any net losses of any
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common
Stock, and dividends on, or certain repurchases of, Preferred Stock, will
reduce funds of the Company legally available for the payment of dividends on
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group should be read in
conjunction with the consolidated financial statements of the Company.
If the Telephony Group Stock Proposal is approved and shares of
Telephony Group Common Stock are issued, the Company will provide to all
holders of TCI Group Common Stock, Liberty Media Group Common Stock and
Telephony Group Common Stock financial statements, management's discussion and
analysis and other relevant information for the Company, for the Liberty Media
Group so long as the Liberty Media Group Common Stock is outstanding, for the
Telephony Group so long as the Telephony Group Common Stock is outstanding and
for the TCI Group so long as either the Liberty Media Group Common Stock or the
Telephony Group Common Stock is outstanding. The combined financial statements
of each Group will principally reflect the combined financial position, results
of operations and cash flows of the businesses and investments included
therein. However, each Group's financial information could also include
allocated portions of the individual assets and liabilities that are not
separately identified with the operations of a specific Group.
LIMITED SEPARATE STOCKHOLDER RIGHTS; EFFECTS ON VOTING POWER
Under the Telephony Group Stock Proposal, holders of Telephony Group
Common Stock would not be provided any rights specifically related to the
Telephony Group or have any right to vote on matters as a separate class, other
than (i) as set
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<PAGE> 33
forth in the provisions relating to dividend and liquidation rights and
requirements for mandatory dividend, redemption or conversion of Telephony
Group Common Stock upon the disposition of all or substantially all of the
properties and assets of the Telephony Group as described under "Description of
Telephony Group Common Stock and Effects on Existing Common Stock--Conversion
and Redemption" and (ii) separate voting rights in limited circumstances as
required by the General Corporation Law of the State of Delaware (the "DGCL").
Separate meetings for the holders of Telephony Group Common Stock would not be
held.
Under the Telephony Group Stock Proposal, holders of TCI Group Common
Stock, Liberty Media Group Common Stock, Telephony Group Common Stock and any
Preferred Stock having general voting rights would vote as one class on all
matters coming before any meeting of stockholders and would not have any
separate class voting rights except in limited circumstances as required by the
DGCL. Under the DGCL, the holders of the outstanding shares of a class are
entitled to vote as a class upon a proposed amendment to a corporation's
certificate of incorporation, whether or not entitled to vote on such amendment
by the certificate of incorporation, if the amendment would alter or change the
powers, preferences or special rights of such class so as to affect them
adversely. For this purpose, if a proposed amendment would alter or change the
powers, preferences or special rights of one or more series of any class so as
to affect them adversely, but would not so affect the entire class, then only
the shares of the series so affected by the amendment would be entitled to vote
as a separate class on the amendment. Accordingly, a proposed amendment the
adverse effect of which on the powers, preferences or rights of any series of
Common Stock does not differ from its adverse effect on the powers, preferences
or rights of any other series of Common Stock would not entitle such series to
vote as a class separately from the other series.
Certain matters on which holders of TCI Group Common Stock, Liberty
Media Group Common Stock and Telephony Group Common Stock would vote together
as a single class could involve a divergence or the appearance of a divergence
of interests between the holders of such series of Common Stock. For example,
the Amended Charter does not require that a merger or consolidation of the
Company requiring the approval of the Company's stockholders be approved by a
separate vote of holders of any series of Common Stock, and Delaware law
requires such approval only in certain circumstances. As a result, if holders
of any one or more series of Common Stock that possess the requisite voting
power vote to approve the merger or consolidation, then the merger or
consolidation could be consummated even if the holders of a majority of some
other series of Common Stock vote against the merger or consolidation. See
"--Potential Divergence of Interests; No Specific Procedures for
Resolution--Allocation of Proceeds of Mergers or Consolidations." Immediately
following the initial issuance of any shares of Telephony Group Common Stock,
the combined voting power of the Series A TCI Group Common Stock and Series B
TCI Group Common Stock would represent a majority of the voting power of all
classes and series entitled to vote in the election of directors.
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Common Stock will have one vote per share and the
Series B Telephony Group Common Stock will have ten votes per share. The Series
A TCI Group Common Stock and Series A Liberty Media Group Common Stock will
continue to have one vote per share and the Series B TCI Group Common Stock and
Series B Liberty Media Group Common Stock will continue to have ten votes per
share. See "Description of Telephony Group Common Stock and Effects on
Existing Common Stock--Voting Rights."
POTENTIAL DIVERGENCE OF INTERESTS; NO SPECIFIC PROCEDURES FOR RESOLUTION
The existence of the Telephony Group Common Stock may give rise to
occasions when the interests of the holders of Telephony Group Common Stock and
the holders of either TCI Group Common Stock or Liberty Media Group Common
Stock, or both, may diverge or appear to diverge. As further discussed below,
examples include, among others, determinations by the Board of Directors to (i)
convert each outstanding share of Telephony Group Common Stock into a fraction
of a share of TCI Group Common Stock, (ii) approve the disposition of all or
substantially all of the properties and assets of the Telephony Group, (iii)
allocate consideration to be received by holders of Common Stock in connection
with a merger or consolidation involving the Company among holders of different
series of Common Stock, (iv) allocate resources and financial support to or
pursue business opportunities or operational strategies through one Group
instead of one or more of the other Groups, (v) allocate the proceeds of
issuances of Telephony Group Common Stock either to the TCI Group in respect of
a reduction in its Inter-Group Interest in the Telephony Group or to the equity
of the Telephony Group, (vi) pay or omit dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common Stock
or (vii) approve transactions involving the transfer of funds or assets from
one Group to one or more of the other Groups or make other operational or
financial decisions with respect to one Group that could be considered to be
detrimental to one or more of the other Groups. Other than as described under
"Management and Allocation Policies," no specific procedures have been adopted
for consideration of matters involving a divergence of interests among the
holders of TCI Group Common Stock,
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<PAGE> 34
Liberty Media Group Common Stock and Telephony Group Common Stock. Rather than
develop additional specific procedures in advance, the Board of Directors
intends to exercise its judgment from time to time, depending on the
circumstances, as to how best to obtain information regarding the divergence
(or potential divergence) of interests, under what circumstances to seek the
assistance of outside advisers, whether a committee of the Board of Directors
should be appointed to address the matter and how to assess which available
alternative is in the best interests of the Company and all of its
stockholders. The Board of Directors believes the advantages of retaining
flexibility in determining how best to fulfill its responsibilities in such
circumstances as they may arise outweigh any perceived advantages from adopting
additional specific procedures in advance.
Optional Conversion of Telephony Group Common Stock into TCI Group
Common Stock. The Board of Directors may determine to convert each outstanding
share of Series A Telephony Group Common Stock into a fraction of a share of
Series A TCI Group Common Stock and each outstanding share of Series B
Telephony Group Common Stock into a fraction of a share of Series B TCI Group
Common Stock, in each case determined based upon the ratio of the value (as
determined on the basis of appraisals performed by investment banking firms) of
one share of Telephony Group Common Stock to the average Market Value over a
20-Trading Day period prior to the date such appraisal process is initiated of
one share of Series A TCI Group Common Stock. Such a conversion could be
effected at any time, including at a time when the value of one share of
Telephony Group Common Stock determined by appraisal differs significantly from
the market value of the Telephony Group Common Stock reflected in the trading
markets, or at a time when the Market Value of the TCI Group Common Stock used
in the determination of the conversion ratio reflects what might be considered
an overvaluation or undervaluation. Basing the conversion ratio on an appraised
value determination for the Telephony Group Common Stock and a trading market
valuation for the TCI Group Common Stock could result in the conversion ratio
being significantly different from that which would have resulted if the same
measure were used for the valuation of both the TCI Group Common Stock and the
Telephony Group Common Stock. For example, a conversion could be considered
dilutive of the interests of the holders of the TCI Group Common Stock if the
Market Value of the TCI Group Common Stock is less than the valuation of the
TCI Group Common Stock that would have resulted if a similar appraisal
procedure to that used in the determination of the value of the Telephony Group
Common Stock were used. Such a conversion would also have the effect of
precluding holders of Telephony Group Common Stock from retaining their
investment in a security intended to reflect separately the business of the
Telephony Group.
Disposition of Group Assets. As long as the assets of a Group continue
to represent less than substantially all of the properties and assets of the
Company, the Board of Directors may approve sales and other dispositions of any
amount of the properties and assets of such Group without stockholder approval,
because under the DGCL and the Amended Charter stockholder approval is required
only for a sale or other disposition of all or substantially all of the
properties and assets of the entire Company. The Amended Charter, however,
contains provisions which, in the event of a Disposition of all or
substantially all of the properties and assets of the Telephony Group in one
transaction or a series of related transactions, other than in a transaction in
which the Company receives primarily equity securities of an entity engaged or
proposing to engage primarily in a similar or complementary business, and other
than in connection with the disposition of all or substantially all of the
assets of the entire Company, require the Company, at its option, either to (i)
distribute by dividend or redemption to the holders of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock an amount in cash and/or
securities or other property equal to their proportionate interest in the Net
Proceeds of such disposition or (ii) convert outstanding shares of Series A
Telephony Group Common Stock into a number (or fraction) of shares of Series A
TCI Group Common Stock and outstanding shares of Series B Telephony Group
Common Stock into a number (or fraction) of shares of Series B TCI Group Common
Stock, equal in each case to 110% of the average daily ratio of the Market
Value of a share of Series A Telephony Group Common Stock to the Market Value
of a share of Series A TCI Group Common Stock over a specified period following
such Disposition. The provisions of the Amended Charter do not require the
Board of Directors to select the option which would result in the distribution
with the highest value to the holders of the Telephony Group Common Stock or
with the smallest effect on the TCI Group Common Stock. The Amended Charter
does not require the Company to take such actions upon sales or other
dispositions of less than substantially all of the properties and assets of the
Telephony Group or upon two or more unrelated sales or other dispositions which
together constitute the sale of substantially all of the properties and assets
of the Telephony Group. In addition, although the Company Charter currently
contains, and the Amended Charter will continue to contain, comparable
provisions relating to a disposition of all or substantially all of the
properties and assets of the Liberty Media Group, the Company Charter currently
does not contain, and the Amended Charter will continue not to contain,
comparable provisions relating to a disposition of all or substantially all of
the properties and assets of the TCI Group. See "Description of Telephony Group
Common Stock and Effects on Existing Common Stock--Conversion and Redemption."
The appropriate disposition of proceeds in the latter case would be subject to
determination by the Board of Directors in accordance with the Amended Charter,
approved allocation policies and in the exercise of its fiduciary duties. See
"--Fiduciary Duties of the Board of Directors Are to All Stockholders
Regardless of Class or Series."
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Allocation of Proceeds of Mergers or Consolidations . The Amended
Charter does not contain any provisions governing how consideration to be
received by the Company's stockholders in connection with a merger or
consolidation involving the Company (in which the Common Stock is to be
converted into other securities, cash or other property) is to be allocated
among holders of TCI Group Common Stock, Liberty Media Group Common Stock and
Telephony Group Common Stock. In any such merger or consolidation, the
allocation of consideration would be determined by the Board of Directors. See
"--Limited Separate Stockholder Rights; Effects on Voting Power."
Allocation of Resources and Financial Support; Pursuit of Business
Opportunities or Operational Strategies. The Board of Directors could from time
to time allocate resources and financial support to or pursue business
opportunities or operational strategies through one Group instead of the other
Groups. The decision to allocate resources and financial support to one Group
may adversely affect the ability of the other Groups to obtain funds sufficient
to implement their business strategies. If the ResTel Business is transferred
to the Telephony Group, both the Telephony Group and the TCI Group would be
using the same hybrid fiber-coaxial plant ("HFC Plant") to provide services to
potentially the same customers. In such circumstances, it would be likely that
the Board of Directors of the Company will be presented with opportunities that
are not clearly either "telephony" services or "cable television" services
within the traditional meaning of such terms and which could be pursued through
either the TCI Group or the Telephony Group, or jointly through both Groups.
See "Management and Allocation Policies."
Allocation of Proceeds Upon Issuance of Telephony Group Common Stock.
To the extent of the TCI Group's Inter-Group Interest in the Telephony Group at
the time of any sale of shares of Telephony Group Common Stock, the Board of
Directors would determine the allocation of the proceeds of such sale between
the TCI Group and the Telephony Group. In such case, the Board of Directors
could allocate up to 100% of the net proceeds of the sale of Telephony Group
Common Stock to the TCI Group or to the Telephony Group, and such net proceeds
would be reflected entirely on the combined financial statements of the Group
to which such proceeds were allocated. Any such allocation of net proceeds to
the TCI Group would reduce its Inter-Group Interest in the Telephony Group.
No Assurance of Payment of Dividends. The Company has never paid cash
dividends on its Common Stock. The Board of Directors does not currently intend
to pay cash dividends on the TCI Group Common Stock, the Liberty Media Group
Common Stock or, if the Telephony Group Stock Proposal is approved and shares
of Telephony Group Common Stock are issued, the Telephony Group Common Stock.
Any dividends on the Telephony Group Common Stock which may be declared by the
Board of Directors will be payable out of the lesser of (i) the funds of the
Company legally available for such purpose, which are determined on the basis
of the entire Company, and (ii) the Telephony Group Available Dividend Amount.
Such dividends are further subject to the prior payment of dividends on
outstanding shares of any class or series of capital stock of the Company with
preferential dividend provisions. Any net losses of the Company (without regard
to whether such losses arose from any specific Group), and any dividends or
distributions on, or repurchases of, the TCI Group Common Stock, the Liberty
Media Group Common Stock or the Telephony Group Common Stock, and dividends on,
and certain repurchases of, Preferred Stock, will reduce the funds of the
Company legally available for payment of dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Telephony Group Common
Stock. Subject to limitations of the DGCL and the Amended Charter, the Board of
Directors may declare and pay dividends on the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Telephony Group Common Stock in equal
or unequal amounts, or may decide not to declare and pay such dividends,
notwithstanding the relationship between the TCI Group Available Dividend
Amount, the Liberty Media Group Available Dividend Amount and the Telephony
Group Available Dividend Amount, the respective amounts of prior dividends paid
on, or liquidation rights of, the TCI Group Common Stock, the Liberty Media
Group Common Stock or the Telephony Group Common Stock or any other factor. See
"Description of Telephony Group Common Stock and Effects on Existing Common
Stock--Dividends" and "Dividend Policy."
Operational and Financial Decisions. The Board of Directors could from
time to time make operational and financial decisions that affect the Groups
disproportionately, such as transfers of funds or assets among the Groups, the
allocation of funds for capital expenditures, the determination to expand into
new areas and the allocation of resources and personnel that may be suitable
for more than one Group. See "Management and Allocation Policies." The
decision to provide funds to one Group may adversely affect the ability of the
other Groups to obtain funds sufficient to implement their business strategies.
For further discussion of potential divergence of interests arising from
financial decisions, see "--Transfer of Funds among Groups; Equity
Contributions from the TCI Group."
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FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS ARE TO ALL STOCKHOLDERS REGARDLESS
OF CLASS OR SERIES
Under Delaware law, the Board of Directors has a duty to act with due
care and in the best interests of all the Company's stockholders, including the
holders of TCI Group Common Stock, Liberty Media Group Common Stock and
Telephony Group Common Stock. The existence of the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Telephony Group Common Stock may give
rise to occasions when the interests of the holders of one or more series of
Common Stock and the holders of the other series of Common Stock may diverge or
appear to diverge. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution." The Board of Directors will address and resolve
any issues involving material divergence of interests between the holders of
the separate series of Common Stock.
Although the Company is not aware of any precedent concerning the
manner in which principles of Delaware law would be applied in the context of a
capital structure involving multiple classes or series of capital stock the
rights of which include terms designed to reflect the separate performance of
specified businesses, principles of Delaware law provide that a board of
directors must act in accordance with its good faith business judgment of the
corporation's best interests, taking into consideration the interests of all
stockholders regardless of class or series. Under these principles of Delaware
law and the "business judgment rule," a good faith determination made by a
disinterested and adequately informed Board of Directors with respect to any
matter having a disparate impact upon the holders of TCI Group Common Stock,
the holders of Liberty Media Group Common Stock and the holders of Telephony
Group Common Stock would be a defense to any challenge to such determination
made by or on behalf of any of such groups of holders. Nevertheless, a
Delaware court hearing a case involving such a challenge may decide to apply
principles of Delaware law other than those discussed above, or may fashion new
principles of Delaware law, in order to decide such a case, which would be a
case of first impression. There may arise circumstances involving a divergence
of interests in which the Board of Directors is held to have properly
discharged its responsibilities to act with due care and in the best interests
of the Company and all of its stockholders, but in which holders of the TCI
Group Common Stock, the Liberty Media Group Common Stock or the Telephony Group
Common Stock consider themselves to be disadvantaged relative to the other
series. In such a case, such holders would not have any other remedy under
Delaware law with respect to the circumstances giving rise to the divergence of
interests.
Disproportionate ownership interests of members of the Board of
Directors in the TCI Group Common Stock, the Liberty Media Group Common Stock
and the Telephony Group Common Stock or disparate values of the TCI Group
Common Stock, the Liberty Media Group Common Stock and the Telephony Group
Common Stock could create or appear to create potential conflicts of interest
when directors are faced with decisions that could have different implications
for different series. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution." Nevertheless, the Company believes that a director
would be able to discharge his or her fiduciary responsibilities even if his or
her interests in shares of TCI Group Common Stock, Liberty Media Group Common
Stock and Telephony Group Common Stock were disproportionate or had disparate
values.
TRANSFER OF FUNDS AMONG GROUPS; EQUITY CONTRIBUTIONS FROM THE TCI GROUP
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance and sale of TCI Telephony Group Common Stock would
(unless the Board of Directors otherwise provides) be specifically attributed
to and reflected on the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred stock or,
in case the entity incurring the debt or issuing the preferred stock is
Tele-Communications, Inc., the TCI Group. The Board of Directors could,
however, determine from time to time that debt incurred or preferred stock
issued by entities included in a Group should be specifically attributed to and
reflected on the combined financial statements of one of the other Groups to
the extent that the debt is incurred or the preferred stock is issued for the
benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the Telephony Group, reflected as the creation of, or
increase in, the TCI Group's Inter-Group Interest in such Group or, in the case
of a transfer from either the Liberty Media Group or the Telephony Group to the
TCI Group, reflected as a reduction in the TCI Group's Inter-Group Interest in
such Group. There are no specific criteria for determining when a transfer will
be reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The
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Board of Directors expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and
time associated with alternative financing sources, prevailing interest rates
and general economic conditions. Generally, it is expected that entities
included in the Liberty Media Group will seek their own long-term debt
financing, whereas the Telephony Group is expected to require additional
advances from the TCI Group for some period of time. To satisfy this need, the
Company expects to provide, effective as of January 1, 1997, a revolving loan
facility to TCI Telephony that would permit borrowings of up to $150-200
million over a five-year period. The interest rate on such revolving loans and
the terms and conditions of borrowing have not yet been determined.
Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board of
Directors. The Board of Directors expects to make such determinations, either
in specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources. In connection with its
determination to recommend the Telephony Group Stock Proposal to the Company's
stockholders, the Board of Directors determined to convert a portion of the
amount invested by the Company in the investments attributed to the Telephony
Group into a $500 million investment by the Company in Telephony Preferred
Stock, which will be attributed to the TCI Group, and a contractual right to
use up to $500 million of tax benefits generated by TCI Telephony (principally
arising from its partnership interest in the PCS Ventures) without charge to
the TCI Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at
a time when such shares could be considered overvalued.
MANAGEMENT AND ALLOCATION POLICIES SUBJECT TO CHANGE
The Board of Directors has adopted certain management and allocation
policies described herein with respect to cash management, corporate expenses
and inter-Group transactions, any and all of which could be modified or
rescinded by the Board of Directors, in its sole discretion, without the
approval of stockholders, although there is no present intention to do so. The
Board of Directors could also adopt additional policies depending upon the
circumstances. Any determination to modify or rescind such policies, or to
adopt additional policies, including any such decision that could have
disparate effects upon holders of TCI Group Common Stock, Liberty Media Group
Common Stock or Telephony Group Common Stock, would be made by the Board of
Directors as set forth under "--Fiduciary Duties of the Board of Directors Are
to All Stockholders Regardless of Class or Series." See "Management and
Allocation Policies."
NO ASSURANCE AS TO MARKET PRICE
Because there has been no prior market for the Telephony Group Common
Stock, there can be no assurance as to the market price of the Telephony Group
Common Stock following its issuance and sale. If a relatively small number of
shares of either or both of the Series A Telephony Group Common Stock or the
Series B Telephony Group Common Stock are issued, there would only be a limited
market, if any, for such shares, and holders could have difficulty selling such
shares. No investment banking opinion as to any anticipated range of trading
prices for the Telephony Group Common Stock in the open market has been
obtained by the Company. Moreover, it is not possible to predict the impact of
the issuance of the Telephony Group Common Stock on the market price of the TCI
Group Common Stock.
The market prices of the Telephony Group Common Stock would be
determined in the trading markets and could be influenced by many factors,
including the consolidated results of the Company, as well as the performance
of the Telephony Group, investors' expectations for the Telephony Group,
trading volumes, regulatory environment and general economic and market
conditions. There can be no assurance as to the extent to which investors would
assign values to the Telephony Group Common Stock based on the reported
financial results or other measures of performance or prospects of the
Telephony Group. Financial effects of the Groups that affect the Company's
consolidated results of operations or financial condition could affect the
market prices of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group
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Common Stock. In addition, the Company cannot predict the impact on the market
price of the Telephony Group Common Stock of certain terms of such securities,
such as basing the consideration to be paid if all or substantially all of the
properties and assets of the Telephony Group are sold in a Disposition on the
Net Proceeds of such Disposition, the ability of the Company to convert shares
of Telephony Group Common Stock into TCI Group Common Stock at a conversion
ratio based on an appraised value determination for the Telephony Group Common
Stock and a trading market valuation for the TCI Group Common Stock or the
discretion of the Board of Directors to make various other determinations with
respect to the Groups and the separate series of Common Stock. There is no
assurance that the Series A Telephony Group Common Stock will be included in
any stock market index in which the Series A TCI Group Common Stock is now
included, or that the Series A TCI Group Common Stock will continue to be
included in such index. Not being included in an index could adversely affect
demand for the Telephony Group Common Stock or the TCI Group Common Stock and,
consequently, the market price thereof.
POTENTIAL CONVERSION OF TELEPHONY GROUP COMMON STOCK
The Telephony Group Stock Proposal will permit the conversion, solely
at the Company's option, of all of the outstanding shares of Telephony Group
Common Stock into TCI Group Common Stock upon the terms described under
"Description of Telephony Group Common Stock and Effects on Existing Common
Stock--Conversion and Redemption." The Company cannot predict the impact on
the market prices of the TCI Group Common Stock or the Telephony Group Common
Stock of its ability to effect any such conversion or the effect, if any, that
the exercise by the Company of this conversion right would have on the market
price of the TCI Group Common Stock or the Telephony Group Common Stock
prevailing at such time. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution--Optional Conversion of Telephony Group Common Stock
into TCI Group Common Stock."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS OF THE TELEPHONY GROUP
The terms of the Telephony Group Common Stock provide that if the
Company were to dispose of all or substantially all of the properties and
assets of the Telephony Group, other than in a transaction in which the Company
receives primarily equity securities of an entity engaged or proposing to
engage primarily in a similar or complementary business and other than in
connection with the disposition of all or substantially all of the assets of
the Company, the Company would be required, at its option, either to (i)
distribute to holders of Telephony Group Common Stock an amount equal to their
proportionate interest in the Net Proceeds of such Disposition, either by
special dividend or by redemption of all or part of the outstanding shares of
Telephony Group Common Stock or (ii) convert outstanding shares of Telephony
Group Common Stock into shares of the corresponding series of TCI Group Common
Stock at a conversion ratio based on 110% of the average daily ratio of the
Market Value of a share of Series A Telephony Group Common Stock to the Market
Value of a share of Series A TCI Group Common Stock over a specified period
following such Disposition. "Net Proceeds" means the proceeds of such
Disposition after payment of or provision for certain specified costs,
including taxes to be paid by the Company in respect of the Disposition or such
dividend or redemption, transaction costs and liabilities and other obligations
(contingent or otherwise, including obligations in respect of Preferred Stock)
attributed to the Telephony Group. If the Telephony Group were a separate
independent company and its shares were acquired by another person, certain of
those costs, including corporate and shareholder level taxes, might not be
payable in connection with such an acquisition. As a result, the consideration
that would be received by stockholders of such a separate independent company
in connection with such a stock acquisition might be greater than the Net
Proceeds that would be received by holders of Telephony Group Common Stock if
all or substantially all of the properties and assets of the Telephony Group
were sold. In addition, no assurance can be given that the Net Proceeds per
share of Telephony Group Common Stock to be received in connection with a
Disposition of all or substantially all of the properties and assets of the
Telephony Group will be equal to or more than the market value per share of
Telephony Group Common Stock prior to or after announcement of such
Disposition. See "--Potential Conversion of Telephony Group Common Stock" and
"--No Assurance as to Market Price" above and "Description of Telephony Group
Common Stock and Effects on Existing Common Stock--Conversion and Redemption."
LIMITATIONS ON POTENTIAL ACQUISITION OF A GROUP
If each Group were a separate publicly held corporation, any person
interested in acquiring such corporation without negotiation with management
could seek control of the outstanding stock of such corporation by means of a
tender offer or proxy contest. Although adoption of the Telephony Group Stock
Proposal would authorize issuance of the Telephony Group Common Stock with
economic terms designed to reflect the separate performance of the Telephony
Group, a person interested in acquiring only the Telephony Group without
negotiation with the Company's management would still be required to seek
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control of the voting power represented by all of the outstanding capital stock
of the Company, including the TCI Group Common Stock, the Liberty Media Group
Common Stock and the Telephony Group Common Stock. See "Description of
Telephony Group Common Stock and Effects on Existing Common Stock--Voting
Rights."
ABSENCE OF APPROVAL RIGHTS WITH RESPECT TO FUTURE ISSUANCES OF AUTHORIZED
SHARES
The authorized but unissued shares of capital stock would be available
for issuance from time to time by the Company at the sole discretion of the
Board of Directors for any proper corporate purpose. Such issuances could
include shares of Telephony Group Common Stock, as well as the issuance of such
shares upon the conversion or exercise of securities of the Company that are
convertible into or exercisable or exchangeable for such shares. The approval
of the stockholders of the Company will not be sought by the Company for the
issuance of authorized but unissued shares of Telephony Group Common Stock (or
the reissuance of previously issued shares that have been reacquired by the
Company) or securities of the Company that are convertible into or exercisable
or exchangeable for such shares, unless deemed advisable by the Board of
Directors or required by applicable law, regulation or Nasdaq National Market
requirements.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Company Charter and the Company's Bylaws contain
provisions which may serve to discourage or make more difficult a change in
control of the Company without the support of the Board of Directors or without
meeting various other conditions. The Company is subject to Section 203 of the
DGCL, which, in general, prohibits a "business combination" between a
corporation and an "interested stockholder" unless certain conditions are met.
The Company Charter and Bylaw provisions which may discourage or make more
difficult a change in control of the Company include the requirement of a
supermajority vote to approve specified actions, the authorization of the
Company's Board of Directors to issue additional shares of Series Preferred
Stock in one or more series and to fix and state the designations, powers,
preferences, qualifications, limitations, restrictions and relative rights of
the shares of each such series without further action by the Company's
stockholders, certain procedures required in connection with the nomination of
directors of the Company and the other provisions described under
"Anti-Takeover Considerations." In addition, the existence of the Telephony
Group Common Stock would present complexities and could in certain
circumstances pose obstacles, financial and otherwise, to an acquiring person.
For example, a potential acquiror would have to take into consideration that
holders of different series of Common Stock might be more or less receptive to
the acquiror's proposal, that a tender offer would have to be structured so as
to take into account different prices at which shares of the different series
might be acquired, that a merger would require allocation of consideration
among the different series of Common Stock and the effects of actions the
Company might take such as causing a conversion of the Telephony Group Common
Stock. The provisions of the DGCL, the Amended Charter and the Company's Bylaws
and the existence of the Telephony Group Common Stock could, under certain
circumstances, prevent stockholders from profiting from an increase in the
market value of their shares as a result of a change in control of the Company
by delaying or preventing such change in control. See "Anti-Takeover
Considerations."
MANAGEMENT AND ALLOCATION POLICIES
If the Telephony Group Stock Proposal is approved by stockholders, the
Company will prepare consolidated financial statements of the Company and
combined financial statements of each Group. Except for the financial
statements included in this Proxy Statement, the Company does not intend to
provide separate combined financial statements for the Telephony Group until
shares of Telephony Group Common Stock are first sold or offered for sale. The
combined financial statements of each Group, taken together and after giving
effect to inter-group eliminations, would effectively comprise all the accounts
reflected as consolidated financial statements of the Company. The combined
financial statements of each Group will principally reflect the combined
financial position, results of operations and cash flows of the businesses
included therein. Consistent with the Amended Charter and applicable policies,
the Group financial information could also include allocated portions of
individual assets and liabilities that are not separately identified with the
operations of a specific Group. Notwithstanding allocations of assets and
liabilities for the purpose of preparing Group combined financial statements,
holders of each series of Common Stock would continue to be subject to risks
associated with an investment in the Company and all of its businesses, assets
and liabilities. See "Factors to be Considered--Stockholders of One Company;
Financial Effects on One Business Could Affect Other Businesses."
If the Telephony Group Stock Proposal is approved by stockholders,
upon initial issuance of Telephony Group Common Stock, cash management, taxes
and allocation of principal corporate activities among the Groups would be
based
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upon methods that management of the Company believes to be reasonable and would
be reflected in the respective Group financial information as follows:
(i) All debt incurred or preferred stock issued by the
Company and its subsidiaries would (unless the Board of Directors
otherwise provides) be specifically attributed to and reflected on the
combined financial statements of the Group that includes the entity
which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is
Tele-Communications, Inc., the TCI Group. The Board of Directors
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected on the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such
other Group.
(ii) For all periods prior to the distribution of the
Liberty Media Group Common Stock on August 10, 1995 (the
"Distribution"), all financial impacts of equity offerings are and
will be attributed entirely to the TCI Group. After the Distribution,
all financial impacts of issuances of additional shares of TCI Group
Common Stock are and will be attributed entirely to the TCI Group, all
financial impacts of issuances of additional shares of Liberty Media
Group Common Stock the proceeds of which are attributed to the Liberty
Media Group are and will be to such extent reflected in the combined
financial statements of the Liberty Media Group, and all financial
impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the TCI Group in
respect of a reduction in any Inter-Group Interest in the Liberty
Media Group are and will be to such extent reflected in the combined
financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of
which are attributed to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group,
and all financial impacts of issuances of shares of Telephony Group
Common Stock the proceeds of which are attributed to the TCI Group in
respect of a reduction in the TCI Group's Inter-Group Interest in the
Telephony Group will be to such extent reflected in the combined
financial statements of the TCI Group. Financial impacts of dividends
or other distributions on, and purchases of, TCI Group Common Stock
will be attributed entirely to the TCI Group, and financial impacts of
dividends or other distributions on Telephony Group Common Stock will
be attributed entirely to the Telephony Group, except that dividends
or other distributions on the Telephony Group Common Stock will (if at
the time there is an Inter-Group Interest in the Telephony Group)
result in the TCI Group being credited, and the Telephony Group being
charged (in addition to the charge for the dividend or other
distribution paid), with an amount equal to the product of the
aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common
Stock and a fraction the numerator of which is the Telephony Group
Inter-Group Interest Fraction and the denominator of which is the
Telephony Group Outstanding Interest Fraction. Financial impacts of
repurchases of Telephony Group Common Stock the consideration for
which is charged to the Telephony Group will be to such extent
reflected in the combined financial statements of the Telephony Group,
and financial impacts of repurchases of Telephony Group Common Stock
the consideration for which is charged to the TCI Group will be to
such extent reflected in the combined financial statements of the TCI
Group and will result in an increase in the TCI Group's Inter-Group
Interest in the Telephony Group.
(iii) To the extent cash needs of one Group exceed cash
provided by such Group, one of the other Groups may transfer funds to
such Group. The TCI Group has provided and will continue to provide
centralized cash management functions under which cash receipts of
certain entities attributed to the other Groups are remitted to the
TCI Group and certain cash disbursements of the other Groups will be
funded by the TCI Group on a daily basis. Such transfers of funds
among the Groups will be reflected as borrowings or, if determined by
the Board of Directors, in the case of a transfer from the TCI Group
to either the Liberty Media Group or the Telephony Group, reflected as
the creation of, or increase in the TCI Group's Inter-Group Interest
in such Group or, in the case of a transfer from either the Liberty
Media Group or the Telephony Group to the TCI Group, reflected as a
reduction in the TCI Group's Inter-Group Interest in such Group. There
are no specific criteria for determining when a transfer will be
reflected as borrowings or as an increase or reduction in an
Inter-Group Interest. The Board of Directors expects to make such
determinations, either in specific instances or by setting generally
applicable policies from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs
of the Company, the financing needs and objectives of the Groups, the
investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest
rates and general economic conditions. Generally, it is expected that
entities included in the Liberty Media Group will seek their own
long-term debt financing, whereas the Telephony Group is expected to
require additional advances from the TCI Group for some period of
time. To
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satisfy this need, the Company expects to provide a five-year
revolving loan facility to TCI Telephony, effective as of January 1,
1997, that would permit borrowings of up to $150-200 million at rates
and upon terms and conditions to be determined.
(iv) Loans from one Group to another Group would bear
interest at such rates and have such repayment schedules and other
terms as are established from time to time by, or pursuant to
procedures established by, the Board of Directors. The Board of
Directors expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans of and the investment opportunities available to
each Group and the availability, cost and time associated with
alternative financing sources.
(v) In the event of a transfer of funds or other assets
from the TCI Group to the Telephony Group that the Board of Directors
has determined to reflect as increasing the TCI Group's Inter-Group
Interest in the Telephony Group, the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest would be increased
by an amount determined by dividing the amount of funds or the value
of the assets transferred by the Market Value of a share of Series A
Telephony Group Common Stock as of the date of such transfer, and the
Telephony Group Inter-Group Interest Fraction would be increased and
the Telephony Group Outstanding Interest Fraction would be decreased
accordingly. In the event of a transfer of funds or other assets from
the Telephony Group to the TCI Group that the Board of Directors has
determined to reflect as a decrease in the TCI Group's Inter-Group
Interest in the Telephony Group, the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest would be decreased
by an amount determined by dividing the amount of funds or the value
of the assets transferred by the Market Value of a share of Series A
Telephony Group Common Stock as of the date of such transfer and the
Telephony Group Inter-Group Interest Fraction would be decreased and
the Telephony Group Outstanding Interest Fraction would be increased
accordingly.
(vi) The combined balance sheets of a Group would reflect
its net loans to or borrowings from the other Groups. Similarly, the
respective combined statements of operations of the Groups would
reflect interest income or expense, as the case may be, associated
with such loans or borrowings and the respective combined statements
of cash flows of the Groups would reflect changes in the amounts of
loans or borrowings deemed outstanding. In the historical financial
information included in this Proxy Statement and the Annexes hereto,
net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the
date of such financial statements, a portion of such net borrowings
was converted into a $500 million investment in Telephony Preferred
Stock. The balance of such net borrowings through January 1, 1997 will
continue to be reflected as a component of the Telephony Group's
combined equity. Amounts borrowed by the Telephony Group from another
Group subsequent to January 1, 1997, will be reflected on the
Telephony Group's financial statements as indebtedness to the
applicable lender.
(vii) Certain corporate general and administrative costs
(including, but not limited to, certain corporate, legal, finance,
accounting, tax, data processing, employee benefit and insurance
costs) would be charged to both the Liberty Media Group and the
Telephony Group at rates set at the beginning of each year based on
projected utilization for that year. The balance of such costs would
be reflected on the combined financial statements of the TCI Group.
The utilization-based charges would be set at levels that management
believes to be reasonable and that would approximate the costs that
the Liberty Media Group and the Telephony Group would incur for
comparable services on a stand-alone basis. Assuming shares of
Telephony Group Common Stock had first been issued on January 1,
1996, the Company estimates that such costs of the Telephony Group
would have aggregated approximately $548,000 for the nine months ended
September 30, 1996. Certain other corporate general and administrative
costs related specifically to management of a Group would be allocated
entirely to such Group. The scope of the services charged to the
Liberty Media Group and the Telephony Group on an allocated basis
could be adjusted from time to time depending on the extent to which
it is determined that services should instead be performed directly by
employees of entities included in such Group.
(viii) If additional assets are transferred to the Telephony
Group from the TCI Group, there may be additional services that the
TCI Group would then provide to the Telephony Group. For example, if
the ResTel Business is transferred to the Telephony Group, the TCI
Group may provide installation, sales and customer services to the
Telephony Group in addition to rights of use of the HFC Plant. The
charges for any such services would be negotiated at the time and
taken into account in the appraisal of the fair market value of the
assets being transferred.
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(ix) Federal income taxes and certain state and local
taxes would be paid on a consolidated basis. However, pursuant to a
tax sharing agreement, federal income taxes are calculated, with
certain adjustments, on a separate return basis for each Group
(applying provisions of the Internal Revenue Code of 1986, as amended,
and related regulations as if such Group filed a separate consolidated
return for federal income tax purposes). Based upon these separate
calculations, an allocation of tax liabilities is made such that each
separate Group is responsible to the Company for its gross share of
the Company's consolidated federal income tax liabilities, such gross
share being determined without regard to (a) tax benefits that are
attributable to the Company or the other Groups or (b) certain tax
benefits that are attributable to a Group but that are taken into
account in determining the Company's consolidated federal income tax
benefit carryovers. Similarly, the Company is responsible to each
Group for tax benefits attributable to such Group and actually used by
the Company in determining its consolidated federal income tax
liability. Notwithstanding the foregoing, the Company and TCI
Telephony have agreed that the Company may use up to $500 million of
tax benefits generated by to the Telephony Group in determining its
consolidated federal income tax liability, without providing a credit
to the Telephony Group in such amount. Tax attributes, including but
not limited to net operating losses, investment tax credits,
alternative minimum tax net operating losses, alternative minimum tax
credits, deferred intercompany gains and tax basis in assets, would be
inventoried and tracked for each Group. In addition, pursuant to such
tax sharing agreement, state and local income taxes are calculated on
a separate return basis for each Group (applying provisions of state
and local tax law and related regulations as if the Group were a
separate unitary or combined group for tax purposes), and the
Company's combined or unitary tax liability is allocated between the
Groups based upon such separate calculation. The Company has retained
the right to file all returns, make all elections and control all
audits and contests.
(x) The Board of Directors expects to determine, either
in specific instances or by setting generally applicable policies from
time to time, whether to allocate resources and financial support to
or pursue business opportunities or operational strategies through one
Group or one or more of the other Groups, after consideration of such
factors as it deems relevant.
Notwithstanding the policies described above, determinations with
respect to the transfer of funds from one Group to one of the other Groups
would be made at the discretion of the Board of Directors, except to the extent
that the Company is contractually obligated to make a transfer of funds to an
entity included in a Group. Nothing in the foregoing policies (as opposed to
any such contractual obligation) obligates the Board of Directors to cause a
Group to provide funds to one of the other Groups if the Board of Directors
determines that it is in the best interests of the Company not to do so.
The above management and allocation policies could be modified or
rescinded by the Board of Directors, in its sole discretion, without approval
of stockholders, although there is no present intention to do so. The Board of
Directors could also adopt additional policies depending upon the
circumstances. The Board of Directors intends that any determination it might
make to modify or rescind such policies, or to adopt additional policies,
including any such decision that could have disparate effects upon holders of
different series of Common Stock, would be made by the Board of Directors as
set forth under " Factors to be Considered--Fiduciary Duties of the Board of
Directors Are to All Stockholders Regardless of Class or Series."
DESCRIPTION OF TELEPHONY GROUP COMMON STOCK AND EFFECTS ON EXISTING COMMON
STOCK
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO THE GLOSSARY OF
CERTAIN DEFINED TERMS CONTAINED IN ANNEX I TO THIS PROXY STATEMENT AND TO ANNEX
II TO THIS PROXY STATEMENT, WHICH CONTAINS THE FULL TEXT OF THE PROPOSED
AMENDMENTS TO THE CHARTER.
GENERAL
The Company Charter currently provides that the Company is authorized
to issue 2,777,375,096 shares of capital stock, including (i) 2,725,000,000
shares of Common Stock, of which 1,750,000,000 shares are designated Series A
TCI Group Common Stock, 150,000,000 shares are designated Series B TCI Group
Common Stock, 750,000,000 shares are designated Series A Liberty Media Group
Common Stock and 75,000,000 shares are designated Series B Liberty Media Group
Common Stock and (ii) 52,375,096 shares of Preferred Stock, of which 700,000
shares are designated Class A Preferred Stock, par value $0.01 per share (the
"Class A Preferred Stock"), 1,675,096 shares are designated Class B Preferred
Stock and 50,000,000 shares are designated as Series Preferred Stock, issuable
in series. Of the Series Preferred Stock, 80,000 shares are designated as
Series C Preferred Stock, 1,000,000 shares are designated as Convertible
Preferred Stock, Series D (the "Series D Preferred
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Stock"), 400,000 shares are designated as Redeemable Convertible Preferred
Stock, Series E (the "Series E Preferred Stock"), 500,000 shares are designated
Convertible Redeemable Participating Preferred Stock, Series F (the "Series F
Preferred Stock"), 7,259,380 shares are designated as Series G Preferred Stock
and 7,259,380 shares are designated as Series H Preferred Stock. If the
Telephony Group Stock Proposal is approved, the Company Charter will be amended
to, among other things, increase the authorized number of shares of Common
Stock from 2,725,000,000 to 3,550,000,000, and to authorize two new series of
Common Stock to consist of: 750,000,000 newly authorized shares designated
Series A Telephony Group Common Stock and 75,000,000 newly authorized shares
designated Series B Telephony Group Common Stock.
The authorized but unissued shares of Telephony Group Common Stock
will be available for issuance by the Company from time to time, as determined
by the Board of Directors, for any proper corporate purpose, which could
include raising capital, acquiring other companies or making investments or
providing compensation or benefits to employees. The issuance of such shares
would not be subject to approval by the stockholders of the Company, unless
deemed advisable by the Board of Directors or required by applicable law,
regulation or Nasdaq National Market requirements.
VOTING RIGHTS
Under the Telephony Group Stock Proposal, holders of Series A
Telephony Group Common Stock will be entitled to one vote for each share of
such stock held and holders of Series B Telephony Group Common Stock will be
entitled to ten votes for each share of such stock held, on all matters
presented to such stockholders, and holders of Series A TCI Group Common Stock
and Series A Liberty Media Group Common Stock will continue to be entitled to
one vote for each share of such stock held and holders of Series B TCI Group
Common Stock and Series B Liberty Media Group Common Stock will continue to be
entitled to ten votes for each share of such stock held. Except as may
otherwise be required by the laws of the State of Delaware, or, with respect to
any class of Preferred Stock or any series of such a class, in the Amended
Charter (including any resolution or resolutions providing for the
establishment of such class or series pursuant to authority vested in the Board
of Directors by the Amended Charter), the holders of TCI Group Common Stock,
the holders of Liberty Media Group Common Stock, the holders of Telephony Group
Common Stock and the holders of each class or series of Preferred Stock, if
any, entitled to vote thereon will vote as one class with respect to all
matters to be voted on by stockholders of the Company.
Under the Telephony Group Stock Proposal, the term "Voting
Securities," as defined in the Amended Charter, will include the Series A TCI
Group Common Stock, the Series B TCI Group Common Stock, the Series A Liberty
Media Group Common Stock, the Series B Liberty Media Group Common Stock, the
Series A Telephony Group Common Stock, the Series B Telephony Group Common
Stock, the Series C Preferred Stock and any other class or series of Preferred
Stock entitled to vote with the holders of Common Stock generally upon all
matters which may be submitted to a vote of stockholders at any annual or
special meeting. The Amended Charter provides that the affirmative vote of
holders of at least 66 2/3% of the total voting power of the then-outstanding
Voting Securities, voting together as a single class, is required for (i) the
amendment, alteration or repeal of any provision of the Amended Charter or the
addition or insertion of other provisions therein, (ii) the adoption, amendment
or repeal of any provision of the Company's Bylaws, unless approved by at least
75% of the members of the Board of Directors then in office, in which case no
vote of stockholders will be required, (iii) the merger or consolidation of the
Company with or into any other corporation other than a merger or consolidation
which does not require the consent of stockholders under the DGCL or which at
least 75% of the members of the Board of Directors then in office have approved
(in which case such merger or consolidation would require the approval of a
majority of the total voting power of the then-outstanding Voting Securities),
(iv) the sale, lease or exchange of all or substantially all of the property
and assets of the Company or (v) the dissolution of the Company. Any action to
remove directors would be required to be for "cause" (as defined in the Amended
Charter) and be approved by the holders of 66 2/3% of the total voting power of
the then-outstanding shares entitled to vote in the election of directors
(which would include the Class B Preferred Stock, the Series G Preferred Stock
and the Series H Preferred Stock).
The holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock will not have any rights to vote as a separate
class or series on any matter coming before the stockholders of the Company,
except with respect to certain limited class and series voting rights provided
under the DGCL. Under the DGCL, the approval of the holders of a majority of
the outstanding shares of any class of capital stock of a corporation, voting
separately as a class, is required to approve any amendment to the charter that
would alter or change the powers, preferences or special rights of the shares
of such class so as to affect them adversely, provided that, if any amendment
would alter or change the powers, preferences or special rights of one or more
series of the class so as to affect them adversely, but would not so affect the
entire class, then only the shares of the series so affected by the amendment
would be entitled to vote thereon separately as a class.
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Because the Series A TCI Group Common Stock, the Series B TCI Group Common
Stock, the Series A Liberty Media Group Common Stock, the Series B Liberty
Media Group Common Stock, the Series A Telephony Group Common Stock and the
Series B Telephony Group Common Stock will each be a separate series of a
single class of stock, each series would be entitled to vote separately as a
class upon an amendment to the Amended Charter that would alter or change the
powers, preferences or special rights of such series so as to affect them
adversely only if the other series were not so affected. The DGCL does not
provide for any other separate voting rights of a class or series of capital
stock (other than with respect to a change in par value or, in certain
circumstances not applicable in the case of the Company's outstanding stock, an
increase or decrease in the authorized shares of such class or series).
Consequently, because most matters brought to a stockholder vote will require
the approval of only a specified percentage of all of the Company's outstanding
capital stock entitled to vote on such matters (including the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Telephony Group Common
Stock) voting together as a single class, if the holders of one or more series
of Common Stock have more than the number of votes required to approve any such
matter, such holders would be in a position to control the outcome of the vote
on such matter.
DIVIDENDS
Dividends on Telephony Group Common Stock. Dividends on Telephony
Group Common Stock will be limited to legally available funds of the Company
under the DGCL and will be subject to the prior payment of dividends on
outstanding shares of Preferred Stock. The DGCL limits the amount of
distributions on the Common Stock to the funds of the Company legally available
for that purpose, which are determined on the basis of the entire Company and
not just the Groups. Consequently, the amount of legally available funds will
be reduced by the amount of any net losses of the Groups and any dividends or
distributions on, or repurchases of, the TCI Group Common Stock, the Liberty
Media Group Common Stock or the Telephony Group Common Stock and dividends on,
or certain repurchases of, Preferred Stock. Certain loan agreements to which
certain subsidiaries of the Company are parties or are subject contain
restricted payment provisions that limit the amount of dividends, other than
stock dividends, that those companies may pay. Future loan agreements may also
contain similar restrictions and limits.
Dividends on the Telephony Group Common Stock, in addition to the
limitations set forth in the foregoing paragraph, will be further limited to an
amount not in excess of the Telephony Group Available Dividend Amount, which is
intended to be similar to the amount that would be legally available for the
payment of dividends on the Telephony Group Common Stock under the DGCL if the
Telephony Group were a separate Delaware corporation. There can be no assurance
that there will be a Telephony Group Available Dividend Amount.
The "Telephony Group Available Dividend Amount," as of any date, means
the product of the Telephony Group Outstanding Interest Fraction and either (i)
the excess of (a) an amount equal to the total assets of the Telephony Group
less the total liabilities (not including preferred stock) of the Telephony
Group as of such date over (b) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding shares of
Telephony Group Common Stock and each class or series of Preferred Stock
attributed to the Telephony Group or (ii) in case there is no such excess, an
amount equal to the Company Earnings (Loss) Attributable to the Telephony Group
(if positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year. The "Company Earnings (Loss) Attributable to the
Telephony Group," for any period, means the net earnings or loss of the
Telephony Group for such period determined on a basis consistent with the
determination of the net earnings or loss of the Telephony Group for such
period as presented in the combined financial statements of the Telephony Group
for such period, including income and expenses of the Company attributed to the
operations of the Telephony Group on a substantially consistent basis,
including, without limitation, corporate administrative costs, net interest and
income taxes.
Except for dividends declared or paid as described below under
"--Share Distributions" and "--Conversion and Redemption--Mandatory Dividend,
Redemption or Conversion of Telephony Group Common Stock," any dividends paid
on the Series A Telephony Group Common Stock or the Series B Telephony Group
Common Stock will be paid only on both series, in equal amounts per share.
The Board of Directors, subject to the provisions described herein
under this caption "Dividends" and below under "--Share Distributions," will
have the authority and discretion to declare and pay dividends on the TCI Group
Common Stock, the Liberty Media Group Common Stock or the Telephony Group
Common Stock in equal or unequal amounts, notwithstanding the relationship
among the TCI Group Available Dividend Amount, the Liberty Media Group
Available Dividend Amount and the Telephony Group Available Dividend Amount,
the respective amounts of prior dividends declared on, or liquidation rights
of, the TCI Group Common Stock, the Liberty Media Group Common Stock or the
Telephony Group Common Stock or any other factor. See "Dividend Policy."
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At the time of any dividend or other distribution on the outstanding
shares of Telephony Group Common Stock (including any dividend of Net Proceeds
from the Disposition of all or substantially all of the properties and assets
of the Telephony Group as described under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock"), the TCI Group will (if at such time there is an Inter-Group
Interest in the Telephony Group) be credited, and the Telephony Group will be
charged (in addition to the charge for the dividend or other distribution paid
or distributed in respect of outstanding shares of Telephony Group Common
Stock), with an amount equal to the product of (i) the aggregate amount of such
dividend or distribution paid or distributed in respect of outstanding shares
of Telephony Group Common Stock times (ii) a fraction the numerator of which is
the Telephony Group Inter-Group Interest Fraction and the denominator of which
is the Telephony Group Outstanding Interest Fraction.
See Annex IV for illustrations of the calculation of the Telephony
Group Inter-Group Interest Fraction and the effects of dividends on shares of
Telephony Group Common Stock.
Dividends on TCI Group Common Stock and Liberty Media Group Common
Stock. The provisions of the Company Charter regarding dividends on the TCI
Group Common Stock and the Liberty Media Group Common Stock will not change
pursuant to the Telephony Group Stock Proposal. However, because the businesses
included in the Telephony Group are currently included in the TCI Group, the
Telephony Group Stock Proposal would affect the determination of, and could
reduce the amount available for dividends under, the TCI Group Available
Dividend Amount.
SHARE DISTRIBUTIONS
Distributions on TCI Group Common Stock. Under the Telephony Group
Stock Proposal, if at any time after the initial issuance of shares of
Telephony Group Common Stock a distribution is to be made with respect to the
TCI Group Common Stock in TCI Group Common Stock, Liberty Media Group Common
Stock, Telephony Group Common Stock, or any other securities of the Company or
any other person (a "share distribution"), such share distribution will be
declared and paid only as follows:
(i) a share distribution consisting of shares of Series A
TCI Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI
Group Common Stock, on an equal per share basis; or consisting of
shares of Series B TCI Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
TCI Group Common Stock) to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series A TCI Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A TCI Group Common Stock) to holders of Series A
TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
TCI Group Common Stock) to holders of Series B TCI Group Common Stock;
(ii) a share distribution consisting of shares of Series A
Liberty Media Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series A
Liberty Media Group Common Stock) to holders of Series A TCI Group
Common Stock and Series B TCI Group Common Stock, on an equal per
share basis; provided that the sum of (A) the aggregate number of
shares of Series A Liberty Media Group Common Stock to be so issued
(or the number of such shares which would be issuable upon conversion,
exercise or exchange of any Convertible Securities to be so issued)
and (B) the number of shares of such series that are subject to
issuance upon conversion, exercise or exchange of any Convertible
Securities then outstanding that are attributed to the TCI Group
(other than Pre-Distribution Convertible Securities and other than
Convertible Securities convertible into or exercisable or exchangeable
for Committed Acquisition Shares) is less than or equal to the Number
of Shares Issuable with Respect to the Liberty Media Group Inter-Group
Interest;
(iii) a share distribution consisting of shares of Series A
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock) to holders of Series A TCI Group Common Stock and
Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series B Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series B Telephony Group Common Stock) to holders of
Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock, on an equal per share basis; or consisting of shares of
Series A Telephony Group Common Stock (or Convertible Securities
convertible into
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or exercisable or exchangeable for shares of Series A Telephony Group
Common Stock) to holders of Series A Telephony Group Common Stock and,
on an equal per share basis, shares of Series B Telephony Group Common
Stock (or like Convertible Securities convertible into or exercisable
or exchangeable for shares of Series B Telephony Group Common Stock)
to holders of Series B Telephony Group Common Stock; provided that the
sum of (A) the aggregate number of shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock to be so issued
(or the number of such shares which would be issuable upon conversion,
exercise or exchange of any Convertible Securities to be so issued)
and (B) the number of shares of Series A Telephony Group Common Stock
that are subject to issuance upon conversion, exercise or exchange of
any Convertible Securities then outstanding that are attributed to the
TCI Group is less than or equal to the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest; and
(iv) a share distribution consisting of any class or
series of securities of the Company or any other person other than TCI
Group Common Stock, Liberty Media Group Common Stock or Telephony
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of TCI Group Common Stock,
Liberty Media Group Common Stock or Telephony Group Common Stock),
either on the basis of a distribution of identical securities, on an
equal per share basis, to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock or on the basis of a distribution
of one class or series of securities to holders of Series A TCI Group
Common Stock and another class or series of securities to holders of
Series B TCI Group Common Stock, provided that the securities so
distributed (and, if the distribution consists of Convertible
Securities, the securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable) do not
differ in any respect other than their relative voting rights and
related differences in designation, conversion, redemption and share
distribution provisions, with holders of shares of Series B TCI Group
Common Stock receiving the class or series having the higher relative
voting rights (without regard to whether such rights differ to a
greater or lesser extent than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution
provisions between the Series A TCI Group Common Stock and the Series
B TCI Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company,
such rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and
share distribution provisions between the Series A TCI Group Common
Stock and the Series B TCI Group Common Stock, and provided in each
case that such distribution is otherwise made on an equal per share
basis.
The Company will not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
Distributions on Telephony Group Common Stock. If at any time a share
distribution is to be made with respect to the Telephony Group Common Stock,
such share distribution will be declared and paid only as follows (or as
described under "--Conversion and Redemption" with respect to the redemptions
and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock) to holders of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, on an equal per share
basis; or consisting of shares of Series B Telephony Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B Telephony Group Common Stock) to
holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, on an equal per share basis; or
consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A Telephony Group Common Stock) to holders of
Series A Telephony Group Common Stock and, on an equal per share
basis, shares of Series B Telephony Group Common Stock (or like
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series B Telephony Group Common Stock) to holders of
Series B Telephony Group Common Stock; and
(ii) a share distribution consisting of any class or
series of securities of the Company or any other person other than as
described in the immediately preceding clause (i) and other than TCI
Group Common Stock or Liberty Media Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for shares
of TCI Group Common Stock or Liberty Media Group Common Stock), either
on the basis of a distribution of
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identical securities, on an equal per share basis, to holders of
Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock or on the basis of a distribution of one class or series
of securities to holders of Series A Telephony Group Common Stock and
another class or series of securities to holders of Series B Telephony
Group Common Stock, provided that the securities so distributed (and,
if the distribution consists of Convertible Securities, the securities
into which such Convertible Securities are convertible or for which
they are exercisable or exchangeable) do not differ in any respect
other than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions,
with holders of shares of Series B Telephony Group Common Stock
receiving the class or series having the higher relative voting rights
(without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and the Series B
Telephony Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the Company,
such rights will not differ to a greater extent than the corresponding
differences in voting rights, designation, conversion, redemption and
share distribution provisions between the Series A Telephony Group
Common Stock and the Series B Telephony Group Common Stock, and
provided in each case that such distribution is otherwise made on an
equal per share basis.
The Company will not reclassify, subdivide or combine the Series A
Telephony Group Common Stock without reclassifying, subdividing or combining
the Series B Telephony Group Common Stock, on an equal per share basis, and the
Company will not reclassify, subdivide or combine the Series B Telephony Group
Common Stock without reclassifying, subdividing or combining the Series A
Telephony Group Common Stock, on an equal per share basis.
Distributions on Liberty Media Group Common Stock. Under the Telephony
Group Stock Proposal, the provisions of the Company Charter regarding share
distributions on the Liberty Media Group Common Stock would be modified to
expressly provide that such share distributions consisting of Telephony Group
Common Stock are not permitted.
CONVERSION AND REDEMPTION
Conversion at the Option of the Holder. Each share of Series B
Telephony Group Common Stock will be convertible, at the option of the holder
thereof, into one share of Series A Telephony Group Common Stock. Any such
conversion may be effected by surrendering the certificate or certificates
representing the Series B Telephony Group Common Stock to be converted, duly
endorsed, at the office of the Company or its transfer agent, together with a
written notice that such holder elects to convert all or a specified number of
the shares represented by such certificate or certificates and stating the name
or names in which such holder desires the certificate or certificates
deliverable upon conversion to be issued. If so required by the Company, any
certificate for shares surrendered for conversion will be accompanied by
instruments of transfer, in form satisfactory to the Company, duly executed by
the holder of such shares or the duly authorized representative of such holder.
Such conversion will be deemed to have been made at the close of business on
the date of receipt by the Company or any such transfer agent of the
certificate or certificates, notice and, if required, instruments of transfer
referred to above, and the person or persons entitled to receive the Series A
Telephony Group Common Stock issuable on such conversion will be treated for
all purposes as the record holder or holders of such Series A Telephony Group
Common Stock on that date. Shares of Series A Telephony Group Common Stock will
not be convertible into shares of Series B Telephony Group Common Stock.
Conversion at the Option of the Company. The Board of Directors may at
any time declare that (i) all of the outstanding shares of Series A Telephony
Group Common Stock will be converted into a number (or fraction) of fully paid
and nonassessable shares of Series A TCI Group Common Stock equal to the
Telephony Group Optional Conversion Ratio, and (ii) all of the outstanding
shares of Series B Telephony Group Common Stock will be converted into a number
(or fraction) of fully paid and nonassessable shares of Series B TCI Group
Common Stock equal to the Telephony Group Optional Conversion Ratio.
For these purposes, the "Telephony Group Optional Conversion Ratio"
means the quotient (calculated to the nearest five decimal places) obtained by
dividing (x) the Telephony Group Common Stock Per Share Value by (y) the
average Market Value of one share of Series A TCI Group Common Stock over the
20-Trading Day period ending on the Trading Day preceding the Appraisal Date.
The Telephony Group Common Stock Per Share Value will equal the quotient
obtained by dividing the Telephony Group Private Market Value by the Adjusted
Outstanding Shares of Telephony Group Common Stock, which will be determined in
the manner provided below.
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The "Telephony Group Private Market Value" means an amount equal to
the private market value of the Telephony Group as of the last day of the
calendar month preceding the month in which the last of the two appraisers
referred to in the immediately following sentence are selected (the last day of
such calendar month is hereinafter referred to as the "Appraisal Date"). In the
event that the Company determines to establish the Telephony Group Private
Market Value, an investment banking firm of recognized national standing will
be designated by the Company (the "First Appraiser") and a second investment
banking firm of recognized national standing will be designated by a committee
of the Board of Directors all of whose members are independent directors as
determined under Nasdaq National Market rules (the "Second Appraiser"). The
date upon which the last of such appraisers is selected is hereinafter referred
to as the "Selection Date." Not later than 20 days after the Selection Date,
the First Appraiser and the Second Appraiser will each determine its initial
view as to the private market value of the Telephony Group as of the Appraisal
Date and will consult with one another with respect thereto. Not later than the
30th day after the Selection Date, the First Appraiser and the Second Appraiser
will each have determined its final view as to such private market value. If
the higher of the respective final views of the First Appraiser and the Second
Appraiser as to such private market value (the "Higher Appraised Amount") is
not more than 120% of the lower of such respective final views (the "Lower
Appraised Amount"), the Telephony Group Private Market Value (subject to any
adjustment described in the second succeeding paragraph) will be the average of
those two amounts. If the Higher Appraised Amount is more than 120% of the
Lower Appraised Amount, the First Appraiser and the Second Appraiser will agree
upon and jointly designate a third investment banking firm of recognized
national standing (the "Mutually Designated Appraiser") to determine such
private market value. The Mutually Designated Appraiser will not be provided
with any of the work of the First Appraiser and the Second Appraiser. The
Mutually Designated Appraiser will, no later than the 20th day after the date
the Mutually Designated Appraiser is designated, determine such private market
value (the "Mutually Appraised Amount"), and the Telephony Group Private Market
Value (subject to any adjustment described in the second succeeding paragraph)
will be (i) if the Mutually Appraised Amount is between the Lower Appraised
Amount and the Higher Appraised Amount, (a) the average of (1) the Mutually
Appraised Amount and (2) the Lower Appraised Amount or the Higher Appraised
Amount, whichever is closer to the Mutually Appraised Amount, or (b) the
Mutually Appraised Amount, if neither the Lower Appraised Amount nor the Higher
Appraised Amount is closer to the Mutually Appraised Amount, or (ii) if the
Mutually Appraised Amount is greater than the Higher Appraised Amount or less
than the Lower Appraised Amount, the average of the Higher Appraised Amount and
the Lower Appraised Amount. For these purposes, if any such investment banking
firm expresses its final view of the private market value of the Telephony
Group as a range of values, such investment banking firm's final view of such
private market value will be deemed to be the midpoint of such range of values.
Each of the investment banking firms referred to in the immediately
preceding paragraph will be instructed to determine the private market value of
the Telephony Group as of the Appraisal Date based upon the amount a willing
purchaser would pay to a willing seller, in an arm's-length transaction, if it
were acquiring the Telephony Group, as if the Telephony Group were a publicly
traded non-controlled corporation and the purchaser was acquiring all of the
capital stock of such corporation and without consideration of any potential
regulatory constraints limiting the potential purchasers of the Telephony Group
other than that which would have existed if the Telephony Group were a publicly
traded non-controlled entity.
Following the determination of the Telephony Group Private Market
Value, the investment banking firms whose final views of the private market
value of the Telephony Group were used in the calculation of the Telephony
Group Private Market Value will determine the Adjusted Outstanding Shares of
Telephony Group Common Stock together with any further appropriate adjustments
to the Telephony Group Private Market Value resulting from such determination.
The "Adjusted Outstanding Shares of Telephony Group Common Stock" means a
number, as determined by such investment banking firms as of the Appraisal
Date, equal to the sum of the number of shares of Telephony Group Common Stock
outstanding, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest, and the number of shares of Telephony Group Common Stock
issuable upon the conversion, exercise or exchange of those Convertible
Securities the holders of which would derive an economic benefit from
conversion, exercise or exchange of such Convertible Securities which exceeds
the economic benefit of not converting, exercising or exchanging such
Convertible Securities. The "Telephony Group Common Stock Per Share Value"
means the quotient obtained by dividing the Telephony Group Private Market
Value by the Adjusted Outstanding Shares of Telephony Group Common Stock,
provided that if such investment banking firms do not agree on the
determinations provided for in this paragraph, the Telephony Group Common Stock
Per Share Value will be the average of the quotients so obtained on the basis
of the respective determinations of such firms.
The term "Convertible Securities," for purposes of the Amended
Charter, means any securities of the Company (other than any series of Common
Stock) that are convertible into, exchangeable for or evidence the right to
purchase any shares of any series of Common Stock, whether upon conversion,
exercise, exchange, pursuant to antidilution provisions of such securities or
otherwise.
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If the Company determines to convert shares of Series A Telephony
Group Common Stock into Series A TCI Group Common Stock and shares of Series B
Telephony Group Common Stock into Series B TCI Group Common Stock at the
Telephony Group Optional Conversion Ratio, such conversion will occur on a
conversion date on or prior to the 120th day following the Appraisal Date. If
the Company determines not to undertake such conversion, the Company may at any
time thereafter undertake to reestablish the Telephony Group Common Stock Per
Share Value as of a subsequent date.
Any such conversion would dilute the interests of holders of TCI Group
Common Stock and would preclude holders of Telephony Group Common Stock from
retaining their interest in a security reflecting separately the business of
the Telephony Group.
See Annex IV for an illustration of the conversion of Telephony Group
Common Stock into TCI Group Common Stock at the Telephony Group Optional
Conversion Ratio.
Mandatory Dividend, Redemption or Conversion of Telephony Group Common
Stock. Upon the sale, transfer, assignment or other disposition, whether by
merger, consolidation, sale or contribution of assets or stock or otherwise (a
"Disposition"), in one transaction or a series of related transactions by the
Company and its subsidiaries of all or substantially all of the properties and
assets of the Telephony Group to any one or more persons, entities or groups
(other than (a) in connection with the Disposition by the Company of all of the
Company's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Company, (b) a dividend, other distribution or redemption in accordance
with any provision described under "--Dividends," "--Share Distributions,"
"--Conversion and Redemption--Redemption in Exchange for Stock of Subsidiary"
or "--Liquidation Rights," (c) to any person, entity or group which the
Company, directly or indirectly, after giving effect to the Disposition,
controls or (d) in connection with a Related Business Transaction), the Company
is required, on or prior to the 85th Trading Day following the consummation of
such Disposition, to either:
(i) subject to the limitations described above under "--Dividends,"
declare and pay a dividend in cash and/or securities or other property (other
than a dividend or distribution of Common Stock) to the holders of the
outstanding shares of Telephony Group Common Stock equally on a share for share
basis (subject to the provisions described in the last sentence of the
paragraph herein which defines the term "Net Proceeds"), in an aggregate amount
equal to the product of the Telephony Group Outstanding Interest Fraction as of
the record date for determining the holders entitled to receive such dividend
and the Net Proceeds of such Disposition;
(ii) provided that there are assets of the Company legally available
therefor and the Telephony Group Available Dividend Amount would have been
sufficient to pay a dividend in lieu thereof as described in clause (i) of this
paragraph, then:
(A) if such Disposition involves all (not merely
substantially all) of the properties and assets of the Telephony
Group, redeem all outstanding shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock in exchange for
cash and/or securities or other property (other than Common Stock) in
an aggregate amount equal to the product of the Telephony Group
Outstanding Interest Fraction as of the date of such redemption and
the Net Proceeds of such Disposition, such aggregate amount to be
allocated (subject to the provisions described in the last sentence of
the paragraph herein which defines the term "Net Proceeds") to shares
of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock in the ratio of the number of shares of each such series
outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Telephony Group Common Stock and
each share of Series B Telephony Group Common Stock is the same); or
(B) if such Disposition involves substantially all (but not
all) of the properties and assets of the Telephony Group, apply an
aggregate amount of cash and/or securities or other property (other
than Common Stock) equal to the product of the Telephony Group
Outstanding Interest Fraction as of the date shares are selected for
redemption and the Net Proceeds of such Disposition to the redemption
of outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, such aggregate amount to be
allocated (subject to the provisions described in the last sentence of
the paragraph herein which defines the term "Net Proceeds") to shares
of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock in the ratio of the number of shares of each such series
outstanding, and the number of shares of each such series to be
redeemed to equal the lesser of (x) the whole number nearest the
number determined by dividing the aggregate amount so allocated to the
redemption of such series by the average Market Value of one share of
Series A Telephony Group Common
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Stock during the ten-Trading Day period beginning on the 16th Trading
Day following the consummation of such Disposition and (y) the number
of shares of such series outstanding (so that the amount of
consideration paid for the redemption of each share of Series A
Telephony Group Common Stock and each share of Series B Telephony
Group Common Stock is the same); or
(iii) convert (A) each outstanding share of Series A Telephony Group
Common Stock into a number (or fraction) of fully paid and nonassessable shares
of Series A TCI Group Common Stock and (B) each outstanding share of Series B
Telephony Group Common Stock into a number (or fraction) of fully paid and
nonassessable shares of Series B TCI Group Common Stock, in each case equal to
110% of the average daily ratio (calculated to the nearest five decimal places)
of the Market Value of one share of Series A Telephony Group Common Stock to
the Market Value of one share of Series A TCI Group Common Stock during the
ten-Trading Day period referred to in clause (ii)(B) of this paragraph.
For these purposes, "substantially all of the properties and assets of
the Telephony Group" means a portion of such properties and assets that
represents at least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets of the Telephony Group as of
such date.
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets of a Group in which the Company
receives as proceeds of such Disposition primarily equity securities
(including, without limitation, capital stock, convertible securities,
partnership or limited partnership interests and other types of equity
securities, without regard to the voting power or contractual or other
management or governance rights related to such equity securities) of the
purchaser or acquiror of such assets and properties of the applicable Group,
any entity which succeeds (by merger, formation of a joint venture enterprise
or otherwise) to such assets and properties of the applicable Group or a third
party issuer, which purchaser, acquiror or other issuer is engaged or proposes
to engage primarily in one or more businesses similar or complementary to the
businesses conducted by the applicable Group prior to such Disposition, as
determined in good faith by the Board of Directors. The Related Business
Transaction exception would enable the Company to enter into transactions in
which the properties or assets of the Telephony Group may be considered to be
"disposed of" in exchange for equity securities of an entity engaged or
proposing to engage in similar or complementary business areas to those of the
Telephony Group while maintaining the capital structure and delineation of
business groups contemplated by the Telephony Group Stock Proposal.
The "Net Proceeds" with respect to any Disposition of any of the
properties and assets of a Group means an amount, if any, equal to the gross
proceeds of such Disposition after any payment of, or reasonable provision for,
(a) any taxes payable by the Company in respect of such Disposition or in
respect of any resulting dividend or redemption (or which would have been
payable but for the utilization of tax benefits attributable to another Group),
(b) any transaction costs, including, without limitation, any legal, investment
banking and accounting fees and expenses and (c) any liabilities and other
obligations (contingent or otherwise) of, or attributed to, the applicable
Group, including, without limitation, any indemnity or guarantee obligations
incurred in connection with the Disposition or any liabilities for future
purchase price adjustments and any preferential amounts plus any accumulated
and unpaid dividends and other obligations in respect of Preferred Stock
attributed to the applicable Group (in the case of the Liberty Media Group,
without duplication of amounts allocated for the satisfaction of the Company's
obligations with respect to Pre- Distribution Convertible Securities and
Committed Acquisition Shares which are included in the determination of the
Adjusted Liberty Media Group Outstanding Interest Fraction). The Company may
elect to pay the dividend or redemption price referred to in clause (i) or (ii)
of the first paragraph under "--Conversion and Redemption--Mandatory Dividend,
Redemption or Conversion of Telephony Group Common Stock" either in the same
form as the proceeds of the Disposition were received or in any other
combination of cash or securities or other property (other than Common Stock)
that the Board of Directors determines will have an aggregate market value on a
fully distributed basis, of not less than the amount of the Net Proceeds. If
the dividend or redemption price is paid in the form of securities of an issuer
other than the Company, the Board of Directors may determine either to (i) pay
the dividend or redemption price in the form of separate classes or series of
securities, with one class or series of such securities to holders of Series A
Telephony Group Common Stock and another class or series of securities to
holders of Series B Telephony Group Common Stock, provided that such securities
(and, if such securities are convertible into or exercisable or exchangeable
for shares of another class or series of securities, the securities so issuable
upon such conversion, exercise or exchange) do not differ in any respect other
than their relative voting rights and related differences in designation,
conversion, redemption and share distribution provisions with holders of shares
of Series B Telephony Group Common Stock receiving the class or series having
the higher relative voting rights (without regard to whether such rights differ
to a greater or lesser extent than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and the Series B Telephony
Group Common Stock), provided that if such securities constitute capital stock
of a subsidiary of the Company, such rights will not differ to a greater extent
than the corresponding differences in voting rights,
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designation, conversion, redemption and share distribution provisions between
the Series A Telephony Group Common Stock and the Series B Telephony Group
Common Stock, and otherwise such securities will be distributed on an equal per
share basis, or (ii) pay the dividend or redemption price in the form of a
single class of securities without distinction between the shares received by
the holders of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock.
"Market Value" of a share of any class or series of capital stock of
the Company on any day means the average of the high and low reported sale
prices regular way of a share of such class or series on such day (if such day
is a trading day, and if such day is not a trading day, on the trading day
immediately preceding such day) or in case no such reported sale takes place on
such trading day the average of the reported closing bid and asked prices
regular way of a share of such class or series on such trading day, in either
case on the Nasdaq National Market, or if the shares of such class or series
are not quoted on the Nasdaq National Market on such trading day, the average
of the closing bid and asked prices of a share of such class or series in the
over-the-counter market on such trading day as furnished by any New York Stock
Exchange member firm selected from time to time by the Company, or if such
closing bid and asked prices are not made available by any such New York Stock
Exchange member firm on such trading day, the market value of a share of such
class or series as determined by the Board of Directors; provided, that for
purposes of determining the ratios described under "--Conversion and
Redemption--Conversion at the Option of the Company" and "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock" and "--Liquidation Rights," and for purposes of determining the
ratios described under the corresponding provisions of "Description of Existing
Common Stock and Other Capital Stock--TCI Group Common Stock and Liberty Media
Group Common Stock", (a) the "Market Value" of any share of any series of
Common Stock on any day prior to the "ex" date or any similar date for any
dividend or distribution paid or to be paid with respect to such series of
Common Stock will be reduced by the fair market value of the per share amount
of such dividend or distribution as determined by the Board of Directors and
(b) the "Market Value" of any share of any series of Common Stock on any day
prior to (i) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of outstanding
shares of such series of Common Stock or (ii) the "ex" date or any similar date
for any dividend or distribution with respect to any such series of Common
Stock in shares of such series of Common Stock will be appropriately adjusted
to reflect such subdivision, combination, dividend or distribution.
The option to convert the Telephony Group Common Stock into TCI Group
Common Stock in the event of a Disposition provides the Company with additional
flexibility by allowing the Company to deliver consideration in the form of
shares of TCI Group Common Stock rather than cash or securities or other
properties. This alternative could be used, for example, in circumstances when
the Company did not have sufficient legally available assets under the DGCL to
pay the full amount of an otherwise required dividend or redemption or when the
Company desired to retain such proceeds.
If less than substantially all of the properties and assets of the
Telephony Group were disposed of by the Company in one transaction (even if an
additional transaction were consummated at a later time in which additional
properties and assets of the Telephony Group were disposed of by the Company,
which, together with the properties and assets disposed of in the first
transaction, would have constituted substantially all of the properties and
assets of the Telephony Group at the time of the first transaction), the
Company would not be required to pay a dividend on, redeem or convert the
outstanding shares of Telephony Group Common Stock, unless such transactions
constituted a series of related transactions. The second transaction, however,
could trigger such a requirement if, at the time of the second transaction, the
properties and assets disposed of in such transaction constituted at least
substantially all of the properties and assets of the Telephony Group at such
time. If less than substantially all of the properties and assets of the
Telephony Group were disposed of by the Company, the holders of the Telephony
Group Common Stock would not be entitled to receive any dividend or have their
shares redeemed or converted for TCI Group Common Stock, although the Board of
Directors could determine, in its sole discretion, to pay a dividend on the
Telephony Group Common Stock in an amount related to the proceeds of such
Disposition.
At the time of any dividend made as a result of a Disposition referred
to above, the TCI Group will be credited, and the Telephony Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of Telephony Group Common Stock), with an amount equal to
the product of (i) the aggregate amount paid in respect of such dividend times
(ii) a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction.
See Annex IV for an illustration of the dividend on or redemption or
conversion of Telephony Group Common Stock following the Disposition of all or
substantially all of the properties and assets of the Telephony Group.
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Redemption in Exchange for Stock of Subsidiary. At any time at which
all of the assets and liabilities attributed to the Telephony Group have become
and continue to be held directly or indirectly by any one or more corporations
that are Qualifying Subsidiaries (the "Telephony Group Subsidiaries"), the
Board of Directors may, subject to the availability of assets of the Company
legally available therefor, redeem on a pro rata basis, all of the outstanding
shares of Telephony Group Common Stock in exchange for an aggregate number of
outstanding, fully paid and nonassessable shares of common stock of each
Telephony Group Subsidiary equal to the product of the Telephony Group
Outstanding Interest Fraction and the number of outstanding shares of common
stock of such Telephony Group Subsidiary that are owned by the Company.
In effecting such a redemption, the Board of Directors may determine
either to (i) redeem shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock in exchange for shares of separate classes or
series of common stock of each Telephony Group Subsidiary with relative voting
rights and related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in
voting rights, designation, conversion, redemption and share distribution
provisions between the Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, with holders of shares of Series B Telephony
Group Common Stock receiving the class or series having the higher relative
voting rights, or (ii) redeem shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock in exchange for shares of a single
class of common stock of each Telephony Group Subsidiary without distinction
between the shares distributed to the holders of the two series of Telephony
Group Common Stock.
See Annex IV for an illustration of the redemption of Telephony Group
Common Stock in exchange for common stock of the Telephony Group Subsidiaries.
Certain Provisions Respecting Convertible Securities. Unless the
provisions of any class or series of Convertible Securities which are
convertible into or exercisable or exchangeable for shares of Telephony Group
Common Stock provide specifically to the contrary, after any conversion date or
redemption date on which all outstanding shares of Telephony Group Common Stock
were converted or redeemed, any share of Telephony Group Common Stock that is
issued on conversion, exercise or exchange of any such Convertible Securities
will, immediately upon issuance pursuant to such conversion, exercise or
exchange and without any notice or any other action on the part of the Company
or its Board of Directors or the holder of such share of Telephony Group Common
Stock, be redeemed in exchange for, to the extent assets of the Company are
legally available therefor, the amount of $.01 per share in cash.
General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above under
"--Conversion and Redemption--Mandatory Dividend, Redemption or Conversion of
Telephony Group Common Stock," the Company will announce publicly by press
release (i) the Net Proceeds of such Disposition, (ii) the number of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, (iii) the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion, exercise or exchange prices thereof and (iv) the Telephony
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, the Company will
announce publicly by press release which of the actions described in clause
(i), (ii) or (iii) of the first paragraph under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend described in clause (i) of
the first paragraph under "--Conversion and Redemption--Mandatory Dividend,
Redemption or Conversion of Telephony Group Common Stock," the Company will,
not later than the 30th Trading Day following the consummation of such
Disposition, cause to be given to each holder of outstanding shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock, and to
each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (i) the record date for determining holders entitled to receive
such dividend, which will be not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition,
(ii) the anticipated payment date of such dividend (which will not be more than
85 Trading Days following the consummation of such Disposition), (iii) the kind
of shares of capital stock, cash and/or other securities or property to be
distributed in respect of shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, (iv) the Net Proceeds of such
Disposition, (v) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (vi) the number of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and the number of shares of
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Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof and (vii) in the case of a notice to holders of Convertible Securities,
a statement to the effect that holders of such Convertible Securities will be
entitled to receive such dividend only if they appropriately convert, exercise
or exchange them prior to the record date referred to in clause (i) of this
sentence. Such notice will be sent by first-class mail, postage prepaid, at
such holder's address as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption of shares of
Telephony Group Common Stock following a Disposition of all (not merely
substantially all) of the properties and assets of the Telephony Group as
described in clause (ii)(A) of the first paragraph under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and to each holder of Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for notice is otherwise made pursuant to the terms of such Convertible
Securities), a notice setting forth (i) a statement that all shares of
Telephony Group Common Stock outstanding on the redemption date will be
redeemed, (ii) the redemption date (which will not be more than 85 Trading Days
following the consummation of such Disposition), (iii) the kind of shares of
capital stock, cash and/or other securities or property to be paid as a
redemption price in respect of shares of Telephony Group Common Stock
outstanding on the redemption date, (iv) the Net Proceeds of such Disposition,
(v) the Telephony Group Outstanding Interest Fraction as of a recent date
preceding the date of such notice, (vi) the place or places where certificates
for shares of Telephony Group Common Stock, properly endorsed or assigned for
transfer (unless the Company waives such requirement), are to be surrendered
for delivery of certificates for shares of such capital stock, cash and/or
other securities or property, (vii) the number of outstanding shares of Series
A Telephony Group Common Stock and Series B Telephony Group Common Stock and
the number of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (viii) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities will be entitled to participate in such
redemption only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the redemption date referred to in
clause (ii) of this sentence and a statement as to what, if anything, such
holders will be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, the provision described under "--Conversion and
Redemption--Certain Provisions Respecting Convertible Securities" if such
holders convert, exercise or exchange such Convertible Securities following
such redemption date. Such notice will be sent by first-class mail, postage
prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to
the redemption date, at such holder's address as the same appears on the
transfer books of the Company.
If the Company determines to undertake a redemption of shares of
Telephony Group Common Stock following a Disposition of substantially all (but
not all) of the properties and assets of the Telephony Group as described in
clause (ii)(B) of the first paragraph under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock," the Company will, not later than the 30th Trading Day following
the consummation of such Disposition, cause to be given to each holder of
record of outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) a date not
earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition which will be the date on which
shares of the Telephony Group Common Stock then outstanding will be selected
for redemption, (ii) the anticipated redemption date (which will not be more
than 85 Trading Days following the consummation of such Disposition), (iii) the
kind of shares of capital stock, cash and/or other securities or property to be
paid as a redemption price in respect of shares of Telephony Group Common Stock
selected for redemption, (iv) the Net Proceeds of such Disposition, (v) the
Telephony Group Outstanding Interest Fraction as of a recent date preceding the
date of such notice, (vi) the number of outstanding shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock and the
number of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof, (vii) in the case of a notice
to holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities will be entitled to participate in such selection
for redemption only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the date referred to in clause (i)
of this sentence and a statement as to what, if anything, such holders will be
entitled to receive pursuant to the terms of such Convertible Securities if
such holders convert, exercise or exchange such Convertible Securities
following such date and (viii) a statement that the Company will not be
required to register a transfer of any shares
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of Telephony Group Common Stock for a period of 15 Trading Days next preceding
the date referred to in clause (i) of this sentence. Promptly following the
date referred to in clause (i) of the preceding sentence, but not earlier than
the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition, the Company will cause to be given to each
holder of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock to be redeemed, a notice setting forth (i) the
number of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock held by such holder to be redeemed, (ii) a
statement that such shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock will be redeemed, (iii) the redemption date
(which will not be more than 85 Trading Days following the consummation of such
Disposition), (iv) the kind and per share amount of shares of capital stock,
cash and/or other securities or property to be received by such holder with
respect to each share of such Telephony Group Common Stock to be redeemed,
including details as to the calculation thereof, and (v) the place or places
where certificates for shares of such Telephony Group Common Stock, properly
endorsed or assigned for transfer (unless the Company waives such requirement),
are to be surrendered for delivery of certificates for shares of such capital
stock, cash and/or other securities or property. The notices referred to in
this paragraph will be sent by first-class mail, postage prepaid, at such
holder's address as the same appears on the transfer books of the Company. The
outstanding shares of Telephony Group Common Stock to be redeemed will be
redeemed by the Company pro rata among the holders of Telephony Group Common
Stock or by such other method as may be determined by the Board of Directors to
be equitable.
In the event of any conversion as described above under "--Conversion
and Redemption--Conversion at the Option of the Company" or "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Telephony Group
Common Stock," the Company will cause to be given to each holder of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and to each holder of Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for such notice is otherwise made pursuant to the terms of such Convertible
Securities), a notice setting forth (i) a statement that all outstanding shares
of Telephony Group Common Stock will be converted, (ii) the conversion date
(which will not be more than 85 Trading Days following the consummation of such
Disposition in the event of a conversion pursuant to the provisions described
under "--Conversion and Redemption--Mandatory Dividend, Redemption or
Conversion of Telephony Group Common Stock" and which will not be more than 120
days after the Appraisal Date in the event of a conversion pursuant to the
provisions described under "--Conversion and Redemption--Conversion at the
Option of the Company"), (iii) the per share number of shares of Series A TCI
Group Common Stock or Series B TCI Group Common Stock, as applicable, to be
received with respect to each share of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock, including details as to the calculation
thereof, (iv) the place or places where certificates for shares of Telephony
Group Common Stock, properly endorsed or assigned for transfer (unless the
Company waives such requirement), are to be surrendered, (v) the number of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof and (vi)
in the case of a notice to holders of Convertible Securities, a statement to
the effect that holders of such Convertible Securities will be entitled to
participate in such conversion only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the conversion
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holders will be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, the provision described under
"--Conversion and Redemption--Certain Provisions Respecting Convertible
Securities" if such holders convert, exercise or exchange such Convertible
Securities following such conversion date. Such notice will be sent by
first-class mail, postage prepaid, not less than 35 Trading Days nor more than
45 Trading Days prior to the conversion date, at such holder's address as the
same appears on the transfer books of the Company.
If the Company determines to redeem shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock as described above under
"--Conversion and Redemption--Redemption in Exchange for Stock of Subsidiary,"
the Company will promptly cause to be given to each holder of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock and to
each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for such notice
is otherwise made pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a statement that all outstanding shares of Telephony
Group Common Stock will be redeemed in exchange for shares of common stock of
the Telephony Group Subsidiaries, (ii) the redemption date, (iii) the Telephony
Group Outstanding Interest Fraction as of a recent date preceding the date of
such notice, (iv) the place or places where certificates for shares of
Telephony Group Common Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement), are to be surrendered for
delivery of certificates for shares of common stock of the Telephony Group
Subsidiaries, (v) the number of outstanding shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock and the number of shares
of Series A Telephony Group Common Stock and Series B
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Telephony Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange prices thereof and (vi) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities will be entitled to receive shares of
common stock of the Telephony Group Subsidiaries upon redemption only if such
holders appropriately convert, exercise or exchange such Convertible Securities
on or prior to the redemption date referred to in clause (ii) of this sentence
and a statement as to what, if anything, such holders will be entitled to
receive pursuant to the terms of such Convertible Securities or, if applicable,
the provisions described under "--Conversion and Redemption--Certain Provisions
Respecting Convertible Securities" if such holders convert, exercise or
exchange such Convertible Securities following the redemption date. Such notice
will be sent by first-class mail, postage prepaid, not less than 35 Trading
Days nor more than 45 Trading Days prior to the redemption date, at such
holder's address as the same appears on the transfer books of the Company.
Neither the failure to mail any notice to any particular holder of
Telephony Group Common Stock or of Convertible Securities nor any defect
therein will affect the sufficiency thereof with respect to any other holder of
outstanding shares of Telephony Group Common Stock or of Convertible
Securities, or the validity of any conversion or redemption.
The Company will not be required to issue or deliver fractional shares
of any class of capital stock or any fractional securities to any holder of
Telephony Group Common Stock upon any conversion, redemption, dividend or other
distribution described above. In connection with the determination of the
number of shares of any class of capital stock that is issuable or the amount
of securities that is deliverable to any holder of record upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities), the Company may aggregate the number of shares of
Telephony Group Common Stock held at the relevant time by such holder of
record. If the number of shares of any class of capital stock or the amount of
securities remaining to be issued or delivered to any holder of Telephony Group
Common Stock is a fraction, the Company will, if such fraction is not issued or
delivered to such holder, pay a cash adjustment in respect of such fraction in
an amount equal to the fair market value of such fraction on the fifth Trading
Day prior to the date such payment is to be made (without interest). For
purposes of the preceding sentence, "fair market value" of any fraction will be
(i) in the case of any fraction of a share of capital stock of the Company, the
product of such fraction and the Market Value of one share of such capital
stock and (ii) in the case of any other fractional security, such value as is
determined by the Board of Directors.
No adjustments in respect of dividends will be made upon the
conversion or redemption of any shares of Telephony Group Common Stock;
provided, however, that if the conversion date or the redemption date with
respect to the Telephony Group Common Stock is subsequent to the record date
for the payment of a dividend or other distribution thereon or with respect
thereto, the holders of shares of Telephony Group Common Stock at the close of
business on such record date will be entitled to receive the dividend or other
distribution payable on or with respect to such shares on the date set for
payment of such dividend or other distribution, notwithstanding the conversion
or redemption of such shares or the Company's default in payment of the
dividend or distribution due on such date.
Before any holder of shares of Telephony Group Common Stock will be
entitled to receive certificates representing shares of any kind of capital
stock or cash and/or securities or other property to be received by such holder
with respect to any conversion or redemption of shares of Telephony Group
Common Stock, such holder is required to surrender at such place as the Company
will specify certificates for such shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement). The Company will as soon
as practicable after surrender of certificates representing shares of Telephony
Group Common Stock deliver to the person for whose account such shares were so
surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock or cash
and/or securities or other property to which such person is entitled, together
with any payment for fractional securities referred to above. If less than all
of the shares of Telephony Group Common Stock represented by any one
certificate are to be redeemed, the Company will issue and deliver a new
certificate for the shares of Telephony Group Common Stock not redeemed. The
Company will not be required to register a transfer of (i) any shares of
Telephony Group Common Stock for a period of 15 Trading Days next preceding any
selection of shares of Telephony Group Common Stock to be redeemed or (ii) any
shares of Telephony Group Common Stock selected or called for redemption.
Shares selected for redemption may not thereafter be converted pursuant to the
provisions described under "--Conversion and Redemption--Conversion at the
Option of the Holder."
From and after any applicable conversion date or redemption date, all
rights of a holder of shares of Telephony Group Common Stock that were
converted or redeemed will cease except for the right, upon surrender of the
certificates representing shares of Telephony Group Common Stock, to receive
certificates representing shares of the kind and amount of capital stock or
cash and/or securities or other property for which such shares were converted
or redeemed, together with any payment for fractional securities, and such
holder will have no other or further rights in respect of the shares of
Telephony Group Common
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Stock so converted or redeemed, including, but not limited to, any rights with
respect to any cash, securities or other property which are reserved or
otherwise designated by the Company as being held for the satisfaction of the
Company's obligations to pay or deliver any cash, securities or other property
upon the conversion, exercise or exchange of any Convertible Securities
outstanding as of the date of such conversion or redemption. No holder of a
certificate that, immediately prior to the applicable conversion date or
redemption date for the Telephony Group Common Stock, represented shares of
Telephony Group Common Stock will be entitled to receive any dividend or other
distribution with respect to shares of any kind of capital stock into or in
exchange for which the Telephony Group Common Stock was converted or redeemed
until surrender of such holder's certificate for a certificate or certificates
representing shares of such kind of capital stock. Upon such surrender, there
will be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable with respect to a record
date after the conversion date or redemption date, as the case may be, but that
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a conversion date or
redemption date, as the case may be, of Telephony Group Common Stock, the
Company will, however, be entitled to treat the certificates for shares of
Telephony Group Common Stock that have not yet been surrendered for conversion
or redemption as evidencing the ownership of the number of whole shares of the
kind or kinds of capital stock for which the shares of Telephony Group Common
Stock represented by such certificates have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue
or transfer taxes that may be payable in respect of the issue or delivery of
any shares of capital stock and/or other securities on conversion or redemption
of shares of Telephony Group Common Stock. The Company will not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue and delivery of any shares of capital stock in a name other than
that in which the shares of Telephony Group Common Stock so converted or
redeemed were registered and no such issue or delivery will be made unless and
until the person requesting such issue has paid to the Company the amount of
any such tax, or has established to the satisfaction of the Company that such
tax has been paid.
LIQUIDATION RIGHTS
The Telephony Group Stock Proposal provides that, in the event of a
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Company and subject to the prior payment in full of the
preferential amounts to which any class or series of Preferred Stock is
entitled, (i) the holders of the shares of TCI Group Common Stock will share
equally, on a share for share basis, in a percentage of the funds of the
Company remaining for distribution to its common stockholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of W/Z for the
20-Trading Day period ending on the Trading Day prior to the date of the public
announcement of such liquidation, dissolution or winding up, (ii) the holders
of the shares of Liberty Media Group Common Stock will share equally, on a
share for share basis, in a percentage of the funds of the Company remaining
for distribution to its common stockholders equal to 100% multiplied by the
average daily ratio (expressed as a decimal) of X/Z for such 20-Trading Day
period and (iii) the holders of the shares of Telephony Group Common Stock will
share equally, on a share for share basis, in a percentage of the funds of the
Company remaining for distribution to its common stockholders equal to 100%
multiplied by the average daily ratio (expressed as a decimal) of Y/Z for such
20-Trading Day period, where W is the aggregate Market Capitalization of the
Series A TCI Group Common Stock and the Series B TCI Group Common Stock, X is
the aggregate Market Capitalization of the Series A Liberty Media Group Common
Stock and the Series B Liberty Media Group Common Stock, Y is the aggregate
Market Capitalization of the Series A Telephony Group Common Stock and the
Series B Telephony Group Common Stock, and Z is the aggregate Market
Capitalization of the Series A TCI Group Common Stock, the Series B TCI Group
Common Stock, the Series A Liberty Media Group Common Stock, the Series B
Liberty Media Group Common Stock, the Series A Telephony Group Common Stock and
the Series B Telephony Group Common Stock. Neither a consolidation, merger nor
sale of assets will be construed to be a "liquidation," "dissolution" or
"winding up" of the Company. The "Market Capitalization" of any class or series
of capital stock of the Company on any trading day means the product of (i) the
Market Value of one share of such class or series on such trading day and (ii)
the number of shares of such class or series outstanding on such trading day.
No holder of Telephony Group Common Stock will have any special right
to receive specific assets of the Telephony Group in the case of any
dissolution, liquidation or winding up of the Company.
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DETERMINATIONS BY THE BOARD OF DIRECTORS
The Amended Charter will provide that any determinations made by the
Board of Directors under any provision described under "Description of
Telephony Group Common Stock and Effects on Existing Common Stock" will be
final and binding on all stockholders of the Company, except as may otherwise
be required by law. Such a determination would not be binding if it were
established that the determination was made in breach of a fiduciary duty of
the Board of Directors. See "Factors to be Considered--Fiduciary Duties of the
Board of Directors Are to All Stockholders Regardless of Class or Series." The
Company will prepare a statement of any such determination by the Board of
Directors respecting the fair market value of any properties, assets or
securities and will file such statement with the Secretary of the Company.
PREEMPTIVE RIGHTS
Under the Telephony Group Stock Proposal, the holders of the TCI Group
Common Stock, Liberty Media Group Common Stock and Telephony Group Common Stock
will not have any preemptive rights to subscribe for any additional shares of
capital stock or other obligations convertible into or exercisable for shares
of capital stock that may hereafter be issued by the Company.
INTER-GROUP INTEREST IN THE TELEPHONY GROUP
Currently, all of the investments attributed to the Telephony Group
are part of the TCI Group and the Company's equity in and share of losses of
the entities in which such investments are held are reflected in their entirety
in the financial statements of the TCI Group. Upon effectiveness of the
Telephony Group Stock Proposal, these investments will cease to be attributed
to the TCI Group; however, until shares of Telephony Group Common Stock are
issued, the TCI Group Common Stock will continue to be intended to reflect all
of the common stockholders' equity value of the Company attributed to the
Telephony Group -- i.e., the Inter-Group Interest of the TCI Group in the
Telephony Group will initially be 100% -- in addition to the separate
performance of all businesses of the Company not included in the Liberty Media
Group or the Telephony Group. At such time as shares of Telephony Group Common
Stock are first issued, the Company's equity in and share of losses of the
entities in which the investments attributed to the Telephony Group are held
will be reflected in the separate financial statements of the Telephony Group
and will cease to be reflected in the financial statements of the TCI Group,
except to the extent of the then Inter-Group Interest, as adjusted to reflect
such issuance, and as appropriate in accordance with generally accepted
accounting principles.
Prior to the issuance of any shares of Telephony Group Common Stock,
the Board of Directors will designate the number of shares of the aggregate 825
million authorized shares of Telephony Group Common Stock that are deemed to
represent the then Inter-Group Interest (i.e., 100% of the common stockholders'
equity value of the Company attributable to the Telephony Group), and such
number will represent the initial Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest. Authorized shares of Telephony Group
Common Stock in excess of the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest will be available for issuance as
additional equity for the Telephony Group. Shares of Telephony Group Common
Stock sold in the initial offering will not include shares attributed to the
Inter-Group Interest.
As shares of Telephony Group Common Stock are offered and sold from
time to time by the Company, the Company will identify (i) the number of shares
of Telephony Group Common Stock offered and sold that represent the Inter-Group
Interest, if any, the sale of which shares will reduce the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest on a
share-for-share basis and the net proceeds of which sale will be reflected
entirely in the financial statements of the TCI Group, and (ii) the number of
such shares that represent an additional equity interest in the Telephony
Group, the sale of which shares will reduce the Available Shares and the net
proceeds of which sale will be reflected entirely in the financial statements
of the Telephony Group. The authorized shares of Telephony Group Common Stock
in excess of the total number of shares outstanding will be available for
issuance or sale without further approval by the Company's stockholders and may
be issued at any time at prices that would dilute the value of the outstanding
shares of Telephony Group Common Stock. The Board of Directors expects to make
such determination, in its sole discretion, after consideration of such factors
as it deems relevant, including, without limitation, the needs of the Company,
the relative levels of internally generated cash flow of the Groups, the
capital expenditure plans of and investment opportunities available to the
Groups, the long-term business prospects for the Groups and the availability,
cost and time associated with alternative financing sources. See "Factors to be
Considered--Fiduciary Duties of the Board of Directors Are to All Stockholders
Regardless of Class or Series." For illustrations of the effects of the
issuance of shares of Telephony Group Common Stock, See Annex IV.
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The TCI Group's Inter-Group Interest in the Telephony Group would be
increased if a subsequent transfer of cash or other property from the TCI Group
to the Telephony Group is specifically designated by the Board of Directors as
being made to increase such Inter-Group Interest (in contrast to transfers made
for other consideration such as transfers as loans or in purchase and sale
transactions) or if outstanding shares of Telephony Group Common Stock are
retired or otherwise cease to be outstanding following their purchase with
funds attributed to the TCI Group. In structuring the terms of the Telephony
Group Stock Proposal, the Board of Directors determined that the Telephony
Group should not be enabled to create an interest in either the TCI Group or
the Liberty Media Group corresponding to the Inter-Group Interest, and that the
Liberty Media Group should not be enabled to create an interest in the
Telephony Group corresponding to the Inter-Group Interest. In making these
determinations, the Board of Directors concluded that an interest corresponding
to the Inter-Group Interest held by the Telephony Group in either the TCI Group
or the Liberty Media Group could influence adversely the ability of the
Telephony Group Common Stock to reflect the separate performance of the
Telephony Group, and that an interest corresponding to an Inter-Group Interest
held by the Liberty Media Group in the Telephony Group could influence
adversely the ability of the Liberty Media Group Common Stock to reflect the
separate performance of the Liberty Media Group.
In general, if the TCI Group's Inter-Group Interest in the Telephony
Group is increased by a transfer of funds or other assets from the TCI Group to
the Telephony Group, the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would be increased by an amount determined
by dividing the amount of funds or value of the assets transferred by the
Market Value of a share of Series A Telephony Group Common Stock as of the date
of such transfer. Any decrease in the Number of Shares Issuable with Respect to
the Telephony Group Inter-Group Interest resulting from a transfer of funds or
other assets from the Telephony Group to the TCI Group determined by the Board
of Directors to be made in respect of such a decrease would be similarly
calculated. To the extent outstanding shares of Telephony Group Common Stock
are retired or otherwise cease to be outstanding following their purchase with
funds attributed to the TCI Group, the Number of Shares Issuable with Respect
to the Telephony Group Inter-Group Interest would increase on a share-for-share
basis. Shares of Telephony Group Common Stock purchased with funds attributed
to the TCI Group which remain outstanding (as a result of being held by a
subsidiary included in the TCI Group) would not increase its Inter-Group
Interest in the Telephony Group but would represent an outstanding interest in
the common stockholders' equity value of the Company attributable to the
Telephony Group. Similarly, shares of Telephony Group Common Stock purchased
with funds attributed to the Liberty Media Group which remain outstanding would
not create an interest in the Telephony Group corresponding to the Inter-Group
Interest, but would represent an outstanding interest in the common
stockholders' equity value of the Company attributable to the Telephony Group.
The Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest will also (a) be adjusted from time to time as appropriate to reflect
(i) subdivisions (by stock split or otherwise) and combinations (by reverse
stock split or otherwise) of the Telephony Group Common Stock, (ii) dividends
or distributions payable in shares of Telephony Group Common Stock to holders
of Telephony Group Common Stock and (iii) reclassifications of Telephony Group
Common Stock and (b) be decreased by the number of shares of Telephony Group
Common Stock (i) issued upon conversion or exercise of Convertible Securities
that are not attributed to the Telephony Group or (ii) issued by the Company as
a dividend or distribution or by reclassification or exchange to holders of TCI
Group Common Stock. The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would not be represented by outstanding shares of
Telephony Group Common Stock and would have no voting rights.
The "Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest" means the number of shares of Series A Telephony Group
Common Stock that could be issued or sold by the Company for the account of the
TCI Group in respect of its Inter-Group Interest in the Telephony Group. The
"Telephony Group Outstanding Interest Fraction" means the percentage interest
in the common stockholders' equity value of the Company attributable to the
Telephony Group that is represented at any time by the outstanding shares of
Telephony Group Common Stock, and the "Telephony Group Inter-Group Interest
Fraction" means any remaining percentage interest in the common stockholders'
equity value of the Company attributable to the Telephony Group that is
attributed to the TCI Group. The sum of the Telephony Group Outstanding
Interest Fraction and the Telephony Group Inter-Group Interest Fraction would
always equal 100%. The full definitions of "Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest," "Telephony Group
Outstanding Interest Fraction" and "Telephony Group Inter-Group Interest
Fraction" are set forth in Annex II.
The Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be represented by outstanding shares of
Telephony Group Common Stock and, therefore, would not be entitled to any
voting rights. In addition, outstanding shares of Telephony Group Common Stock
that are held by majority-owned subsidiaries of the Company (as to which the
Company owns a majority of the shares entitled to vote in the election of
directors) would not, in accordance with the DGCL, be entitled to vote on
matters presented to stockholders or be counted for quorum purposes.
Accordingly, the Company will not have any voting rights with respect to any
Inter-Group Interest in the Telephony Group, and the outcome
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of any vote of the Telephony Group Common Stock would be determined by the
holders of the outstanding shares of Telephony Group Common Stock (excluding
any shares held by such majority-owned subsidiaries of the Company).
For financial reporting purposes, shares of Telephony Group Common
Stock acquired by consolidated subsidiaries of the Company included in the TCI
Group which remain outstanding following such acquisition would be combined
with the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest and reported as the TCI Group's investment in the
Telephony Group. Any differences between such reported investment and the TCI
Group's Inter-Group Interest in the Telephony Group would be reconcilable by
adding to such Inter-Group Interest the number of outstanding shares of
Telephony Group Common Stock held by consolidated subsidiaries of the Company.
Because these shares would still be outstanding for purposes of the receipt of
dividends and payment of redemption or liquidation amounts, the TCI Group would
obtain substantially the same economic benefits from such outstanding shares as
it would have received had such shares been retired or otherwise ceased to be
outstanding following their purchase and added to the Number of Shares Issuable
with Respect to the Telephony Group Inter-Group Interest.
Whenever additional shares of Telephony Group Common Stock are issued
or sold by the Company for the account of the TCI Group in respect of a
reduction in its Inter-Group Interest in the Telephony Group, the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest would
decrease on a share-for-share basis and the Telephony Group Inter-Group
Interest Fraction would decrease and the Telephony Group Outstanding Interest
Fraction would increase accordingly. If the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest is reduced to zero as a
result of such issuances, shares of Telephony Group Common Stock could no
longer be issued or sold by the Company for the account of the TCI Group unless
an Inter-Group Interest in the Telephony Group is again subsequently created.
If the net proceeds of any issuance or sale by the Company of Telephony Group
Common Stock are allocated to the Telephony Group, the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest would not be
reduced, but the Telephony Group Inter-Group Interest Fraction would decrease
and the Telephony Group Outstanding Interest Fraction would increase
accordingly.
If the Board of Directors determines to issue or deliver shares of
Telephony Group Common Stock as a distribution on the TCI Group Common Stock,
such distribution would be treated as a distribution of shares issuable with
respect to the TCI Group's Inter-Group Interest in the Telephony Group, and as
a result, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would decrease by the number of shares distributed to the
holders of TCI Group Common Stock, resulting in a proportionate decrease in the
Telephony Group Inter-Group Interest Fraction and increase in the Telephony
Group Outstanding Interest Fraction.
If shares of Telephony Group Common Stock are retired or otherwise
cease to be outstanding following their purchase with funds attributed to the
TCI Group, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would increase on a share-for-share basis and the
Telephony Group Inter-Group Interest Fraction would increase and the Telephony
Group Outstanding Interest Fraction would decrease accordingly. If the purchase
of shares of Telephony Group Common Stock were attributed to the Telephony
Group, the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest would not be increased, but the Telephony Group
Inter-Group Interest Fraction would increase and the Telephony Group
Outstanding Interest Fraction would decrease accordingly. The Board of
Directors would, in its sole discretion, determine whether purchases of
Telephony Group Common Stock should be made with consideration attributed to
the TCI Group or the Telephony Group, by considering such factors as it deems
relevant, including, without limitation, the needs of the Company, the relative
levels of internally generated cash flow of the Groups, the capital expenditure
plans of the Groups, the investment opportunities available to the Groups, the
long-term business prospects for the Groups and the availability, cost and time
associated with alternative financing sources.
The Board of Directors could, in its sole discretion, determine from
time to time to contribute cash or other property of the TCI Group as
additional equity to the Telephony Group, which would increase the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest by the
number determined by dividing the amount of such cash or the fair value (as
determined by the Board of Directors) of such property by the Market Value of
one share of Series A Telephony Group Common Stock as of the date of such
contribution. In such event, the Telephony Group Inter-Group Interest Fraction
will increase and the Telephony Group Outstanding Interest Fraction will
decrease accordingly. The Board of Directors could, in its sole discretion,
also determine from time to time to transfer cash or other property of the
Telephony Group from the Telephony Group to the TCI Group in respect of a
reduction in its Inter-Group Interest in the Telephony Group, in which case the
Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest would be decreased by the number determined by dividing the amount of
such cash or the fair value (as determined by the Board of Directors) of such
property
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by the Market Value of one share of Series A Telephony Group Common Stock as of
the date of such contribution. In such event, the Telephony Group Inter-Group
Interest Fraction would decrease and the Telephony Group Outstanding Interest
Fraction would increase accordingly. The Board of Directors could, in its sole
discretion, determine to make contributions or other transfers referred to in
this paragraph after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing needs
and objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions.
In the event of any dividend or other distribution paid or distributed
in respect of the outstanding shares of Telephony Group Common Stock (other
than in shares of Telephony Group Common Stock), the TCI Group will be
credited, and the Telephony Group will be charged (in addition to the charge
for such dividend or other distribution), with an amount equal to the product
of (i) the aggregate amount of any dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common Stock
(including any dividend of Net Proceeds from the Disposition of all or
substantially all of the assets and properties of the Telephony Group), times
(ii) a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction.
See Annex IV for illustrations of the calculation of the TCI Group's
Inter-Group Interest in the Telephony Group and the effects thereon of
dividends on, and the sale or purchase of, shares of Telephony Group Common
Stock and contributions of cash or other property of the TCI Group to the
Telephony Group.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock. The Board of
Directors does not currently intend to pay dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock or, if the Telephony Group Stock
Proposal is approved, the Telephony Group Common Stock. However, the Board of
Directors reserves the right to pay such dividends at any time and from time to
time out of funds legally available therefor.
Any decision to pay dividends in the future will depend on the
financial condition, results of operations and business requirements of the
Company as a whole. Any future dividends on the TCI Group Common Stock, the
Liberty Media Group Common Stock and the Telephony Group Common Stock would be
paid on such basis as the Board of Directors determines, subject to the
provisions described under "Description of Telephony Group Common Stock and
Effects on Existing Common Stock--Dividends." In making its determination, the
Board of Directors expects to follow a policy under which it will consider,
among other factors, the relative financial condition, results of operations
and business requirements of the respective Groups. See Annex V for the
Consolidated Financial Information of the Company, the Combined Financial
Information of the Telephony Group and the Combined Financial Information of
the TCI Group.
For information concerning dividends on the TCI Group Common Stock,
the Liberty Media Group Common Stock and the Telephony Group Common Stock, see
"Description of Telephony Group Common Stock and Effects on Existing Common
Stock--Dividends."
STOCK TRANSFER AGENT AND REGISTRAR
The Bank of New York will act as transfer agent and registrar for the
Telephony Group Common Stock upon issuance thereof.
INCLUSION IN NASDAQ NATIONAL MARKET
The Company anticipates applying for inclusion of the Series A
Telephony Group Common Stock and the Series B Telephony Group Common Stock in
the Nasdaq National Market under the symbols "_______" and "_________,"
respectively. The Series A TCI Group Common Stock, Series B TCI Group Common
Stock, Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock will continue to be included in the Nasdaq National Market
under the symbols "TCOMA," "TCOMB," LBTYA" and "LBTYB," respectively.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material Federal income tax consequences
of the Telephony Group Stock Proposal is based on the opinion of Baker & Botts,
L.L.P., counsel to the Company, and Baker & Botts, L.L.P. has advised the
Company that this summary accurately describes such material consequences. The
discussion is based on the Internal Revenue Code of 1986, as amended to the
date hereof (the "Code"), Treasury Department regulations, published positions
of the Service and court decisions now in effect, all of which are subject to
change. In particular, Congress could enact legislation affecting the treatment
of stock with characteristics similar to the Telephony Group Common Stock, or
the Treasury Department could change the current law in future regulations,
including regulations issued pursuant to its authority under Section 337(d) of
the Code (granting the Treasury regulatory authority with respect to the
proper tax treatment of corporate distributions of appreciated property to
shareholders). Any further legislation or regulations could be enacted or
promulgated so as to apply retroactively to the Telephony Group Stock Proposal.
However, upon advice of counsel, the Company believes that, as a practical
matter, it is unlikely that such legislation or regulations would apply
retroactively to the Telephony Group Common Stock. The discussion contained
herein and counsel's opinion are based on the assumption that the Telephony
Group Stock Proposal will be implemented as described herein.
The Company has not applied for an advance tax ruling from the Service
because the Service has announced that it will not issue advance rulings on the
classification of stock with characteristics similar to the Telephony Group
Common Stock.
IT IS IMPORTANT TO NOTE THAT THE OPINION OF COUNSEL DESCRIBED HEREIN
IS BASED UPON THE LAW IN EFFECT AS OF THE DATE HEREOF. THE TELEPHONY GROUP
STOCK PROPOSAL CONTEMPLATES THE POSSIBILITY OF THE PASSAGE OF TIME BETWEEN THE
DATE HEREOF AND THE ISSUANCE OF SHARES OF TELEPHONY GROUP COMMON STOCK.
THEREFORE, THE COMPANY WILL SEEK APPROPRIATE ADVICE FROM ITS COUNSEL TO UPDATE
THIS OPINION PRIOR TO THE INITIAL ISSUANCE OF SUCH SHARES.
TAX IMPLICATIONS TO STOCKHOLDERS
This discussion addresses those stockholders who will hold Telephony
Group Common Stock and/or TCI Group Common Stock as capital assets within the
meaning of Section 1221 of the Code. This discussion is included for general
information only. It does not discuss all aspects of Federal income taxation
that could be relevant to a stockholder in light of such stockholder's
particular tax circumstances and does not apply to certain types of
stockholders who could be subject to special treatment under the Federal income
tax laws. STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS
WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX
LAWS TO WHICH THEY COULD BE SUBJECT.
Distribution and Receipt of Telephony Group Common Stock. Following
approval by stockholders of the Telephony Group Stock Proposal, the Company
currently intends, subject to prevailing market and other conditions, to offer
shares of Series A Telephony Group Common Stock for cash in an initial public
offering. Additional shares of Telephony Group Common Stock could be offered in
the future for cash in one or more public offerings or issued as a distribution
to the holders of TCI Group Common Stock on a pro rata basis; and the Company
may, from time to time, issue shares of Telephony Group Common Stock for other
corporate purposes.
In the opinion of counsel, the Telephony Group Common Stock should be
treated as stock of the Company for Federal income tax purposes. Therefore,
counsel is also of the opinion that in the event of a future distribution of
the Telephony Group Common Stock by the Company to the holders of TCI Group
Common Stock, such distribution should, in the absence of special
circumstances, constitute a stock dividend and be tax-free under Section 305 of
the Code if the various requirements of Section 305 are met in the particular
transaction. If such a distribution of Telephony Group Common Stock is so
treated, the basis each stockholder has in the TCI Group Common Stock with
respect to which the Telephony Group Common Stock is distributed would be
allocated between such TCI Group Common Stock and the Telephony Group Common
Stock received in proportion to the respective fair market values of each. The
holding period of the Telephony Group Common Stock would include the holding
period of the TCI Group Common Stock with respect to which it is distributed,
assuming that the TCI Group Common Stock is held as a capital asset on the date
of distribution.
Although it is counsel's opinion that any future distribution of
Telephony Group Common Stock should generally not result in the recognition of
any income, gain or loss by stockholders, there are no Federal income tax
regulations, court decisions or published rulings of the Service bearing
directly on stock with characteristics of the Telephony Group Common
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Stock, particularly the dividend and liquidation features. In addition, the
Service announced during 1987 that it was studying the Federal income tax
consequences of stock which has certain voting and liquidation rights in an
issuing corporation, but whose dividend rights are determined by reference to
the earnings and profits of a segregated portion of the issuing corporation's
assets, and that it would not issue any advance rulings regarding such stock.
In 1995, the Service withdrew the characterization of such stock from its list
of matters under consideration but reiterated that it would not issue advance
rulings regarding such stock. In the absence of such a ruling, there is a risk
that the Service could assert that the Telephony Group Common Stock does not
constitute stock of the Company but is other property.
If the Telephony Group Common Stock were treated as property other
than stock of the Company, any future distribution of the Telephony Group
Common Stock to holders of TCI Group Common Stock could be taxed as a dividend
to stockholders in an amount equal to the fair market value of the Telephony
Group Common Stock on the date received. If the distribution is so taxed,
shareholders would generally have a tax basis in the Telephony Group Stock
equal to such fair market value on receipt.
Sale or Exchange of Common Stock. Upon a stockholder's taxable sale or
exchange of the Telephony Group Common Stock, such stockholder would recognize
gain or loss equal to the difference between (i) any cash received plus the
fair market value of any other consideration received and (ii) the tax basis of
the stock sold or exchanged. Such tax basis would, in the case of a purchase of
the stock, be the amount paid therefore or, if received in a distribution,
would be determined in the manner described above under "--Tax Implications to
Stockholders--Distribution and Receipt of Telephony Group Common Stock."
Should the Company redeem the Telephony Group Common Stock in the
future by distributing shares of the Telephony Group Subsidiaries in exchange
therefor, it intends to do so in a manner that it will be tax free under
Section 355 of the Code. If such redemption does not qualify under Section 355
of the Code, then (i) the holders of the Telephony Group Common Stock could,
depending upon their individual circumstances, either (a) recognize gain on the
redemption in an amount equal to the difference between the fair market value
of the Telephony Group Subsidiaries stock received and the stockholders' tax
basis in their shares being redeemed or (b) be treated as having received a
taxable dividend in an amount equal to the fair market value of the received
Telephony Group Subsidiaries stock.
The excess of net long-term capital gains over net short-term capital
loss could be taxed at a rate lower than ordinary income for certain
noncorporate taxpayers. A capital gain is long-term if the asset is held for
more than one year and is short-term if held for one year or less. The
distinction between capital gain or loss and ordinary income is also relevant
for purposes of, among other things, the limitation on the deductibility of
capital losses.
Conversion. If the Telephony Group Common Stock is treated as stock of
the Company as discussed above, a conversion of such stock into TCI Group
Common Stock pursuant to the terms of the Telephony Group Stock Proposal should
constitute a tax free exchange. However, it is not clear that an exchange of
shares of Telephony Group Common Stock for shares of TCI Group Common Stock, or
shares of TCI Group Common Stock for shares of Telephony Group Common Stock,
would constitute a tax free exchange under the Code.
Adjustments to Convertible Securities. In the event of a future
distribution by the Company of Telephony Group Common Stock to holders of TCI
Group Common Stock, any outstanding Convertible Securities convertible into, or
exercisable or exchangeable for, TCI Group Common Stock will, on the effective
date of such distribution, either become convertible into, or exercisable or
exchangeable for, a combination of TCI Group Common Stock and Telephony Group
Common Stock, or into an increased amount of TCI Group Common Stock. To the
extent that the conversion right, or exercise right or exchange right of such
Convertible Securities is adjusted pursuant to their terms only as necessary to
prevent dilution, such adjustment should not be deemed a taxable stock
distribution to holders of the Convertible Securities.
Nonresident Alien Holders. Dividend payments received by a holder of
Telephony Group Common Stock who is a Nonresident Alien (as defined below)
would be subject to United States Federal withholding tax. A Nonresident Alien
holder would not be subject to United States Federal income or withholding tax
on any gain realized on the taxable sale or exchange of any such stock, unless
(A) such gain was effectively connected with a United States trade or business
of the Nonresident Alien, (B) the Nonresident Alien was an individual who had
been present in the United States for a period or periods of 183 days or more
during the taxable year and certain other conditions were met or (C) the stock
sold or exchanged was a "United States Real Property Interest" as defined in
Section 897(c)(1) of the Code at any time during the five years prior to the
sale or exchange of the stock or at any time during the time that the
Nonresident Alien held such stock, whichever time was shorter.
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The Telephony Group Common Stock sold or exchanged would be a United States
Real Property Interest only if, at any time during the five years prior to the
sale or exchange of such stock, or at any time during the period that the
Nonresident Alien held such stock, whichever time was shorter, the Company had
been a "United States real property holding corporation" as defined in Section
897(c)(2) of the Code and the Nonresident Alien owned directly or indirectly
more than 5% of such series of Telephony Group Common Stock. The Company
believes that it is not, has not been and will not become a "United States real
property holding corporation" for Federal income tax purposes.
A "Nonresident Alien" is any person who, for Federal income tax
purposes, is a foreign corporation, a nonresident alien individual, a
nonresident alien fiduciary or a foreign estate or trust, or a foreign
partnership that includes as a member any of the foregoing persons.
Backup Withholding. Certain noncorporate holders of Telephony Group
Common Stock could be subject to backup withholding at a rate of 31% on the
payment of dividends on such stock. Backup withholding will apply only if the
holder (i) failed to furnish its Taxpayer Identification Number ("TIN"), which,
for an individual, is his or her Social Security number, (ii) furnished an
incorrect TIN, (iii) was notified by the Service that it had failed to properly
report payments of interest or dividends or (iv) under certain circumstances,
failed to certify under penalties of perjury that it had furnished a correct
TIN and had been notified by the Service that it had failed to properly report
payments of interest or dividends. Stockholders should consult their tax
advisors regarding their qualification for exemption from backup withholding
and the procedures for obtaining such an exemption if applicable.
The amount of any backup withholding on a payment to a holder of
Telephony Group Common Stock would be allowed as a credit against such
stockholder's Federal income tax liability and could entitle such stockholder
to a refund, provided that the required information was furnished to the
Service.
TAX IMPLICATIONS TO THE COMPANY.
As noted above, in the opinion of counsel, the Telephony Group Common
Stock should be treated as stock of the Company for federal income tax
purposes. Accordingly, no gain or loss should be recognized by the Company on
the sale of Telephony Group Common Stock or on any subsequent distribution of
such stock to holders of TCI Group Common Stock. If, however, the Telephony
Group Common Stock were treated as property other than stock of the Company,
the Company could recognize gain on the distribution or sale of Telephony Group
Common Stock in an amount equal to the difference between the fair market value
of such distributed stock, or the proceeds received therefrom in the case of a
sale, and its tax basis in the hands of the Company, which basis would probably
be zero. If the Telephony Group Common Stock is treated as stock of a
subsidiary of the Company, and not as stock of the Company, the Telephony Group
could, depending upon the amount of stock issued, be treated as not includable
in the Company's consolidated federal income tax return. If so treated, any
dividends paid or deemed paid to the Company by the Telephony Group would be
taxed to the Company.
DESCRIPTION OF EXISTING COMMON STOCK AND OTHER CAPITAL STOCK
Pursuant to the Telephony Group Stock Proposal, the authorized shares
of Common Stock would increase, two new series of Common Stock, designated
Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock, would be authorized and certain of the rights and powers of the TCI
Group Common Stock and the Liberty Media Group Common Stock would be changed.
Each series of Common Stock and each class and series of Preferred Stock
described below will remain authorized following approval of the Telephony
Group Stock Proposal.
The following description of certain terms of the TCI Group Common
Stock, the Liberty Media Group Common Stock and the outstanding classes and
series of Preferred Stock does not purport to be complete and is qualified in
its entirety by reference to the Company Charter (including the Certificate of
Designation with respect to each outstanding series of Series Preferred Stock).
TCI GROUP COMMON STOCK AND LIBERTY MEDIA GROUP COMMON STOCK
The Company is currently authorized to issue 2,725,000,000 shares of
Common Stock, of which 1,750,000,000 shares are designated Series A TCI Group
Common Stock, 150,000,000 shares are designated Series B TCI Group Common
Stock, 750,000,000 shares are designated Series A Liberty Media Group Common
Stock and 75,000,000 shares are designated Series B Liberty Media Group Common
Stock.
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As of October 31, 1996, 579,395,742 shares of Series A TCI Group
Common Stock, 84,663,501 shares of Series B TCI Group Common Stock, 144,815,842
shares of Series A Liberty Media Group Common Stock and 21,191,669 shares of
Series B Liberty Media Group Common Stock (in each case net of shares held in
treasury) had been issued and were outstanding and 100,524,365 shares of Series
A TCI Group Common Stock were held by subsidiaries of the Company. As of that
date, 119,320,915 shares of Series A TCI Group Common Stock and 20,842,015
shares of Series A Liberty Media Group Common Stock were reserved for issuance
upon conversion, exchange or exercise of outstanding convertible or
exchangeable securities and options. In addition, TCI has reserved a number of
shares of Series A TCI Group Common Stock equal to the number of shares of
Series B TCI Group Common Stock outstanding, and a number of shares of Series A
Liberty Media Group Common Stock equal to the number of shares of Series B
Liberty Media Group Common Stock outstanding, for issuance upon conversion, at
the option of the holder, of the Series B TCI Group Common Stock and Series B
Liberty Media Group Common Stock, respectively. Additionally, subsidiaries of
TCI own shares of TCI's Series F Preferred Stock which is convertible into
358,323,046 shares of Series A TCI Group Common Stock.
Certain Definitions. As used in this Proxy Statement, the following
terms have the meanings specified below:
"Committed Acquisition Shares" means (i) the shares of Series A
Liberty Media Group Common Stock that the Company had, prior to the record date
for the Distribution, agreed to issue, but as of such record date had not
issued, and (ii) the shares of Series A Liberty Media Group Common Stock that
are issuable upon conversion, exercise or exchange of Convertible Securities
that the Company had, prior to the record date for the Distribution, agreed to
issue, but as of such record date had not issued, in each case including
obligations of the Company to issue shares of the Company's Class A Common
Stock, par value $1.00 per share (which has been redesignated Series A TCI
Group Common Stock), which as a result of the Distribution, constitute
obligations to issue, among other securities, Series A Liberty Media Group
Common Stock or Convertible Securities which are convertible into or
exercisable or exchangeable for Series A Liberty Media Group Common Stock;
provided, however, that Committed Acquisition Shares will not include any
shares of Liberty Media Group Common Stock issuable upon conversion, exercise
or exchange of Pre-Distribution Convertible Securities. The type and amount of
Committed Acquisition Shares issuable will be appropriately adjusted to reflect
subdivisions and combinations of the Series A Liberty Media Group Common Stock
and dividends or distributions of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock to holders of Series A
Liberty Media Group Common Stock and other reclassifications of the Series A
Liberty Media Group Common Stock, in each case occurring (or the record date
for which occurs) after the Distribution. The shares of Series A Liberty Media
Group Common Stock issuable upon conversion of the Series H Preferred Stock
will constitute Committed Acquisition Shares.
"The "Inter-Group Interest" of the TCI Group in the Liberty Media
Group means any common stockholders' equity value of the Company attributable
to the Liberty Media Group that is not represented by outstanding shares of
Liberty Media Group Common Stock. The TCI Group's Inter-Group Interest in the
Liberty Media Group is represented by the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest.
The "Liberty Media Group" means as of any date of determination
thereof:
(i) the interest of the Company or any of its
subsidiaries in Liberty Media Corporation or any of its subsidiaries
(including any successor thereto by merger, consolidation or sale of
all or substantially all of its assets, whether or not in connection
with a Related Business Transaction) and their respective properties
and assets;
(ii) all assets and liabilities of the Company or any of
its subsidiaries to the extent attributed to any of the properties or
assets referred to in clause (i) of this sentence, whether or not such
assets or liabilities are assets and liabilities of Liberty Media
Corporation or any of its subsidiaries (or a successor as described in
clause (i) of this sentence);
(iii) all assets and properties contributed or otherwise
transferred to the Liberty Media Group from the TCI Group; and
(iv) the interest of the Company or any of its
subsidiaries in the businesses, assets and liabilities acquired by the
Company or any of its subsidiaries for the Liberty Media Group, as
determined by the Board of Directors;
provided that (a) from and after any dividend or other distribution with
respect to any shares of Liberty Media Group Common Stock (other than a
dividend or other distribution payable in shares of Liberty Media Group Common
Stock, with respect to
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which adjustment will be made as described in clause (i) of the definition of
"Number of Shares Issuable with Respect to the Liberty Media Group Inter-Group
Interest," or in other securities of the Company attributed to the Liberty
Media Group for which provision will be made as described in the penultimate
sentence of this definition), the Liberty Media Group will no longer include an
amount of assets or properties equal to the aggregate amount of such kind of
assets or properties so paid in respect of shares of Liberty Media Group Common
Stock multiplied by a fraction the numerator of which is equal to the Liberty
Media Group Inter-Group Interest Fraction in effect immediately prior to the
record date for such dividend or other distribution and the denominator of
which is equal to the Liberty Media Group Outstanding Interest Fraction in
effect immediately prior to the record date for such dividend or other
distribution and (b) from and after any transfer of assets or properties from
the Liberty Media Group to the TCI Group, the Liberty Media Group will no
longer include the assets or properties so transferred. If the Company pays a
dividend or makes any other distribution with respect to shares of Liberty
Media Group Common Stock payable in securities of the Company attributed to the
Liberty Media Group other than Liberty Media Group Common Stock, the TCI Group
will be deemed to hold an amount of such other securities equal to the amount
so distributed multiplied by the fraction specified in clause (a) of this
definition (determined as of a time immediately prior to the record date for
such dividend or other distribution), and to the extent interest or dividends
are paid or other distributions are made on such other securities so
distributed to the holders of Liberty Media Group Common Stock, the Liberty
Media Group will no longer include a corresponding ratable amount of the kind
of assets paid as such interest or dividends or other distributions in respect
of such securities so deemed to be held by the TCI Group. The Company may
also, to the extent any such other securities constitute Convertible Securities
which are at the time convertible, exercisable or exchangeable, cause such
Convertible Securities deemed to be held by the TCI Group to be deemed to be
converted, exercised or exchanged (and to the extent the terms of such
Convertible Securities require payment or delivery of consideration in order to
effect such conversion, exercise or exchange, the Liberty Media Group will in
such case include an amount of the kind of properties or assets required to be
paid or delivered as such consideration for the amount of the Convertible
Securities deemed converted, exercised or exchanged as if such Convertible
Securities were outstanding), in which case such Convertible Securities will no
longer be deemed to be held by the TCI Group or attributed to the Liberty Media
Group.
The "Liberty Media Group Inter-Group Interest Fraction" means a
fraction the numerator of which is the Number of Shares Issuable with Respect
to the Liberty Media Group Inter-Group Interest and the denominator of which is
the sum of such Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest and the aggregate number of shares of Liberty Media
Group Common Stock outstanding.
The "Liberty Media Group Outstanding Interest Fraction" means a
fraction the numerator of which is the aggregate number of shares of Liberty
Media Group Common Stock outstanding and the denominator of which is the sum of
such aggregate number of shares of Liberty Media Group Common Stock outstanding
and the Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest.
The "Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest" is currently zero and will from time to time be
(i) adjusted as appropriate to reflect subdivisions (by
stock split or otherwise) and combinations (by reverse stock split or
otherwise) of the Series A Liberty Media Group Common Stock and
dividends or distributions of shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock to holders
of Series A Liberty Media Group Common Stock and other
reclassifications of Series A Liberty Media Group Common Stock,
(ii) decreased (but not to less than zero) by (a) the
aggregate number of shares of Series A Liberty Media Group Common
Stock issued or sold by the Company after the Distribution other than
Committed Acquisition Shares, the proceeds of which are attributed to
the TCI Group, (b) the aggregate number of shares of Series A Liberty
Media Group Common Stock issued or delivered upon conversion, exercise
or exchange of Convertible Securities (other than Pre-Distribution
Convertible Securities and Convertible Securities which are
convertible into or exercisable or exchangeable for Committed
Acquisition Shares), the proceeds of which are attributed to the TCI
Group, (c) the aggregate number of shares of Liberty Media Group
Common Stock issued or delivered by the Company as a dividend or
distribution to holders of Series A TCI Group Common Stock and Series
B TCI Group Common Stock, (d) the aggregate number of shares of
Liberty Media Group Common Stock issued or delivered upon the
conversion, exercise or exchange of any Convertible Securities (other
than Pre-Distribution Convertible Securities and Convertible
Securities which are convertible into or exercisable or exchangeable
for Committed Acquisition Shares) issued or delivered by the Company
after the Distribution as a dividend or distribution or by
reclassification
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or exchange to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock and (e) the aggregate number of shares of
Series A Liberty Media Group Common Stock (rounded, if necessary, to
the nearest whole number), equal to the aggregate fair value (as
determined by the Board of Directors) of assets or properties
attributed to the Liberty Media Group that are transferred from the
Liberty Media Group to the TCI Group in consideration of a reduction
in the Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest, divided by the Market Value of one share
of Series A Liberty Media Group Common Stock as of the date of such
transfer, and
(iii) increased by (a) the aggregate number of any shares
of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock which are retired or otherwise cease to be
outstanding following their purchase with funds attributed to the TCI
Group, (b) a number (rounded, if necessary, to the nearest whole
number), equal to the fair value (as determined by the Board of
Directors) of assets or properties theretofore attributed to the TCI
Group that are contributed to the Liberty Media Group in consideration
of an increase in the Number of Shares Issuable with Respect to the
Liberty Media Group Inter- Group Interest, divided by the Market Value
of one share of Series A Liberty Media Group Common Stock as of the
date of such contribution and (c) the aggregate number of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock into or for which Convertible Securities are deemed
to be converted, exercised or exchanged pursuant to the last sentence
of the definition of "TCI Group."
The Company will not issue or sell shares of Series B Liberty Media Group
Common Stock in respect of a reduction in the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest. Whenever a change in
the Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest occurs, the Company will prepare and file a statement of
such change with the Secretary of the Company.
"Pre-Distribution Convertible Securities" means Convertible Securities
that were outstanding on the record date for the Distribution and were, prior
to such date, convertible into or exercisable or exchangeable for shares of the
Company's Class A Common Stock, par value $1.00 per share (which has been
redesignated Series A TCI Group Common Stock).
The "TCI Group" means as of any date of determination thereof:
(i) the interest of the Company or any of its
subsidiaries in all of the businesses in which the Company or any of
its subsidiaries (or any of their predecessors or successors) is or
has been engaged, directly or indirectly, and the respective assets
and liabilities of the Company or any of its subsidiaries, other than
any businesses, assets or liabilities of the Liberty Media Group and,
if the Telephony Group Stock Proposal is approved, other than any
businesses, assets or liabilities of the Telephony Group;
(ii) a proportionate interest in the businesses, assets
and liabilities of the Liberty Media Group equal to the Liberty Media
Group Inter-Group Interest Fraction as of such date and, if the
Telephony Group Stock Proposal is approved, a proportionate interest
in the businesses, assets and liabilities of the Telephony Group equal
to the Telephony Group Inter-Group Interest Fraction as of such date;
(iii) from and after any dividend or other distribution
with respect to shares of Liberty Media Group Common Stock (other than
a dividend or other distribution payable in shares of Liberty Media
Group Common Stock, with respect to which adjustment will be made as
described in clause (i) of the definition of "Number of Shares
Issuable with Respect to the Liberty Media Group Inter-Group
Interest," or in other securities of the Company attributed to the
Liberty Media Group, for which provision will be made as described in
the second sentence of this definition), an amount of assets or
properties theretofore included in the Liberty Media Group equal to
the aggregate amount of such kind of assets or properties so paid in
respect of such dividend or other distribution with respect to shares
of Liberty Media Group Common Stock multiplied by a fraction the
numerator of which is equal to the Liberty Media Group Inter-Group
Interest Fraction in effect immediately prior to the record date for
such dividend or other distribution and the denominator of which is
equal to the Liberty Media Group Outstanding Interest Fraction in
effect immediately prior to the record date for such dividend or other
distribution;
(iv) if the Telephony Group Stock Proposal is approved and
shares of Telephony Group Common Stock are issued, from and after any
dividend or other distribution with respect to shares of Telephony
Group Common Stock (other than a dividend or other distribution
payable in shares of Telephony Group Common Stock with respect
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to which appropriate adjustments will be made to the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest, or
in other securities of the Company attributed to the Telephony Group,
for which provision will be made as described in the penultimate
sentence of this definition), an amount of assets or properties
theretofore included in the Telephony Group equal to the aggregate
amount of such kind of assets or properties so paid in respect of such
dividend or distribution with respect to shares of Telephony Group
Common Stock multiplied by a fraction the numerator of which is equal
to the Telephony Group Inter-Group Interest Fraction in effect
immediately prior to the record date for such dividend or other
distribution and the denominator of which is equal to the Telephony
Group Outstanding Interest Fraction in effect immediately prior to the
record date for such dividend or other distribution; and
(v) any assets or properties transferred from the Liberty
Media Group or the Telephony Group to the TCI Group;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group or the Telephony
Group, the TCI Group will no longer include such assets or properties so
contributed or transferred (other than pursuant to its interest in the
businesses, assets and liabilities of the Liberty Media Group or the Telephony
Group, as applicable, described in clause (ii) above). If the Company pays a
dividend or makes any other distribution with respect to shares of Liberty
Media Group Common Stock payable in other securities of the Company attributed
to the Liberty Media Group, the TCI Group will be deemed to hold an amount of
such other securities equal to the amount so distributed multiplied by the
fraction specified in clause (iii) of this definition (determined as of a time
immediately prior to the record date for such dividend or other distribution),
and to the extent interest or dividends are paid or other distributions are
made on such other securities so distributed to holders of Liberty Media Group
Common Stock, the TCI Group will include a corresponding ratable amount of the
kind of assets paid as such interest or dividends or other distributions in
respect of such securities so deemed to be held by the TCI Group. If the
Company pays a dividend or makes any other distribution with respect to shares
of Telephony Group Common Stock payable in other securities of the Company
attributed to the Telephony Group, the TCI Group will be deemed to hold an
amount of such other securities equal to the amount so distributed multiplied
by the fraction specified in clause (iv) of this definition (determined as of a
time immediately prior to the record date for such dividend or other
distribution), and to the extent interest or dividends are paid or other
distributions are made on such other securities so distributed to holders of
Telephony Group Common Stock, the TCI Group will include a corresponding
ratable amount of the kind of assets paid as such interest or dividends or
other distribution in respect of such securities so deemed to be held by the
TCI Group. The Company may also, to the extent any such other securities
constitute Convertible Securities which are at the time convertible,
exercisable or exchangeable, cause such Convertible Securities deemed to be
held by the TCI Group to be deemed to be converted, exercised or exchanged (and
to the extent the terms of such Convertible Securities require payment or
delivery of consideration in order to effect such conversion, exercise or
exchange, the TCI Group will in such case no longer include an amount of the
kind of properties or assets required to be paid or delivered as such
consideration for the amount of the Convertible Securities deemed converted,
exercised or exchanged as if such Convertible Securities were outstanding), in
which case such Convertible Securities will no longer be deemed to be held by
the TCI Group or attributed to the Liberty Media Group or Telephony Group, as
applicable. See Annex II for the full definition of the "TCI Group" under the
Telephony Group Stock Proposal.
Voting Rights. Holders of Series A TCI Group Common Stock are entitled
to one vote for each share of such stock held, holders of Series B TCI Group
Common Stock are entitled to ten votes for each share of such stock held,
holders of Series A Liberty Media Group Common Stock are entitled to one vote
for each share of such stock held and holders of Series B Liberty Media Group
Common Stock are entitled to ten votes for each share of such stock held, on
all matters presented to such stockholders. Except as may otherwise be required
by the laws of the State of Delaware or, with respect to any class of Preferred
Stock or any series of such a class, in the Company Charter (including any
resolution or resolutions providing for the establishment of such class or
series pursuant to authority vested in the Board of Directors by the Company
Charter), the holders of TCI Group Common Stock and the holders of Liberty
Media Group Common Stock and the holders of each class or series of Preferred
Stock, if any, entitled to vote thereon will vote as one class for all
purposes.
Neither the holders of Series A TCI Group Common Stock or Series B TCI
Group Common Stock, nor the holders of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock, have any rights to vote as
a separate class or series on any matter coming before the stockholders of the
Company, except with respect to certain limited class and series voting rights
provided under the DGCL. Under the DGCL, the approval of the holders of a
majority of the outstanding shares of any class of capital stock of a
corporation, voting separately as a class, is required to approve any amendment
to the charter that would alter or change the powers, preferences or special
rights of the shares of such class so as
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to affect them adversely, provided that, if any amendment would alter or change
the powers, preferences or special rights of one or more series of the class so
as to affect them adversely, but would not so affect the entire class, then
only the shares of the series so affected by the amendment would be entitled to
vote thereon separately as a class.
Dividends. Subject to the prior payment of dividends on, and other
rights of, any of the outstanding shares of Preferred Stock, dividends may be
paid as determined by the Board of Directors (i) on the TCI Group Common Stock
out of the lesser of (x) the TCI Group Available Dividend Amount and (y) funds
of the Company legally available therefor under the DGCL and (ii) on the
Liberty Media Group Common Stock out of the lesser of (x) the Liberty Media
Group Available Dividend Amount and (y) funds of the Company legally available
therefor under the DGCL. Under the DGCL the amount of the funds of the Company
legally available for the payment of dividends on any series of Common Stock is
determined on the basis of the entire corporation and not just the Liberty
Media Group or the TCI Group or the Telephony Group. Consequently, the amount
of legally available funds will be reduced by the amount of any net losses of
the Liberty Media Group or the TCI Group or the Telephony Group and any
dividends or distributions on, or repurchases of, the TCI Group Stock or the
Liberty Media Group Common Stock or, if the Telephony Group Stock Proposal is
approved, the Telephony Group Common Stock, if any, and any dividends or
distributions on, or repurchases of, the TCI Group or the Liberty Media Group
Common Stock or the Telephony Group Common Stock, if any, and dividends on, or
certain repurchases of, Preferred Stock. Certain loan agreements to which
certain subsidiaries of the Company are parties or are subject contain
restricted payment provisions that limit the amount of dividends, other than
stock dividends, that those companies may pay. Future loan agreements may also
contain similar restrictions and limits.
The "TCI Group Available Dividend Amount," as of any date, means
either (i) the excess of (a) an amount equal to the total assets of the TCI
Group less the total liabilities (not including preferred stock) of the TCI
Group as of such date over (b) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding shares of TCI
Group Common Stock and each class or series of Preferred Stock attributed to
the TCI Group or (ii) in case there is no such excess, an amount equal to the
Company Earnings (Loss) Attributable to the TCI Group (if positive) for the
fiscal year in which such date occurs and/or the preceding fiscal year.
"Company Earnings (Loss) Attributable to the TCI Group," for any period, means
the net earnings or loss of the TCI Group for such period determined on a basis
consistent with the determination of the net earnings or loss of the TCI Group
for such period as presented in the combined financial statements of the TCI
Group for such period, including income and expenses of the Company attributed
to the operations of the TCI Group on a substantially consistent basis,
including, without limitation, corporate administrative costs, net interest and
income taxes. The TCI Group Available Dividend Amount is intended to be similar
to the amount that would be legally available for the payment of dividends on
the TCI Group Common Stock under the DGCL if the TCI Group were a separate
Delaware corporation. There can be no assurance that there will be a TCI Group
Available Dividend Amount.
The "Liberty Media Group Available Dividend Amount," as of any date,
means the product of the Liberty Media Group Outstanding Interest Fraction and
either (i) the excess of (a) an amount equal to the total assets of the Liberty
Media Group less the total liabilities (not including preferred stock) of the
Liberty Media Group as of such date over (b) the aggregate par value of, or any
greater amount determined to be capital in respect of, all outstanding shares
of Liberty Media Group Common Stock and each class or series of Preferred Stock
attributed to the Liberty Media Group or (ii) in case there is no such excess,
an amount equal to Company Earnings (Loss) Attributable to the Liberty Media
Group (if positive) for the fiscal year in which such date occurs and/or the
preceding fiscal year. The "Company Earnings (Loss) Attributable to the Liberty
Media Group," for any period, means the net earnings or loss of the Liberty
Media Group for such period determined on a basis consistent with the
determination of the net earnings or loss of the Liberty Media Group for such
period as presented in the combined financial statements of the Liberty Media
Group for such period, including income and expenses of the Company attributed
to the operations of the Liberty Media Group on a substantially consistent
basis, including, without limitation, corporate administrative costs, net
interest and income taxes. The Liberty Media Group Available Dividend Amount is
intended to be similar to the amount that would be legally available for the
payment of dividends on the Liberty Media Group Common Stock under the DGCL if
the Liberty Media Group were a separate Delaware corporation. There is no
assurance that there will be a Liberty Media Group Available Dividend Amount.
Except for dividends declared or paid as described below under
"--Share Distributions" and "--Conversion and Redemption--Mandatory Dividend,
Redemption or Conversion of Liberty Media Group Common Stock," any dividends
paid on the Series A TCI Group Common Stock or the Series B TCI Group Common
Stock will be paid only on both series, in equal amounts per share, and any
dividends paid on the Series A Liberty Media Group Common Stock or the Series B
Liberty Media Group Common Stock will be paid only on both series, in equal
amounts per share.
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The Board of Directors, subject to the provisions described above and
under "--Share Distributions" below, has the authority and discretion to
declare and pay dividends on the TCI Group Common Stock or the Liberty Media
Group Common Stock in equal or unequal amounts, notwithstanding the
relationship between the TCI Group Available Dividend Amount and the Liberty
Media Group Available Dividend Amount, the respective amounts of prior
dividends declared on, or liquidation rights of, the TCI Group Common Stock or
the Liberty Media Group Common Stock or any other factor.
At the time of any dividend or other distribution on the outstanding
shares of Liberty Media Group Common Stock (including any dividend of Net
Proceeds from the Disposition of all or substantially all of the properties and
assets of the Liberty Media Group as described below under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Liberty Media Group
Common Stock"), the TCI Group will (if at such time there is an Inter-Group
Interest in the Liberty Media Group) be credited, and the Liberty Media Group
will be charged (in addition to the charge for the dividend or other
distribution paid or distributed in respect of outstanding shares of Liberty
Media Group Common Stock), with an amount equal to the product of (i) the
aggregate amount of such dividend or distribution paid or distributed in
respect of outstanding shares of Liberty Media Group Common Stock times (ii) a
fraction the numerator of which is the Liberty Media Group Inter-Group Interest
Fraction and the denominator of which is the Liberty Media Group Outstanding
Interest Fraction.
Share Distributions.
Distributions on TCI Group Common Stock. If at any time after
the Distribution a distribution paid in TCI Group Common Stock, Liberty Media
Group Common Stock, any other securities of the Company or any other person (a
"share distribution") is to be made with respect to the TCI Group Common Stock,
such share distribution will be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A TCI
Group Common Stock (or Convertible Securities convertible into
or exercisable or exchangeable for shares of Series A TCI
Group Common Stock) to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock, on an equal per
share basis; or consisting of shares of Series B TCI Group
Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series B TCI Group
Common Stock) to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock, on an equal per share
basis; or consisting of shares of Series A TCI Group Common
Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Group
Common Stock) to holders of Series A TCI Group Common Stock
and, on an equal per share basis, shares of Series B TCI Group
Common Stock (or like Convertible Securities convertible into
or exercisable or exchangeable for shares of Series B TCI
Group Common Stock) to holders of Series B TCI Group Common
Stock;
(ii) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of
Series A Liberty Media Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common
Stock, on an equal per share basis; provided that the sum of
(A) the aggregate number of shares of Series A Liberty Media
Group Common Stock to be so issued (or the number of such
shares which would be issuable upon conversion, exercise or
exchange of any Convertible Securities to be so issued) and
(B) the number of shares of such series that are subject to
issuance upon conversion, exercise or exchange of any
Convertible Securities then outstanding that are attributed to
the TCI Group (other than Pre-Distribution Convertible
Securities and other than Convertible Securities convertible
into or exercisable or exchangeable for Committed Acquisition
Shares) is less than or equal to the Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest;
and
(iii) a share distribution consisting of any class or series of
securities of the Company or any other person other than TCI
Group Common Stock or Liberty Media Group Common Stock (or
Convertible Securities convertible into or exercisable or
exchangeable for shares of TCI Group Common Stock or Liberty
Media Group Common Stock), either on the basis of a
distribution of identical securities, on an equal per share
basis, to holders of Series A TCI Group Common Stock and
Series B TCI Group Common Stock or on the basis of a
distribution of one class or series of securities to holders
of Series A TCI Group Common Stock and another class or series
of securities to holders of Series B TCI Group Common Stock,
provided that the securities so distributed (and, if the
distribution consists of Convertible Securities, the
securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable)
do not differ
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in any respect other than their relative voting rights and
related differences in designation, conversion, redemption and
share distribution provisions, with holders of shares of
Series B TCI Group Common Stock receiving the class or series
having the higher relative voting rights (without regard to
whether such rights differ to a greater or lesser extent than
the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions
between the Series A TCI Group Common Stock and the Series B
TCI Group Common Stock), provided that if the securities so
distributed constitute capital stock of a subsidiary of the
Company, such rights will not differ to a greater extent than
the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions
between the Series A TCI Group Common Stock and the Series B
TCI Group Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
The Company will not reclassify, subdivide or combine the Series A TCI
Group Common Stock without reclassifying, subdividing or combining the Series B
TCI Group Common Stock, on an equal per share basis, and the Company will not
reclassify, subdivide or combine the Series B TCI Group Common Stock without
reclassifying, subdividing or combining the Series A TCI Group Common Stock, on
an equal per share basis.
Distributions on Liberty Media Group Common Stock. If at any
time a share distribution is to be made with respect to the Liberty Media Group
Common Stock, such share distribution will be declared and paid only as follows
(or as described under "--Conversion and Redemption" with respect to the
redemptions and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A Liberty
Media Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of
Series A Liberty Media Group Common Stock) to holders of
Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock, on an equal per share basis; or
consisting of shares of Series B Liberty Media Group Common
Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series B Liberty
Media Group Common Stock) to holders of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common
Stock, on an equal per share basis; or consisting of shares of
Series A Liberty Media Group Common Stock (or Convertible
Securities convertible into or exercisable or exchangeable for
shares of Series A Liberty Media Group Common Stock) to
holders of Series A Liberty Media Group Common Stock and, on
an equal per share basis, shares of Series B Liberty Media
Group Common Stock (or like Convertible Securities convertible
into or exercisable or exchangeable for shares of Series B
Liberty Media Group Common Stock) to holders of Series B
Liberty Media Group Common Stock; and
(ii) a share distribution consisting of any class or series of
securities of the Company or any other person other than as
described in the immediately preceding clause (i) and other
than TCI Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of
Series A TCI Group Common Stock or Series B TCI Group Common
Stock), either on the basis of a distribution of identical
securities, on an equal per share basis, to holders of Series
A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock or on the basis of a distribution of one
class or series of securities to holders of Series A Liberty
Media Group Common Stock and another class or series of
securities to holders of Series B Liberty Media Group Common
Stock, provided that the securities so distributed (and, if
the distribution consists of Convertible Securities, the
securities into which such Convertible Securities are
convertible or for which they are exercisable or exchangeable)
do not differ in any respect other than their relative voting
rights and related differences in designation, conversion,
redemption and share distribution provisions, with holders of
shares of Series B Liberty Media Group Common Stock receiving
the class or series having the higher relative voting rights
(without regard to whether such rights differ to a greater or
lesser extent than the corresponding differences in voting
rights, designation, conversion, redemption and share
distribution provisions between the Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common
Stock), provided that if the securities so distributed
constitute capital stock of a subsidiary of the Company, such
rights will not differ to a greater extent than the
corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions
between the Series A Liberty Media Group Common Stock and the
Series B Liberty Media Group Common Stock, and provided in
each case that such distribution is otherwise made on an equal
per share basis.
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The Company will not reclassify, subdivide or combine the Series A
Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series B Liberty Media Group Common Stock, on an equal per share
basis, and the Company will not reclassify, subdivide or combine the Series B
Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series A Liberty Media Group Common Stock, on an equal per share
basis.
Conversion and Redemption.
Conversion at the Option of the Holder. Each share of Series B
TCI Group Common Stock is convertible, at the option of the holder thereof,
into one share of Series A TCI Group Common Stock. Each share of Series B
Liberty Media Group Common Stock is convertible, at the option of the holder
thereof, into one share of Series A Liberty Media Group Common Stock. Shares of
Series A TCI Group Common Stock are not convertible into shares of Series B TCI
Group Common Stock, and shares of Series A Liberty Media Group Common Stock are
not convertible into shares of Series B Liberty Media Group Common Stock.
Conversion at the Option of the Company. The Board of
Directors may at any time declare that (i) all of the outstanding shares of
Series A Liberty Media Group Common Stock will be converted into a number (or
fraction) of fully paid and nonassessable shares of Series A TCI Group Common
Stock equal to the Liberty Media Group Optional Conversion Ratio, and (ii) all
of the outstanding shares of Series B Liberty Media Group Common Stock will be
converted into a number (or fraction) of fully paid and nonassessable shares of
Series B TCI Group Common Stock equal to the Liberty Media Group Optional
Conversion Ratio.
For these purposes, the "Liberty Media Group Optional Conversion
Ratio" means the quotient (calculated to the nearest five decimal places)
obtained by dividing (x) the Liberty Media Group Common Stock Per Share Value
by (y) the average Market Value of one share of Series A TCI Group Common Stock
over the 20-Trading Day period ending on the Trading Day preceding the
Appraisal Date. The Liberty Media Group Common Stock Per Share Value will equal
the quotient obtained by dividing the Liberty Media Group Private Market Value
by the Adjusted Outstanding Shares of Liberty Media Group Common Stock, which
will be determined in the manner described below.
The "Liberty Media Group Private Market Value" means an amount equal
to the private market value of the Liberty Media Group as of the last day of
the calendar month preceding the month in which the last of the two appraisers
referred to in the immediately following sentence are selected (the last day of
such calendar month is hereinafter referred to as the "Appraisal Date"). In the
event that the Company determines to establish the Liberty Media Group Private
Market Value, two investment banking firms of recognized national standing will
be designated to determine the private market value of the Liberty Media Group,
one designated by the Company (the "First Appraiser") and one designated by a
committee of the TCI Board of Directors all of whose members are independent
directors as determined under Nasdaq National Market rules (the "Second
Appraiser"). The date upon which the last of such appraisers is selected is
hereinafter referred to as the "Selection Date." Not later than 20 days after
the Selection Date, the First Appraiser and the Second Appraiser will each
determine its initial view as to the private market value of the Liberty Media
Group as of the Appraisal Date and will consult with one another with respect
thereto. Not later than the 30th day after the Selection Date, the First
Appraiser and the Second Appraiser will each have determined its final view as
to such private market value. If the higher of the respective final views of
the First Appraiser and the Second Appraiser as to such private market value
(the "Higher Appraised Amount") is not more than 120% of the lower of such
respective final views (the "Lower Appraised Amount"), the Liberty Media Group
Private Market Value (subject to any adjustment described in the second
succeeding paragraph) will be the average of those two amounts. If the Higher
Appraised Amount is more than 120% of the Lower Appraised Amount, the First
Appraiser and the Second Appraiser will agree upon and jointly designate a
third investment banking firm of a recognized national standing ("the Mutually
Designated Appraiser") to determine such private market value. The Mutually
Designated Appraiser will not be provided with any of the work of the First
Appraiser and the Second Appraiser. The Mutually Designated Appraiser will, no
later than the 20th day after the date the Mutually Designated Appraiser is
designated, determine such private market value (the "Mutually Appraised
Amount"), and the Liberty Media Group Private Market Value (subject to any
adjustment described in the second succeeding paragraph) will be (i) if the
Mutually Appraised Amount is between the Lower Appraised Amount and the Higher
Appraised Amount, (a) the average of (1) the Mutually Appraised Amount and (2)
the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer
to the Mutually Appraised Amount, or (b) the Mutually Appraised Amount, if
neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to
the Mutually Appraised Amount, or (ii) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such investment
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banking firm expresses its final view of the private market value of the
Liberty Media Group as a range of values, such investment banking firm's final
view of such private market value will be deemed to be the midpoint of such
range of values.
Each of the investment banking firms referred to in the immediately
preceding paragraph will be instructed to determine the private market value of
the Liberty Media Group as of the Appraisal Date based upon the amount a
willing purchaser would pay to a willing seller, in an arm's-length
transaction, if it were acquiring the Liberty Media Group, as if the Liberty
Media Group were a publicly traded non-controlled corporation and the purchaser
was acquiring all of the capital stock of such corporation and without
consideration of any potential regulatory constraints limiting the potential
purchasers of the Liberty Media Group other than that which would have existed
if the Liberty Media Group were a publicly traded non-controlled entity.
Following the determination of the Liberty Media Group Private Market
Value, the investment banking firms whose final views of the private market
value of the Liberty Media Group were used in the calculation of the Liberty
Media Group Private Market Value will determine the Adjusted Outstanding Shares
of Liberty Media Group Common Stock together with any further appropriate
adjustments to the Liberty Media Group Private Market Value resulting from such
determination. The "Adjusted Outstanding Shares of Liberty Media Group Common
Stock" means a number, as determined by such investment banking firms as of the
Appraisal Date, equal to the sum of the number of shares of Liberty Media Group
Common Stock outstanding, the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest, the number of Committed Acquisition
Shares issuable, the number of shares of Liberty Media Group Common Stock
issuable upon the conversion, exercise or exchange of all Pre-Distribution
Convertible Securities and the number of shares of Liberty Media Group Common
Stock issuable upon the conversion, exercise or exchange of those Convertible
Securities (other than Pre-Distribution Convertible Securities and other than
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares) the holders of which would
derive an economic benefit from conversion, exercise or exchange of such
Convertible Securities which exceeds the economic benefit of not converting,
exercising or exchanging such Convertible Securities. The "Liberty Media Group
Common Stock Per Share Value" means the quotient obtained by dividing the
Liberty Media Group Private Market Value by the Adjusted Outstanding Shares of
Liberty Media Group Common Stock, provided that if such investment banking
firms do not agree on the determinations provided for in this paragraph, the
Liberty Media Group Common Stock Per Share Value will be the average of the
quotients so obtained on the basis of the respective determinations of such
firms.
If the Company determines to convert shares of Series A Liberty Media
Group Common Stock into Series A TCI Group Common Stock and shares of Series B
Liberty Media Group Common Stock into Series B TCI Group Common Stock at the
Liberty Media Group Optional Conversion Ratio, such conversion will occur on a
conversion date on or prior to the 120th day following the Appraisal Date. If
the Company determines not to undertake such conversion, the Company may at any
time thereafter undertake to reestablish the Liberty Media Group Common Stock
Per Share Value as of a subsequent date.
Mandatory Dividend, Redemption or Conversion of Liberty Media
Group Common Stock. Upon the Disposition, in one transaction or a series of
related transactions by the Company and its subsidiaries of all or
substantially all of the properties and assets of the Liberty Media Group to
one or more persons, entities or groups (other than (a) in connection with the
Disposition by the Company of all of the Company's properties and assets in one
transaction or a series of related transactions in connection with the
liquidation, dissolution or winding up of the Company, (b) a dividend, other
distribution or redemption in accordance with any provision described under
"--Dividends," "--Share Distributions," "--Conversion and
Redemption--Redemption in Exchange for Stock of Subsidiary" or "--Liquidation
Rights," (c) to any person, entity or group which the Company, directly or
indirectly, after giving effect to the Disposition, controls or (d) in
connection with a Related Business Transaction), the Company is required, on or
prior to the 85th trading day following the consummation of such Disposition,
to either:
(i) subject to the limitations described under "--Dividends,"
declare and pay a dividend in cash and/or securities or other
property (other than a dividend or distribution of Common
Stock) to the holders of the outstanding shares of Liberty
Media Group Common Stock equally on a share for share basis
(subject to the provisions described in the last sentence of
the penultimate paragraph of this section "--Mandatory
Dividend, Redemption or Conversion of Liberty Media Group
Common Stock"), in an aggregate amount equal to the product of
the Liberty Media Group Outstanding Interest Fraction as of
the record date for determining the holders entitled to
receive such dividend and the Net Proceeds of such
Disposition;
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(ii) provided that there are assets of the Company legally
available therefor and the Liberty Media Group
Available Dividend Amount would have been sufficient
to pay a dividend in lieu thereof as described in
clause (i) of this paragraph, then:
(A) if such Disposition involves all (not merely
substantially all) of the properties and assets of the Liberty
Media Group, redeem all outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group
Common Stock in exchange for cash and/or securities or other
property (other than Common Stock) in an aggregate amount
equal to the product of the Adjusted Liberty Media Group
Outstanding Interest Fraction as of the date of such
redemption and the Net Proceeds of such Disposition, such
aggregate amount to be allocated (subject to the provisions
described in the last sentence of the penultimate paragraph of
this section) to shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock in the
ratio of the number of shares of each such series outstanding
(so that the amount of consideration paid for the redemption
of each share of Series A Liberty Media Group Common Stock and
each share of Series B Liberty Media Group Common Stock is the
same); or
(B) if such Disposition involves substantially
all (but not all) of the properties and assets of the Liberty
Media Group, apply an aggregate amount of cash and/or
securities or other property (other than Common Stock) equal
to the product of the Liberty Media Group Outstanding Interest
Fraction as of the date shares are selected for redemption and
the Net Proceeds of such Disposition to the redemption of
outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, such
aggregate amount to be allocated (subject to the provisions
described in the last sentence of the penultimate paragraph of
this section) to shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock in the
ratio of the number of shares of each such series outstanding,
and the number of shares of each such series to be redeemed to
equal the lesser of (x) the whole number nearest the number
determined by dividing the aggregate amount so allocated to
the redemption of such series by the average Market Value of
one share of Series A Liberty Media Group Common Stock during
the ten-Trading Day period beginning on the 16th Trading Day
following the consummation of such Disposition and (y) the
number of shares of such series outstanding (so that the
amount of consideration paid for the redemption of each share
of Series A Liberty Media Group Common Stock and each share of
Series B Liberty Media Group Common Stock is the same); or
(iii) convert (A) each outstanding share of Series A Liberty Media
Group Common Stock into a number (or fraction) of fully paid
and nonassessable shares of Series A TCI Group Common Stock
and (B) each outstanding share of Series B Liberty Media Group
Common Stock into a number (or fraction) of fully paid and
nonassessable shares of Series B TCI Group Common Stock, in
each case equal to 110% of the average daily ratio (calculated
to the nearest five decimal places) of the Market Value of one
share of Series A Liberty Media Group Common Stock to the
Market Value of one share of Series A TCI Group Common Stock
during the ten-Trading Day period referred to in clause
(ii)(B) of this paragraph.
For these purposes, "substantially all of the properties and assets of
the Liberty Media Group" means a portion of such properties and assets that
represents at least 80% of the then-current market value (as determined by the
Board of Directors) of the properties and assets of the Liberty Media Group as
of such date.
The "Adjusted Liberty Media Group Outstanding Interest Fraction" means
a fraction the numerator of which is the number of outstanding shares of
Liberty Media Group Common Stock and the denominator of which is the sum of (a)
such number of outstanding shares, (b) the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest, (c) the number of
shares of Liberty Media Group Common Stock issuable upon conversion, exercise
or exchange of Pre-Distribution Convertible Securities and (d) the number of
Committed Acquisition Shares issuable.
The Company may elect to pay the dividend or redemption price referred
to in clause (i) or (ii) of the first paragraph of this section "Mandatory
Dividend, Redemption or Conversion or Liberty Media Group Common Stock" either
in the same form as the proceeds of the Disposition were received or in any
other combination of cash or securities or other property (other than Common
Stock) that the Board of Directors determines will have an aggregate market
value on a fully distributed basis, of not less than the amount of the Net
Proceeds. If the dividend or redemption price is paid in the form of securities
of an issuer other than the Company, the Board of Directors may determine
either to (i) pay the dividend or redemption price in the form
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of separate classes or series of securities, with one class or series of such
securities to holders of Series A Liberty Media Group Common Stock and another
class or series of securities to holders of Series B Liberty Media Group Common
Stock, provided that such securities (and, if such securities are convertible
into or exercisable or exchangeable for shares of another class or series of
securities, the securities so issuable upon such conversion, exercise or
exchange) do not differ in any respect other than their relative voting rights
and related differences in designation, conversion, redemption and share
distribution provisions with holders of shares of Series B Liberty Media Group
Common Stock receiving the class or series having the higher relative voting
rights (without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights, designation,
conversion, redemption and share distribution provisions between the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock), provided that if such securities constitute capital stock of a
subsidiary of the Company, such rights will not differ to a greater extent than
the corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common Stock, and
otherwise such securities will be distributed on an equal per share basis, or
(ii) pay the dividend or redemption price in the form of a single class of
securities without distinction between the shares received by the holders of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock.
At the time of any dividend made as a result of a Disposition referred
to above, the TCI Group will be credited, and the Liberty Media Group will be
charged (in addition to the charge for the dividend paid in respect of
outstanding shares of Liberty Media Group Common Stock), with an amount equal
to the product of (i) the aggregate amount paid in respect of such dividend
times (ii) a fraction the numerator of which is the Liberty Media Group
Inter-Group Interest Fraction and the denominator of which is the Liberty Media
Group Outstanding Interest Fraction.
Redemption in Exchange for Stock of Subsidiary. At any time at
which all of the assets and liabilities attributed to the Liberty Media Group
are and continue to be held directly or indirectly by any one or more
corporations all of the capital stock of which is owned by the Company (the
"Liberty Media Group Subsidiaries"), the Board of Directors may, subject to the
availability of assets of the Company legally available therefor, redeem on a
pro rata basis, all of the outstanding shares of Liberty Media Group Common
Stock in exchange for an aggregate number of outstanding fully paid and
nonassessable shares of common stock of each Liberty Media Group Subsidiary
equal to the product of the Adjusted Liberty Media Group Outstanding Interest
Fraction and the number of all of the outstanding shares of common stock of
such Liberty Media Group Subsidiary.
In effecting such a redemption, the Board of Directors may determine
either to (i) redeem shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock in exchange for shares of separate
classes or series of common stock of each Liberty Media Group Subsidiary with
relative voting rights and related differences in designation, conversion,
redemption and share distribution provisions not greater than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, with holders of shares of Series
B Liberty Media Group Common Stock receiving the class or series having the
higher relative voting rights, or (ii) redeem shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock in exchange
for shares of a single class of common stock of each Liberty Media Group
Subsidiary without distinction between the shares distributed to the holders of
the two series of Liberty Media Group Common Stock. If the Company determines
to undertake a redemption as described in clause (i) of the preceding sentence,
the outstanding shares of common stock of each Liberty Media Group Subsidiary
not distributed to holders of Liberty Media Group Common Stock would consist
solely of the class or series having the lower relative voting rights.
Certain Provisions Respecting Convertible Securities. Unless
the provisions of any class or series of Pre-Distribution Convertible
Securities or Convertible Securities which are convertible into or exercisable
or exchangeable for Committed Acquisition Shares provide specifically to the
contrary, after any conversion date or redemption date on which all outstanding
shares of Liberty Media Group Common Stock were converted or redeemed, any
share of Liberty Media Group Common Stock that is issued on conversion,
exercise or exchange of any Pre-Distribution Convertible Securities or any
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares will, immediately upon issuance
pursuant to such conversion, exercise or exchange and without any notice or any
other action on the part of the Company or the Board of Directors or the
holder of such share of Liberty Media Group Common Stock, be converted into or
redeemed in exchange for, as applicable, the kind and amount of shares of
capital stock, cash and/or other securities or property that a holder of such
Pre-Distribution Convertible Securities or any Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares would have been entitled to receive pursuant
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to the terms of such securities had such terms provided that the conversion,
exercise or exchange privilege in effect immediately prior to any such
conversion or redemption of all outstanding shares of Liberty Media Group
Common Stock would be adjusted so that the holder of any such Pre-Distribution
Convertible Securities or any Convertible Securities which are convertible into
or exercisable or exchangeable for Committed Acquisition Shares thereafter
surrendered for conversion, exercise or exchange would be entitled to receive
the kind and amount of shares of capital stock, cash and/or other securities or
property such holder would have received as a result of such action had such
securities been converted, exercised or exchanged immediately prior thereto.
With respect to any Convertible Securities which are created, established or
otherwise first authorized for issuance subsequent to the record date for the
Distribution (other than Pre-Distribution Convertible Securities and
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares), the terms and provisions of
which do not provide for adjustments specifying the kind and amount of capital
stock, cash and/or securities or other property that such holder would be
entitled to receive upon the conversion, exercise or exchange of such
Convertible Securities following any conversion date or redemption date on
which all outstanding shares of Liberty Media Group Common Stock were converted
or redeemed, then upon such conversion, exercise or exchange of such
Convertible Securities, any share of Liberty Media Group Common Stock that is
issued on conversion, exercise or exchange of any such Convertible Securities
will, immediately upon issuance and without any notice or any other action on
the part of the Company or the Board of Directors or the holder of such share
of Liberty Media Group Common Stock, be redeemed in exchange for, to the extent
assets of the Company are legally available therefor, the amount of $.01 per
share in cash.
General Conversion and Redemption Provisions. Not later than
the 10th Trading Day following the consummation of a Disposition referred to
above under "--Conversion and Redemption--Mandatory Dividend, Redemption or
Conversion of Liberty Media Group Common Stock," the Company will announce
publicly by press release (i) the Net Proceeds of such Disposition, (ii) the
number of outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, (iii) the number of shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock into or for which Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof (and stating which, if any, of such Convertible Securities constitute
Pre-Distribution Convertible Securities or Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares) and the number of Committed Acquisition Shares issuable, (iv) the
Liberty Media Group Outstanding Interest Fraction as of a recent date preceding
the date of such notice and (v) the Adjusted Liberty Media Group Outstanding
Interest Fraction as of a recent date preceding the date of such notice. Not
earlier than the 26th Trading Day and not later than the 30th Trading Day
following the consummation of such Disposition, the Company will announce
publicly by press release which of the actions described in clauses (i), (ii)
or (iii) of the first paragraph under "--Conversion and Redemption--Mandatory
Dividend, Redemption or Conversion of Liberty Media Group Common Stock" it has
irrevocably determined to take.
The Company will also cause to be given to each holder of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, and to each holder of Convertible Securities convertible
into or exercisable or exchangeable for shares of either such series (unless
provision for notice is otherwise made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) if the Company has
determined to pay a dividend described in clause (i) of the first paragraph
under "--Conversion and Redemption--Mandatory Dividend, Redemption or
Conversion of Liberty Media Group Common Stock" (a "Dividend Election") (x) the
record date for determining holders entitled to receive such dividend, which
will not be earlier than the 40th Trading Day, nor later than the 50th Trading
Day, following the consummation of such Disposition and (y) the anticipated
payment date of such dividend (which will not be more than 85 Trading Days
following the consummation of such Disposition),(ii) if the Company has
determined to redeem shares of Liberty Media Group Common Stock following a
Disposition of all (and not merely substantially all) of the properties and
assets of the Liberty Media Group as described in clause (ii)(A) of the first
paragraph under "--Conversion and Redemption--Mandatory Dividend, Redemption or
Conversion of Liberty Media Group Common Stock" (a "Full Redemption Election"),
(x) the redemption date (which will not be more than 85 Trading Days following
the consummation of such Disposition) and (y) a statement that all shares of
Liberty Media Group Common Stock outstanding on the redemption date will be
redeemed, (iii) if the Company has determined to redeem shares of Liberty Media
Group Common Stock following a Disposition of substantially all (but not all)
of the properties and assets of the Liberty Media Group as described in clause
(ii)(B) of the first paragraph under "--Conversion and Redemption--Conversion
of Liberty Media Group Common Stock" (a "Partial Redemption Election"), (x) a
date not earlier than the 40th Trading Day and not later than the 50th Trading
Day following the consummation of such Disposition on which shares of Liberty
Media Group Common Stock then outstanding will be selected for redemption and
(y) the anticipated redemption date (which will not be more than 85 Trading
Days following the consummation of such Disposition) and (iv) in the event of
any conversion as described above under "--Conversion and Redemption--Mandatory
Dividend, Redemption or Conversion of Liberty Media Group Common Stock"
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and "--Conversion and Redemption--Conversion at the Option of the Company" or
as described in clause (iii) of the first paragraph under "--Conversion and
Redemption--Mandatory Dividend, Redemption or Conversion of Liberty Media Group
Common Stock" (a "Conversion Election"), (x) a statement that all outstanding
shares of Liberty Media Group Common Stock will be converted and (y) the
conversion date (which will not be more than 85 Trading Days following the
consummation of the Disposition in the event of conversion pursuant to the
provisions described under "--Conversion and Redemption--Mandatory Dividend
Redemption or Conversion of Liberty Media Group Common Stock" and which will
not be more than 120 days after the Appraisal Date in the event of conversion
pursuant to the provisions described under "--Conversion and
Redemption--Conversion at the Option of the Company"). Each notice of a
Dividend Election, a Full Redemption Election or a Partial Redemption Election
also will state, as applicable, (i) the kind of shares of capital stock, cash
and/or other securities or property to be distributed in respect of shares of
Liberty Media Group Common Stock (in the case of a Dividend Election) or paid
as the redemption price with respect to shares of Liberty Media Group Common
Stock outstanding on the redemption date (in the case of a Full Redemption
Election) or selected for redemption (in the case of a Partial Redemption
Election); (ii) the Net Proceeds of such Disposition; (iii) in the case of a
Dividend Election and a Partial Redemption Election, the Liberty Media Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, and in the case of a Full Redemption Election, the Adjusted Liberty
Media Group Outstanding Interest Fraction as of a recent date preceding the
date of such notice; (iv) the number of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock and the
number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock into or for which outstanding Convertible
Securities are then convertible, exercisable or exchangeable and the
conversion, exercise or exchange price thereof (and, in the case of a Full
Redemption Election, stating which, if any, of such Convertible Securities
constitute Pre-Distribution Convertible Securities or Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares and the number of Committed Acquisition Shares issuable);
(v) in the case of a Full Redemption Election, the place or places where
certificates for shares of Liberty Media Group Common Stock properly endorsed
or assigned for transfer (unless the Company waives such requirement), are to
be surrendered for delivery of certificates for shares of such capital stock,
cash and/or other securities or property; (vi) in the case of notice to holders
of Convertible Securities, a statement to the effect that holders of such
Convertible Securities will be entitled to receive such dividend (in the case
of a Dividend Election) or participate in such redemption (in the case of a
Full Redemption Election) or in the selection of shares for redemption (in the
case of a Partial Redemption Election) only if such holders appropriately
convert, exercise or exchange such Convertible Securities on or prior to the
record date for determining holders entitled to receive such dividend, the
redemption date, or the date fixed for the selection of shares to be redeemed,
respectively, and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such Convertible Securities or, if
applicable, the provisions described under "--Conversion and
Redemption--Certain Provisions Respecting Convertible Securities" if such
holder converts, exercises or exchanges such Convertible Securities following
such redemption date or date for selection of shares to be redeemed, as
applicable, and (vii) in the case of a Partial Redemption Election, a statement
that the Company will not be required to register a transfer of any shares of
Liberty Media Group Common Stock for a period of 15 Trading Days next preceding
the date fixed for selection of shares to be redeemed. In the case of a Partial
Redemption Election, the Company also will cause to be given to each holder of
shares of Liberty Media Group Common Stock selected for redemption, a notice
setting forth (i) the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock held by such holder to be
redeemed, (ii) a statement that such shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock will be redeemed,
(iii) the redemption date (which will not be more than 85 Trading Days
following the consummation of such Disposition), (iv) the kind and per share
amount of shares of capital stock, cash and/or other securities or property to
be received by such holder with respect to each share of such Liberty Media
Group Common Stock to be redeemed, including details as to the calculation
thereof, and (v) the place or places where certificates for shares of such
Liberty Media Group Common Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement), are to be surrendered for
delivery of certificates for shares of such capital stock, cash and/or other
securities or property. The outstanding shares of Liberty Media Group Common
Stock to be redeemed will be redeemed by the Company pro rata among the holders
of Liberty Media Group Common Stock or by such other method as may be
determined by the Board of Directors to be equitable.
In the case of a Conversion Election, the Company's notice also will
state (i) the per share number of shares of Series A TCI Group Common Stock or
Series B TCI Group Common Stock, as applicable, to be received with respect to
each share of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock, including details as to the calculation thereof, (ii)
the place or places where certificates for shares of Liberty Media Group Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement), are to be surrendered, (iii) the number of outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock, the number of Committed Acquisition Shares issuable and the
number of shares of Series A Liberty Media Group Common Stock
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and Series B Liberty Media Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion, exercise or exchange prices thereof and (iv) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities will be entitled to participate in such
conversion only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the conversion date and a statement
as to what, if anything, such holders will be entitled to receive pursuant to
the terms of such Convertible Securities or, if applicable, the provision
described under "--Conversion and Redemption--Certain Provisions Respecting
Convertible Securities" if such holders convert, exercise or exchange such
Convertible Securities following such conversion date.
Notice of a Dividend Election will be given not later than the 30th
Trading Day following the consummation of the Disposition; notice of a Full
Redemption Election will be given not less than 35 Trading Days nor more than
45 Trading Days prior to the redemption date; notice of a Partial Redemption
Election will be given not later than the 30th Trading Day following the
consummation of the Disposition and the notice to holders of shares selected
for redemption will be given promptly following such selection, but not earlier
than the 40th Trading Day and not later than the 50th Trading Day following the
consummation of the Disposition; and notice of a Conversion Election will be
given not less than 35 Trading Days nor more than 45 Trading Days prior to the
conversion date. All such notices will be sent by first-class mail, postage
prepaid, to a holder at such holder's address as the same appears on the
transfer books of the Company.
If the Company determines to redeem shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock as described
above under "--Conversion and Redemption--Redemption in Exchange for Stock of
Subsidiary," the Company will promptly cause to be given to each holder of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock and to each holder of Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for such notice is otherwise made pursuant to the terms of such Convertible
Securities), a notice setting forth (i) a statement that all outstanding shares
of Liberty Media Group Common Stock will be redeemed in exchange for shares of
common stock of the Liberty Media Group Subsidiaries, (ii) the redemption date,
(iii) the Adjusted Liberty Media Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (iv) the place or places where
certificates for shares of Liberty Media Group Common Stock, properly endorsed
or assigned for transfer (unless the Company waives such requirement), are to
be surrendered for delivery of certificates for shares of common stock of the
Liberty Media Group Subsidiaries, (v) the number of outstanding shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock and the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities constitute
Pre-Distribution Convertible Securities or Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares) and the number of Committed Acquisition Shares issuable and (vi) in the
case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities will be entitled to receive
shares of common stock of the Liberty Media Group Subsidiaries upon redemption
only if such holders appropriately convert, exercise or exchange such
Convertible Securities on or prior to the redemption date referred to in clause
(ii) of this sentence and a statement as to what, if anything, such holders
will be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, the provisions described under "--Conversion and
Redemption--Certain Provisions Respecting Convertible Securities" if such
holders convert, exercise or exchange such Convertible Securities following the
redemption date. Such notice will be sent by first-class mail, postage prepaid,
not less than 35 Trading Days nor more than 45 Trading Days prior to the
redemption date, at such holder's address as the same appears on the transfer
books of the Company.
Neither the failure to mail any notice to any particular holder of
Liberty Media Group Common Stock or of Convertible Securities nor any defect
therein will affect the sufficiency thereof with respect to any other holder of
outstanding shares of Liberty Media Group Common Stock or of Convertible
Securities, or the validity of any conversion or redemption.
The Company will not be required to issue or deliver fractional shares
of any class of capital stock or any fractional securities to any holder of
Liberty Media Group Common Stock upon any conversion, redemption, dividend or
other distribution described above. In connection with the determination of the
number of shares of any class of capital stock that is issuable or the amount
of securities that is deliverable to any holder of record upon any such
conversion, redemption, dividend or other distribution (including any fractions
of shares or securities), the Company may aggregate the number of shares of
Liberty Media Group Common Stock held at the relevant time by such holder of
record. If the number of shares of any class of capital stock or the amount of
securities remaining to be issued or delivered to any holder of Liberty Media
Group Common Stock is a fraction, the Company will, if such fraction is not
issued or delivered to such holder, pay a cash adjustment
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in respect of such fraction in an amount equal to the fair market value of such
fraction on the fifth Trading Day prior to the date such payment is to be made
(without interest). For purposes of the preceding sentence, "fair market value"
of any fraction will be (i) in the case of any fraction of a share of capital
stock of the Company, the product of such fraction and the Market Value of one
share of such capital stock and (ii) in the case of any other fractional
security, such value as is determined by the Board of Directors.
No adjustments in respect of dividends will be made upon the
conversion or redemption of any shares of Liberty Media Group Common Stock;
provided, however, that if the conversion date or the redemption date with
respect to the Liberty Media Group Common Stock is subsequent to the record
date for the payment of a dividend or other distribution thereon or with
respect thereto, the holders of shares of Liberty Media Group Common Stock at
the close of business on such record date will be entitled to receive the
dividend or other distribution payable on or with respect to such shares on the
date set for payment of such dividend or other distribution, notwithstanding
the conversion or redemption of such shares or the Company's default in payment
of the dividend or distribution due on such date.
Before any holder of shares of Liberty Media Group Common Stock will
be entitled to receive certificates representing shares of any kind of capital
stock or cash and/or securities or other property to be received by such holder
with respect to any conversion or redemption of shares of Liberty Media Group
Common Stock, such holder is required to surrender at such place as the Company
will specify certificates for such shares, properly endorsed or assigned for
transfer (unless the Company waives such requirement). The Company will as soon
as practicable after such surrender of certificates representing shares of
Liberty Media Group Common Stock deliver to the person for whose account such
shares were so surrendered, or to the nominee or nominees of such person,
certificates representing the number of whole shares of the kind of capital
stock or cash and/or securities or other property to which such person is
entitled, together with any payment for fractional securities referred to
above. If less than all of the shares of Liberty Media Group Common Stock
represented by any one certificate are to be redeemed, the Company will issue
and deliver a new certificate for the shares of Liberty Media Group Common
Stock not redeemed. The Company will not be required to register a transfer of
(i) any shares of Liberty Media Group Common Stock for a period of 15 Trading
Days next preceding any selection of shares of Liberty Media Group Common Stock
to be redeemed or (ii) any shares of Liberty Media Group Common Stock selected
or called for redemption. Shares selected for redemption may not thereafter be
converted pursuant to the provisions described under "--Conversion and
Redemption--Conversion at the Option of the Holder."
From and after any applicable conversion date or redemption date, all
rights of a holder of shares of Liberty Media Group Common Stock that were
converted or redeemed will cease except for the right, upon surrender of the
certificates representing shares of Liberty Media Group Common Stock, to
receive certificates representing shares of the kind and amount of capital
stock or cash and/or securities or other property for which such shares were
converted or redeemed, together with any payment for fractional securities, and
such holder will have no other or further rights in respect of the shares of
Liberty Media Group Common Stock so converted or redeemed, including, but not
limited to, any rights with respect to any cash, securities or other property
which are reserved or otherwise designated by the Company as being held for the
satisfaction of the Company's obligations to pay or deliver any cash,
securities or other property upon the conversion, exercise or exchange of any
Convertible Securities outstanding as of the date of such conversion or
redemption or any Committed Acquisition Shares which may then be issuable. No
holder of a certificate that, immediately prior to the applicable conversion
date or redemption date for the Liberty Media Group Common Stock, represented
shares of Liberty Media Group Common Stock will be entitled to receive any
dividend or other distribution with respect to shares of any kind of capital
stock into or in exchange for which the Liberty Media Group Common Stock was
converted or redeemed until surrender of such holder's certificate for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there will be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date after the conversion date or redemption
date, as the case may be, but that were not paid by reason of the foregoing,
with respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such surrender. From
and after a conversion date or redemption date, as the case may be, for any
shares of Liberty Media Group Common Stock, the Company will, however, be
entitled to treat the certificates for shares of Liberty Media Group Common
Stock that have not yet been surrendered for conversion or redemption as
evidencing the ownership of the number of whole shares of the kind or kinds of
capital stock for which the shares of Liberty Media Group Common Stock
represented by such certificates have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue
or transfer taxes that may be payable in respect of the issue or delivery of
any shares of capital stock and/or other securities on conversion or redemption
of shares of Liberty Media Group Common Stock. The Company will not, however,
be required to pay any tax that may be payable in respect of
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any transfer involved in the issue and delivery of any shares of capital stock
in a name other than that in which the shares of Liberty Media Group Common
Stock so converted or redeemed were registered and no such issue or delivery
will be made unless and until the person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, after payment or
provision for payment of the debts and other liabilities of the Company and
subject to the prior payment in full of the preferential amounts to which any
class or series of Preferred Stock is entitled, (i) the holders of the shares
of TCI Group Common Stock will share equally, on a share for share basis, in a
percentage of the funds of the Company remaining for distribution to its common
stockholders equal to 100% multiplied by the average daily ratio (expressed as
a decimal) of X/Z for the 20-Trading Day period ending on the Trading Day prior
to the date of the public announcement of such liquidation, dissolution or
winding up, and (ii) the holders of the shares of Liberty Media Group Common
Stock will share equally, on a share for share basis, in a percentage of the
funds of the Company remaining for distribution to its common stockholders
equal to 100% multiplied by the average daily ratio (expressed as a decimal) of
Y/Z for such 20-Trading Day period, where X is the aggregate Market
Capitalization of the Series A TCI Group Common Stock and the Series B TCI
Group Common Stock, Y is the aggregate Market Capitalization of the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group Common
Stock, and Z is the aggregate Market Capitalization of the Series A TCI Group
Common Stock, the Series B TCI Group Common Stock, the Series A Liberty Media
Group Common Stock and the Series B Liberty Media Group Common Stock. Neither a
consolidation, merger nor sale of assets will be construed to be a
"liquidation," "dissolution" or "winding up" of the Company. For a discussion
of the relative liquidation rights of the Groups if the Telephony Group Stock
Proposal is approved, see "Description of Telephony Group Common Stock and
Effects on Existing Common Stock--Liquidation Rights."
No holder of Liberty Media Group Common Stock will have any special
right to receive specific assets of the Liberty Media Group in the case of any
dissolution, liquidation or winding up of the Company.
Determinations by the Board of Directors. The Company Charter provides
that any determinations made by the Board of Directors under any provision
described under "--TCI Group Common Stock and Liberty Media Group Common Stock"
will be final and binding on all stockholders of the Company, except as may
otherwise be required by law. Such a determination would not be binding if it
were established that the determination was made in breach of a fiduciary duty
of the Board of Directors. The Company will prepare a statement of any such
determination by the Board of Directors respecting the fair market value of any
properties, assets or securities and will file such statement with the
Secretary of the Company.
Preemptive Rights. Holders of the TCI Group Common Stock and Liberty
Media Group Common Stock do not have any preemptive rights to subscribe for any
additional shares of capital stock or other obligations convertible into or
exercisable for shares of capital stock that may hereafter be issued by the
Company.
PREFERRED STOCK
As of October 31, 1996, 1,675,096 shares of Class B Preferred Stock
and 50 million shares of Series Preferred Stock were authorized for issuance,
of which 1,620,026 shares of Class B Preferred Stock, 70,575 shares of Series C
Preferred Stock, 997,222 shares of Series D Preferred Stock, 278,307 shares of
Series F Preferred Stock, 6,695,527 shares of Series G Preferred Stock and
6,695,527 shares of Series H Preferred Stock were outstanding. All of the
shares of Class A Preferred Stock have previously been redeemed and retired and
may not be reissued, thereby reducing the number of authorized shares of
Preferred Stock. All of the shares of Series E Preferred Stock have previously
been redeemed and retired, with the effect that such shares have been restored
to the status of authorized and unissued shares of Series Preferred Stock, may
be reissued as shares of another series of Series Preferred Stock, but may not
be reissued as Series E Preferred Stock. As of October 31, 1996, all of the
outstanding shares of Series F Preferred Stock were held by subsidiaries of the
Company.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
Subject to the prior preferences and other rights of any class or series of
Preferred Stock ranking prior to the Class B Preferred Stock with respect to
the payment of dividends, the holders of Class B Preferred Stock are entitled
to receive cumulative dividends, when and as declared by the Board of Directors
out of unrestricted funds legally available therefor, in preference to
dividends on the Common Stock. Dividends accrue cumulatively (but without
compounding) at an annual rate of 6% of the stated liquidation value of $100
per share (the "Stated Liquidation Value"), whether or not such dividends are
declared or funds are legally available for payment of dividends. Accrued
dividends are payable annually and, in the sole discretion of the Board of
Directors, may be declared
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and paid in cash, in shares of Series A TCI Group Common Stock or in any
combination of the foregoing. Accrued dividends not paid as provided above on
any dividend payment date accumulate and such accumulated unpaid dividends may
be declared and paid in cash, shares of Series A TCI Group Common Stock or any
combination thereof at any time without reference to any regular dividend
payment date, to holders of record of Class B Preferred Stock as of a special
record date fixed by the Board of Directors. No interest or additional
dividends will accrue or be payable with respect to any dividend payment on the
Class B Preferred Stock that may be in arrears or with respect to that portion
of any other payment on the Class B Preferred Stock that is in arrears which
consists of accumulated or accrued and unpaid dividends.
Upon the liquidation, dissolution or winding up of the Company, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of Preferred Stock ranking prior to
the Class B Preferred Stock with respect to liquidating distributions, to
receive from the assets of the Company available for distribution to
stockholders an amount in cash or property or a combination thereof, per share,
equal to the Stated Liquidation Value thereof, plus all accumulated and accrued
but unpaid dividends thereon to the date of payment.
Subject to the rights of any class or series of Preferred Stock
ranking prior to or on a parity with the Class B Preferred Stock, the Class B
Preferred Stock is redeemable at the option of the Company, in whole at any
time or in part from time to time, for a redemption price per share payable in
cash equal to the Stated Liquidation Value thereof, plus all accumulated and
accrued but unpaid dividends thereon to and including the redemption date. The
Company does not have any mandatory obligation to redeem the Class B Preferred
Stock as of any fixed date, at the option of the holders or otherwise.
The Class B Preferred Stock is exchangeable at the option of the
Company in whole but not in part at any time for junior subordinated debt
securities of the Company ("Junior Exchange Notes"). If the Company exercises
its optional exchange right, each holder of outstanding shares of Class B
Preferred Stock will be entitled to receive in exchange therefor newly issued
Junior Exchange Notes of a series authorized and established for the purpose of
such exchange, the aggregate principal amount of which will be equal to the
aggregate Stated Liquidation Value of the shares of Class B Preferred Stock so
exchanged by such holder, plus all accumulated and accrued but unpaid dividends
thereon to and including the exchange date. The Junior Exchange Notes will
mature on the 15th anniversary of the date of issuance and will be subject to
earlier redemption at the option of the Company, in whole or in part, for a
redemption price equal to the principal amount thereof plus accrued but unpaid
interest. Interest will accrue, and be payable annually, on the principal
amount of the Junior Exchange Notes at a rate per annum to be determined prior
to issuance by adding a spread of 215 basis points to the "Fifteen Year
Treasury Rate" (as defined in the Indenture pursuant to which the Junior
Exchange Notes will be issued). Interest will accrue on overdue principal at
the same rate, but will not accrue on overdue interest.
The Class B Preferred Stock ranks senior to the TCI Group Common Stock
and the Liberty Media Group Common Stock and ranks junior to the Series C
Preferred Stock, the Series D Preferred Stock, the Series F Preferred Stock,
the Series G Preferred Stock and the Series H Preferred Stock as to dividend
rights, rights to redemption and rights on liquidation.
For so long as any dividends are in arrears on the Class B Preferred
Stock or any class or series of Preferred Stock ranking pari passu with the
Class B Preferred Stock which is entitled to payment of cumulative dividends
prior to the redemption, exchange, purchase, or other acquisition of the Class
B Preferred Stock, and until all dividends accrued up to the immediately
preceding dividend payment date on the Class B Preferred Stock and such parity
stock have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, neither the Company nor any
subsidiary thereof may redeem, exchange, purchase, or otherwise acquire any
shares of Class B Preferred Stock, any such parity stock or any class or series
of its capital stock ranking junior to the Class B Preferred Stock, or set
aside any money or assets for such purpose, unless all of the outstanding
shares of Class B Preferred Stock and such parity stock are redeemed. For so
long as any dividends are in arrears on the Class B Preferred Stock and until
all dividends accrued up to the immediately preceding dividend payment date on
the Class B Preferred Stock have been paid or declared and set apart so as to
be available for payment in full thereof and for no other purpose, the Company
may not declare or pay any dividend on or make any distribution with respect to
any junior stock or parity stock or set aside any money or assets for any such
purpose, except for dividends declared and paid on parity stock
contemporaneously and on a pro rata basis with dividends declared and paid on
the Class B Preferred Stock. If the Company fails to redeem or exchange shares
of Class B Preferred Stock on a date fixed for redemption or exchange, and
until such shares are redeemed or exchanged in full, the Company may not redeem
or exchange any parity stock or junior stock, declare or pay any dividend on or
make any distribution with respect to any junior stock, or set aside money or
assets for such purpose, and neither the Company nor any subsidiary thereof may
purchase or otherwise acquire any Class B Preferred Stock, parity stock or
junior stock or set aside any money or assets for any such purpose. The failure
of the Company to pay any dividends on any class or series of parity stock or
to redeem or exchange on
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any date fixed for redemption or exchange any shares of Class B Preferred Stock
will not prevent the Company from (i) paying any dividends on junior stock
solely in shares of junior stock or the redemption, purchase or other
acquisition of junior stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; or (ii) the payment of
dividends on any parity stock solely in shares of parity stock and/or junior
stock or the redemption, exchange, purchase or other acquisition of Class B
Preferred Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, parity stock and/or junior stock.
The Class B Preferred Stock has no voting rights, except as required
by the DGCL, and except that the holders of Class B Preferred Stock have the
right to vote with the holders of TCI Group Common Stock and Liberty Media
Group Common Stock, on the basis of one vote per share, in any general election
of directors of the Company.
Series Preferred Stock. The Series Preferred Stock is issuable, from
time to time, in one or more series, with such powers, designations,
preferences and relative participating, optional or other rights, and
qualifications, limitations or restrictions thereof, as is stated and expressed
in a resolution or resolutions providing for the issue of each such series
adopted by the Board of Directors.
All shares of any one series of the Series Preferred Stock are
required to be alike in every particular. Except to the extent otherwise
provided in the resolution or resolutions providing for the issue of any series
of Series Preferred Stock, the holders of shares of such series will have no
voting rights except as may be required by Delaware law.
Series C Convertible Preferred Stock. Each share of Series C
Preferred Stock is convertible, at the option of the holder, into 100 shares of
Series A TCI Group Common Stock and 25 shares of Series A Liberty Media Group
Common Stock, subject to anti-dilution adjustments. The dividend, liquidation
and redemption features of the Series C Preferred Stock, each of which is
discussed in greater detail below, are determined by reference to the
liquidation value of the Series C Preferred Stock, which as of any date of
determination is equal, on a per share basis, to the sum of (i) $2,375, plus
(ii) all dividends accrued on such share through the dividend payment date on
or immediately preceding such date of determination to the extent not paid on
or before such date, plus (iii) for purposes of determining liquidation and
redemption payments, all unpaid dividends accrued on the sums of clauses (i)
and (ii) above, to such date of determination.
Subject to the prior preferences and other rights of any class or
series of preferred stock ranking senior to or on a parity with the Series C
Preferred Stock, the holders of Series C Preferred Stock are entitled to
receive preferential cumulative cash dividends out of funds legally available
therefor. Dividends accrue cumulatively at an annual rate of 5 1/2% of the
liquidation value per share, whether or not such dividends are declared or
funds are legally or contractually available for payment of dividends, except
that if the Company fails to redeem shares of Series C Preferred Stock required
to be redeemed on a redemption date, dividends will thereafter accrue
cumulatively at an annual rate of 15% of the liquidation value per share.
Dividends not paid on any dividend payment date will be added to the
liquidation value on such date and remain a part thereof until such dividends
and all dividends accrued thereon are paid in full. Dividends will accrue on
unpaid dividends at the rate of 5 1/2% per annum (15% under the circumstances
described above), unless such dividends remain unpaid for two consecutive
quarters, in which event such rate will increase to 15% per annum until such
dividends and all dividends, accrued thereon, are paid in full.
Upon the dissolution, liquidation or winding up of the Company,
holders of the Series C Preferred Stock will be entitled to receive from the
assets of the Company available for distribution to stockholders an amount in
cash, per share, equal to the liquidation value of the Series C Preferred
Stock.
The Series C Preferred Stock is subject to optional redemption by the
Company at any time after August 8, 2001, in whole or in part, at a redemption
price, per share, equal to the then liquidation value of the Series C Preferred
Stock. Subject to the prior preferences and other rights of any other class or
series of Preferred Stock ranking senior to or on a parity with the Series C
Preferred Stock and subject to any prohibition or restriction contained in any
instrument evidencing indebtedness of the Company, the Series C Preferred Stock
is required to be redeemed by the Company at any time on or after August 8,
2001 at the option of the holder, in whole or in part (provided that the
aggregate liquidation value of the shares to be redeemed is in excess of $1
million), in each case at a redemption price, per share, equal to the then
liquidation value.
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The Series C Preferred Stock ranks senior to the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Class B Preferred Stock and
on a parity basis with the Series D Preferred Stock, the Series F Preferred
Stock, the Series G Preferred Stock and the Series H Preferred Stock as to
dividend rights, rights to redemption and rights on liquidation.
For so long as any dividends are in arrears on the Series C Preferred
Stock and until all dividends accrued up to the immediately preceding dividend
payment date on the Series C Preferred Stock have been paid or declared and set
apart so as to be available for payment in full thereof and for no other
purpose, the Company may not redeem or otherwise acquire any shares of Series C
Preferred Stock or any shares of any class or series of its capital stock
ranking junior to the Series C Preferred Stock, unless all of the outstanding
shares of Series C Preferred Stock are redeemed. For so long as any dividends
are in arrears on the Series C Preferred Stock and until all dividends accrued
up to the immediately preceding dividend payment date on the Series C Preferred
Stock have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, the Company may not declare
or pay any dividend on or make any other distribution with respect to any
junior stock or set aside any money or assets for such purpose, except that the
Company may pay a dividend on any class or series of junior stock solely in
shares of capital stock ranking junior to the Series C Preferred Stock. If the
Company fails to redeem shares of Series C Preferred Stock required to be
redeemed on a redemption date, and until all then outstanding shares of Series
C Preferred Stock are redeemed in full, the Company may not redeem any junior
stock, or otherwise acquire any shares of such stock or Series C Preferred
Stock, except that the Company may acquire shares of Series C Preferred Stock
pursuant to a purchase or exchange offer made to holders of all outstanding
shares of Series C Preferred Stock, if as to holders of all outstanding shares
of Series C Preferred Stock the terms of the purchase or exchange offer for all
such shares are identical.
The holders of Series C Preferred Stock are entitled to vote on an as
converted basis on all matters submitted to a vote of holders of TCI Group
Common Stock and Liberty Media Group Common Stock and any other class of
capital stock of the Company entitled to vote generally on the election of
directors. Holders of Series C Preferred Stock are not entitled to vote as a
separate class except as otherwise may be required by the DGCL.
Series D Convertible Preferred Stock. Each share of Series D
Preferred Stock is convertible, at the option of the holder, into 10 shares of
Series A TCI Group Common Stock and two and one-half shares of Series A Liberty
Media Group Common Stock, subject to anti-dilution adjustments. The Certificate
of Designations for the Series D Preferred Stock further provides that if the
Company distributes to all holders of Class A Common Stock rights or warrants
to subscribe for or purchase shares of capital stock of the Company (other than
shares of Class A Common Stock or Class B Common Stock) or a subsidiary of the
Company, which capital stock (i) is common stock of its issuer or (ii)
participates in one or more business operations of the issuer thereof in such a
manner that if such operations were owned by a corporation and such stock were
issued thereby such capital stock would be common stock of such corporation
("Special Securities"), each holder of Series D Preferred Stock will have the
option, in lieu of any antidilution adjustment that would otherwise apply to
the conversion rate of the Series D Preferred Stock, to exchange a specified
portion of its shares of Series D Preferred Stock for shares of a new series of
convertible preferred stock of the issuer of the Special Securities having
terms similar to the Series D Preferred Stock but convertible into Special
Securities.
The dividend, liquidation and redemption features of the Series D
Preferred Stock, each of which is discussed below, are determined by reference
to the liquidation value of the Series D Preferred Stock, which as of any date
of determination is equal, on a per share basis, to the sum of (i) $300, plus
(ii) all dividends accrued on such share through the dividend payment date on
or immediately preceding such date of determination to the extent not paid on
or before such date, plus (iii) for purposes of determining liquidation and
redemption payments, an amount equal to all unpaid dividends accrued on the sum
of clauses (i) and (ii) above, to such date of determination.
Subject to the prior preferences and other rights of any class or
series of Preferred Stock ranking senior to or on a parity with the Series D
Preferred Stock with respect to the payment or declaration of dividends, the
holders of Series D Preferred Stock are entitled to receive preferential
cumulative cash dividends out of funds legally available therefor. Dividends
accrue on a daily basis at an annual rate of 5 1/2% of the liquidation value
per share, whether or not such dividends are declared or funds are legally or
contractually available for payment of dividends, except that if the Company
fails to redeem shares of Series D Preferred Stock required to be redeemed on a
redemption date, dividends will thereafter accrue cumulatively at an annual
rate of 10% of the liquidation value per share until such shares are redeemed.
To the extent any cash dividends are not paid on any dividend payment date, the
amount of such dividends will be automatically converted, to the extent
permissible under the DGCL, into shares of Class A Common Stock at a conversion
rate equal to 95% of the then "current market price" (as defined in the
Certificate of Designations establishing the Series D Preferred Stock) of the
Class A Common Stock, and
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upon issuance of shares of Class A Common Stock to holders of Series D
Preferred Stock in respect of such conversion such dividend will be deemed paid
for all purposes. Dividends not so paid or deemed paid on any dividend payment
date are added to the liquidation value on such date and remain a part thereof
until such dividends and all dividends accrued thereon are paid in full.
Dividends will accrue on such unpaid dividends at the rate of 5 1/2% per annum
(10% under the circumstances described above), unless such dividends remain
unpaid for two consecutive quarters, in which event such rate will increase to
10% per annum until such dividends and all dividends accrued thereon are paid
in full.
Upon the dissolution, liquidation or winding up of the Company,
holders of the Series D Preferred Stock will be entitled to receive from the
assets of the Company available for distribution to stockholders an amount in
cash, per share, equal to the liquidation value of the Series D Preferred
Stock.
The Series D Preferred Stock is subject to optional redemption by the
Company at any time after the fifth anniversary of its issuance, in whole or
from time to time in part, at a redemption price, per share, equal to the then
liquidation value of the Series D Preferred Stock. Shares of Series D Preferred
Stock may also be redeemed at the option of the Company after the third
anniversary of the issue date, in whole or from time to time in part, at a
redemption price per share equal to the then liquidation value of the Series D
Preferred Stock, if the market value per share of the Class A Common Stock has
exceeded $37.50 for the period specified in the Certificate of Designations
establishing the Series D Preferred Stock. Subject to the prior preferences and
other rights of any other class or series of Preferred Stock ranking senior to
or on a parity basis with the Series D Preferred Stock and subject to any
prohibition or restriction contained in any instrument evidencing indebtedness
of the Company, any holder of Series D Preferred Stock, at such holder's
option, may require the Company, at any time after the tenth anniversary of the
issuance of such Series D Preferred Stock, to redeem all or a portion of such
holder's shares of Series D Preferred Stock, provided that the aggregate
liquidation value of the shares to be redeemed is in excess of $50,000 (or, if
all of the shares of Series D Preferred Stock held by such holder have an
aggregate liquidation value of less than $50,000, all but not less than all of
such shares of Series D Preferred Stock), in each case at a redemption price,
per share, equal to the then liquidation value of the Series D Preferred Stock.
If the Company fails to effect any redemption of Series D Preferred Stock
called for redemption or which a holder has validly requested be redeemed, the
holders thereof will have the option to convert their shares of Series D
Preferred Stock into shares of Class A Common Stock at a conversion rate equal
to the quotient obtained by dividing the redemption price by 95% of the
"current market price" of the Class A Common Stock on the redemption date,
provided that in the case of a failure by the Company to redeem shares at the
request of a holder, the exercise of the foregoing conversion right will be
delayed for one year.
The Series D Preferred Stock ranks senior to the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Class B Preferred Stock and
on a parity basis with the Series C Preferred Stock, the Series F Preferred
Stock, the Series G Preferred Stock and the Series H Preferred Stock as to
dividend rights, rights to redemption and rights on liquidation.
For so long as any dividends are in arrears on the Series D Preferred
Stock and until all dividends accrued up to the immediately preceding dividend
payment date on the Series D Preferred Stock have been paid or declared and set
apart so as to be available for payment in full thereof and for no other
purpose, the Company may not redeem or otherwise acquire any shares of Series D
Preferred Stock or any shares of any class or series of its capital stock
ranking pari passu with or junior to the Series D Preferred Stock, unless all
of the outstanding shares of Series D Preferred Stock are redeemed. For so long
as any dividends are in arrears on the Series D Preferred Stock and until all
dividends accrued up to the immediately preceding dividend payment date on the
Series D Preferred Stock have been paid or declared and set apart so as to be
available for payment in full thereof and for no other purpose, the Company may
not declare or pay any dividend on or make any other distribution with respect
to any junior stock or set aside any money or assets for such purpose, except
that the Company may pay a dividend on any class or series of junior stock
solely in shares of capital stock ranking junior to the Series D Preferred
Stock. If the Company fails to redeem shares of Series D Preferred Stock
required to be redeemed on a redemption date, and until all then outstanding
shares of Series D Preferred Stock are redeemed in full, the Company may not
redeem any junior stock, or otherwise acquire any shares of such stock or
Series D Preferred Stock, except that the Company may acquire shares of Series
D Preferred Stock pursuant to a purchase or exchange offer made to holders of
all outstanding shares of Series D Preferred Stock, if as to holders of all
outstanding shares of Series D Preferred Stock the terms of the purchase or
exchange offer for all such shares are identical.
The Series D Preferred Stock has no voting rights, except as required
by the DGCL and except that, without the consent of the holders of 66 2/3% of
the aggregate liquidation value of the Series D Preferred Stock, the Company
may not create any series of Preferred Stock that is senior as to dividend
rights, rights to redemption, or rights on liquidation to the Series D
Preferred Stock.
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Series F Convertible Redeemable Participating Preferred Stock.
Shares of Series F Preferred Stock are convertible, at the option of the
holder, into Series A TCI Group Common Stock at a rate of 1496.65 shares of
Series A TCI Group Common Stock for each share of Series F Preferred Stock,
subject to anti-dilution adjustments. In addition, any shares of Series F
Preferred Stock which cease to be held by the Company or a subsidiary of the
Company will automatically be converted into shares of Series A TCI Group
Common Stock. The anti-dilution provisions of the Series F Preferred Stock
provide that the conversion rate of the Series F Preferred Stock will be
adjusted (i) in the event of a dividend or distribution on the outstanding
shares of Series A TCI Group Common Stock in shares of Series A TCI Group
Common Stock, by adjusting the then-current conversion rate such that the
holder of Series F Preferred Stock thereafter surrendered for conversion would
receive the number of shares of Series A TCI Group Common Stock which it would
have been entitled to receive had such shares of Series F Preferred Stock been
converted prior to the record date for such dividend or distribution and (ii)
in the event of a dividend or distribution to holders of Series A TCI Group
Common Stock of any securities, evidences of indebtedness or other assets
(other than cash dividends or shares of Series A TCI Group Common Stock), then
the conversion rate will be adjusted by multiplying the then-current conversion
rate by a fraction, the numerator of which is the current market price of a
share of Series A TCI Group Common Stock and the denominator of which is such
current market price less the fair market value (as determined by the Board of
Directors) of the securities, evidences of indebtedness or assets so
distributed.
The holders of the Series F Preferred Stock are entitled to
participate, on an as-converted basis, with the holders of the Series A TCI
Group Common Stock, with respect to any cash dividends or distributions
declared and paid on the Series A TCI Group Common Stock. Dividends or
distributions on the Series A TCI Group Common Stock which are not paid in cash
would result in the adjustment of the applicable conversion rate as described
above.
Upon the dissolution, liquidation or winding up of the Company,
holders of the Series F Preferred Stock are entitled to receive from the assets
of the Company available for distribution to stockholders an amount in cash or
property or a combination thereof, per share of Series F Preferred Stock, equal
to the sum of (i) $.01 and (ii) the amount to be distributed per share of
Series A TCI Group Common Stock in such liquidation, dissolution or winding up
multiplied by the applicable conversion rate of a share of Series F Preferred
Stock.
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after the 30th business day following issuance, in whole or
in part, at a redemption price, per share, equal to $24,875 (as adjusted in
respect of stock splits, reverse splits and other events affecting the shares
of Series F Preferred Stock), plus any dividends which have been declared but
are unpaid as of the date fixed for such redemption. The Company will pay the
redemption price (or designated portion thereof) of the shares of Series F
Preferred Stock called for redemption by issuing to the holder thereof, in
respect of its shares to be redeemed, a number of shares of Series A TCI Group
Common Stock equal to the aggregate redemption price (or designated portion
thereof) of such shares divided by the average market price of the Series A TCI
Group Common Stock for a period specified, and subject to the adjustments
described, in the certificate of designations establishing the Series F
Preferred Stock.
The Series F Preferred Stock ranks senior to the TCI Group Common
Stock and Liberty Media Group Common Stock and the Class B Preferred Stock and
on a parity with the Series C Preferred Stock, the Series D Preferred Stock,
the Series G Preferred Stock and the Series H Preferred Stock as to dividend
rights, rights to redemption and rights on liquidation.
If at any time the Company has declared a dividend on the Series F
Preferred Stock and failed to pay or set aside consideration sufficient to pay
such dividend, or if the Company declares a cash dividend on the shares of
Series A TCI Group Common Stock and fails to pay or set aside the participating
dividend required to be paid to the holders of the Series F Preferred Stock,
then (i) the Company may not declare or pay any dividend on or make any
distribution with respect to any parity stock or junior stock or set aside any
money or assets for any such purpose until such dividend payable to the holders
of Series F Preferred Stock has been paid or consideration sufficient to pay
such dividend has been set aside for such purpose, and (ii) neither the Company
nor any subsidiary thereof may redeem, exchange, purchase or otherwise acquire
any shares of Series F Preferred Stock, parity stock or junior stock, or set
aside any money or assets for any such purpose, unless all then outstanding
shares of such parity stock required to be redeemed under such circumstances
are redeemed. If the Company fails to redeem shares of Series F Preferred Stock
required to be redeemed on a redemption date, the Company may not declare or
pay any dividend on or make any distribution with respect to any junior stock
or set aside money or assets for any such purpose, and neither the Company nor
any subsidiary may redeem any parity stock or junior stock, or purchase or
otherwise acquire any Series F Preferred Stock, parity stock or junior stock,
or set aside any money or assets for any such purpose, until such shares of
Series F Preferred Stock are redeemed. The failure of the Company to pay any
dividends on any class or series of parity stock or to redeem on any date fixed
for redemption any shares of Series F Preferred Stock will not prevent the
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Company from (i) paying any dividends on junior stock solely in shares of
junior stock or the redemption or other acquisition of junior stock solely in
exchange for (together with a cash adjustment for fractional shares, if any)
shares of junior stock; or (ii) the payment of dividends on any parity stock
solely in shares of parity stock and/or junior stock or the redemption or other
acquisition of parity 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 parity stock and/or junior stock.
The Series F Preferred Stock has no voting rights, except as required
by the DGCL, and except that such shares will vote with the TCI Group Common
Stock and the Liberty Media Group Common Stock and any class or series of
Preferred Stock entitled to vote thereon, on the basis of one vote per share,
in any general election of directors of the Company.
Series G Redeemable Convertible Preferred Stock. If the sum of
(i) the last reported sale price of the Series A TCI Group Common Stock plus
(ii) one-fourth of the last reported sale price of the Series A Liberty Media
Group Common Stock, equals or exceeds $27 (as adjusted for stock dividends,
stock splits, reclassifications or combinations of the Series A TCI Group
Common Stock and the Series A Liberty Media Group Common Stock) for any ten
consecutive trading days during the 65 consecutive trading days ending on the
last trading day immediately preceding January 25, 1997 (the "Contingency"),
then no dividends will accrue or be payable on the Series G Preferred Stock. If
the Contingency is not met, and only in such event, then subject to the prior
preferences and other rights of any class or series of Preferred Stock ranking
prior to the Series G Preferred Stock with respect to the payment of dividends,
the holders of Series G Preferred Stock will be entitled to receive cumulative
dividends, when and as declared by the Board of Directors out of unrestricted
funds legally available therefor, in preference to dividends on the Common
Stock and the Class B Preferred Stock. Dividends will accrue on the Series G
Preferred Stock from and after the first anniversary of issuance if the
Contingency is not met, on a daily basis at the rate of 4% per annum of the
Liquidation Preference per share, whether or not such dividends are declared or
funds are available for payment of dividends. The "Liquidation Preference" of a
share of Series G Preferred Stock as of any date in question means an amount
equal to the sum of (i) the stated liquidation value of $21.60 per share, plus
(ii) an amount equal to all dividends accrued on such share which have been
added to and remain a part of the Liquidation Preference as of such date, plus
(iii) for purposes of determining liquidation and redemption payments, an
amount equal to all unpaid dividends accrued on the sum of the amounts
specified in clauses (i) and (ii) above during the period from the immediately
preceding dividend payment date through and including the date in question.
Dividends not paid on any dividend payment date are added to the Liquidation
Preference on such date and remain a part thereof until such dividends are
paid. The rate per annum at which dividends will accrue on that portion of the
Liquidation Preference that consists of unpaid dividends that were added to the
Liquidation Preference on a dividend payment date and that remain unpaid on the
next succeeding dividend payment date will increase to 8.625% per annum from
and after such next succeeding dividend payment date. Accrued dividends are
payable semiannually and, in the sole discretion of the Board of Directors, may
be declared and paid in cash, in shares of Series A TCI Group Common Stock or
in any combination of the foregoing. Accrued dividends not paid as provided
above on any dividend payment date accumulate and such accumulated unpaid
dividends may be declared and paid in cash, shares of Series A TCI Group Common
Stock or any combination thereof at any time without reference to any regular
dividend payment, to holders of record of Series G Preferred Stock as of a
special record date fixed by the Board of Directors.
Upon the liquidation, dissolution or winding up of the Company, the
holders of Series G Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of Preferred Stock ranking prior to
the Series G Preferred Stock with respect to liquidating distributions, to
receive from the assets of the Company available for distribution to
stockholders an amount in cash or property or a combination thereof, per share,
equal to the Liquidation Preference thereof as of the date of payment or
distribution.
Subject to the rights of any class or series of Preferred Stock
ranking prior to or on a parity with Series G Preferred Stock, the Series G
Preferred Stock is redeemable at the option of the Company, in whole at any
time or in part from time to time on or after February 1, 2001 for a redemption
price per share payable in cash equal to the Liquidation Preference thereof on
such redemption date. Subject to the rights of any class or series of Preferred
Stock ranking prior to or on a parity with the Series G Preferred Stock, the
Company shall redeem the Series G Preferred Stock out of funds legally
available therefor on February 1, 2016, for a redemption price per share
payable in cash equal to the Liquidation Preference thereof on such redemption
date.
The Series G Preferred Stock ranks senior to the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Class B Preferred Stock and
on a parity basis with the Series C Preferred Stock, the Series D Preferred
Stock, the Series F Preferred Stock and the Series H Preferred Stock as to
dividend rights, rights to redemption and rights on liquidation.
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Each share of Series G Preferred Stock is convertible, at the option
of the holder, at any time prior to the close of business on the business day
immediately prior to the redemption thereof, into 1.05 shares of Series A TCI
Group Common Stock, subject to anti-dilution adjustments.
For so long as any dividends are in arrears on the Series G Preferred
Stock or any class or series of Preferred Stock ranking on a parity with the
Series G Preferred Stock which is entitled to payment of cumulative dividends
prior to the redemption, exchange, purchase, or other acquisition of the Series
G Preferred Stock, and until all dividends accrued up to the immediately
preceding dividend payment date on the Series G Preferred Stock and such parity
stock have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, neither the Company nor any
subsidiary thereof may redeem, exchange, purchase, or otherwise acquire any
shares of Series G Preferred Stock, any parity stock or any class or series of
its capital stock ranking junior to the Series G Preferred Stock, or set aside
any money or assets for such purpose, unless all of the then outstanding shares
of Series G Preferred Stock and such parity stock and any other parity stock
that by its terms is required to be redeemed under such circumstances are
redeemed. For so long as any dividends are in arrears on the Series G Preferred
Stock and until all dividends accrued up to the immediately preceding dividend
payment date on the Series G Preferred Stock have been paid or declared and set
apart so as to be available for payment in full thereof and for no other
purpose, the Company may not declare or pay any dividend on or make any
distribution with respect to any junior stock or parity stock or set aside any
money or assets for any such purpose, except for dividends declared and paid on
parity stock contemporaneously and on a pro rata basis with dividends declared
and paid on the Series G Preferred Stock. If the Company fails to redeem shares
of Series G Preferred Stock on a date fixed for redemption, and until such
shares are redeemed in full, the Company may not redeem any junior stock or,
except for contemporaneous pro rata redemptions, any parity stock, declare or
pay any dividend on or make any distribution with respect to any junior stock,
or, except as provided above, parity stock or set aside money or assets for
such purpose and neither the Company nor any subsidiary thereof may purchase or
otherwise acquire any Series G Preferred Stock, parity stock or junior stock or
set aside any money or assets for any such purpose.
The failure of the Company to pay any dividends on any class or series
of parity stock or to redeem on any date fixed for redemption any shares of
Series G Preferred Stock will not prevent (i) the payment of dividends on
junior stock solely in shares of junior stock or the redemption, purchase or
other acquisition of junior stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; (ii) the payment of
dividends on any parity stock solely in shares of parity stock and/or junior
stock or the redemption, exchange, purchase, or other acquisition of Series G
Preferred Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, parity stock and/or junior stock; or (iii) the
purchase or acquisition of shares of Series G Preferred Stock pursuant to a
purchase or exchange offer made to all holders of outstanding shares of Series
G Preferred Stock, provided that the terms of the purchase or exchange offer
shall be identical for all shares of Series G Preferred Stock and all accrued
dividends on such shares shall have been paid or shall have been declared and
irrevocably set apart in trust for the benefit of the holders of shares of
Series G Preferred Stock and for no other purpose.
The Series G Preferred Stock has no voting rights, except (i) as
required by the DGCL, and (ii) that the holders of Series G Preferred Stock
have the right to vote with the TCI Group Common Stock, the Liberty Media Group
Common Stock, the Class B Preferred Stock and any other class or series of
Preferred Stock entitled to vote in any general election of directors, on the
basis of one vote per share, in any general election of directors of the
Company.
Series H Redeemable Convertible Preferred Stock. If the
Contingency is met, then no dividends will accrue or be payable on the Series H
Preferred Stock. If the Contingency is not met, and only in such event, then
subject to the prior preferences and other rights of any class or series of
Preferred Stock ranking prior to the Series H Preferred Stock with respect to
the payment of dividends, the holders of Series H Preferred Stock will be
entitled to receive cumulative dividends, when and as declared by the Board of
Directors out of unrestricted funds legally available therefor, in preference
to dividends on the Common Stock and the Class B Preferred Stock. Dividends
will accrue on the Series H Preferred Stock from and after the first
anniversary of issuance, if the Contingency is not met, on a daily basis at the
rate of 4% per annum of the Liquidation Preference per share, whether or not
such dividends are declared or funds are available for payment of dividends.
The "Liquidation Preference" of a share of Series H Preferred Stock as of any
date in question means an amount equal to the sum of (i) the stated liquidation
value of $5.40 per share, plus (ii) an amount equal to all dividends accrued on
such share which have been added to and remain a part of the Liquidation
Preference as of such date, plus (iii) for purposes of determining liquidation
and redemption payments, an amount equal to all unpaid dividends accrued on the
sum of the amounts specified in clauses (i) and (ii) above during the period
from the immediately preceding dividend payment date through and including
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the date in question. Dividends not paid on any dividend payment date are added
to the Liquidation Preference on such date and remain a part thereof until such
dividends are paid. The rate per annum at which dividends will accrue on that
portion of the Liquidation Preference that consists of unpaid dividends that
were added to the Liquidation Preference on a dividend payment date and that
remain unpaid on the next succeeding dividend payment date will increase to
8.625% per annum from and after such next succeeding dividend payment date.
Accrued dividends are payable semiannually and, in the sole discretion of the
Board of Directors, may be declared and paid in cash, in shares of Series A TCI
Group Common Stock or in any combination of the foregoing. Accrued dividends
not paid as provided above on any dividend payment date accumulate and such
accumulated unpaid dividends may be declared and paid in cash, shares of Series
A TCI Group Common Stock or any combination thereof at any time without
reference to any regular dividend payment, to holders of record of Series H
Preferred Stock as of a special record date fixed by the Board of Directors.
Upon the liquidation, dissolution or winding up of the Company, the
holders of Series H Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of Preferred Stock ranking prior to
the Series H Preferred Stock with respect to liquidating distributions, to
receive from the assets of the Company available for distribution to
stockholders an amount in cash or property or a combination thereof, per share,
equal to the Liquidation Preference thereof as of the date of payment or
distribution.
Subject to the rights of any class or series of Preferred Stock
ranking prior to or on a parity with Series H Preferred Stock, the Series H
Preferred Stock is redeemable at the option of the Company, in whole at any
time or in part from time to time on or after February 1, 2001, for a
redemption price per share payable in cash equal to the Liquidation Preference
thereof on such redemption date. Subject to the rights of any class or series
of Preferred Stock ranking prior to or on a parity with the Series H Preferred
Stock, the Company shall redeem the Series H Preferred Stock out of funds
legally available therefor on February 1, 2016, for a redemption price per
share payable in cash equal to the Liquidation Preference thereof on such
redemption date.
The Series H Preferred Stock ranks senior to the TCI Group Common
Stock, Liberty Media Group Common Stock and the Class B Preferred Stock and on
a parity basis with the Series C Preferred Stock, the Series D Preferred Stock,
the Series F Preferred Stock and the Series G Preferred Stock as to dividend
rights, rights to redemption and rights on liquidation.
Each share of Series H Preferred Stock is convertible, at the option
of the holder, at any time prior to the close of business on the business day
immediately prior to the redemption thereof, into .2625 of one share of Series
A Liberty Media Group Common Stock, subject to anti-dilution adjustments.
For so long as any dividends are in arrears on the Series H Preferred
Stock or any class or series of Preferred Stock ranking on a parity with the
Series H Preferred Stock which is entitled to payment of cumulative dividends
prior to the redemption, exchange, purchase, or other acquisition of the Series
H Preferred Stock, and until all dividends accrued up to the immediately
preceding dividend payment date on the Series H Preferred Stock and such parity
stock have been paid or declared and set apart so as to be available for
payment in full thereof and for no other purpose, neither the Company nor any
subsidiary thereof may redeem, exchange, purchase, or otherwise acquire any
shares of Series H Preferred Stock, any parity stock or any class or series of
its capital stock ranking junior to the Series H Preferred Stock, or set aside
any money or assets for such purpose, unless all of the then outstanding shares
of Series H Preferred Stock and such parity stock and any other parity stock
that by its terms is required to be redeemed under such circumstances are
redeemed. For so long as any dividends are in arrears on the Series H Preferred
Stock and until all dividends accrued up the immediately preceding dividend
payment date on the Series H Preferred Stock have been paid or declared and set
apart so as to be available for payment in full thereof and for no other
purpose, the Company may not declare or pay any dividend on or make any
distribution with respect to any junior stock or parity stock or set aside any
money or assets for any such purpose, except for dividends declared and paid on
parity stock contemporaneously and on a pro rata basis with dividends declared
and paid on the Series H Preferred Stock. If the Company fails to redeem shares
of Series H Preferred Stock on a date fixed for redemption, and until such
shares are redeemed in full, the Company may not redeem any junior stock or,
except for contemporaneous pro rata redemptions, any parity stock, declare or
pay any dividend on or make any distribution with respect to any junior stock
or, except as provided above, parity stock, or set aside money or assets for
such purpose and neither the Company nor any subsidiary thereof may purchase or
otherwise acquire any Series H Preferred Stock, parity stock or junior stock or
set aside any money or assets for any such purpose.
The failure of the Company to pay any dividends on any class or series
of parity stock or to redeem on any date fixed for redemption any shares of
Series H Preferred Stock will not prevent (i) the payment of dividends on
junior stock solely in shares of junior stock or the redemption, purchase or
other acquisition of junior stock solely in exchange for (together with
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a cash adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; (ii) the payment of
dividends on any parity stock solely in shares of parity stock and/or junior
stock or the redemption, exchange, purchase, or other acquisition of Series H
Preferred Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of a
failure to pay dividends on any parity stock) through the application of the
proceeds from the sale of, parity stock and/or junior stock; or (iii) the
purchase or acquisition of shares of Series H Preferred Stock pursuant to a
purchase or exchange offer made to all holders of outstanding shares of Series
H Preferred Stock, provided that the terms of the purchase or exchange offer
shall be identical for all shares of Series H Preferred Stock and all accrued
dividends on such shares shall have been paid or shall have been declared and
irrevocably set apart in trust for the benefit of the holders of shares of
Series H Preferred Stock and for no other purpose.
The Series H Preferred Stock has no voting rights, except (i) as
required by the DGCL, and (ii) that the holders of Series H Preferred Stock
have the right to vote with the TCI Group Common Stock, the Liberty Media Group
Common Stock, the Class B Preferred Stock and any other class or series of
Preferred Stock entitled to vote in any general election of directors, on the
basis of one vote per share, in any general election of directors of the
Company.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the Company Charter and the Company's Bylaws contain
provisions which may serve to discourage or make more difficult a change in
control of the Company without the support of the Board of Directors or without
meeting various other conditions. The principal provisions of the DGCL and the
aforementioned corporate governance documents are outlined below.
DGCL Section 203, in general, prohibits a "business combination"
between a corporation and an "interested stockholder" within three years of the
date such stockholder became an "interested stockholder," unless (i) prior to
such date the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, exclusive of
shares owned by directors who are also officers and by certain employee stock
plans or (iii) on or after such date, the business combination is approved by
the board of directors and authorized by the affirmative vote at a
stockholders' meeting of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. The term "business combination" is
defined to include, among other transactions between the interested stockholder
and the corporation or any direct or indirect majority-owned subsidiary
thereof, a merger or consolidation; a sale, pledge, transfer or other
disposition (including as part of a dissolution) of assets having an aggregate
market value equal to 10% or more of either the aggregate market value of all
assets of the corporation on a consolidated basis or the aggregate market value
of all the outstanding stock of the corporation; certain transactions that
would increase the interested stockholder's proportionate share ownership of
the stock of any class or series of the corporation or such subsidiary; and any
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any such subsidiary. In general, and subject to certain
exceptions, an "interested stockholder" is any person who is the owner of 15%
or more of the outstanding voting stock (or, in the case of a corporation with
classes of voting stock with disparate voting power, 15% or more of the voting
power of the outstanding voting stock) of the corporation, and the affiliates
and associates of such person. The term "owner" is broadly defined to include
any person that individually or with or through his or its affiliates or
associates, among other things, beneficially owns such stock, or has the right
to acquire such stock (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement or understanding or upon
the exercise of warrants or options or otherwise or has the right to vote such
stock pursuant to any agreement or understanding, or has an agreement or
understanding with the beneficial owner of such stock for the purpose of
acquiring, holding, voting or disposing of such stock. The restrictions of DGCL
Section 203 do not apply to corporations that have elected, in the manner
provided therein, not to be subject to such section or, with certain
exceptions, which do not have a class of voting stock that is listed on a
national securities exchange or authorized for quotation on an interdealer
quotation system of a registered national securities association or held of
record by more than 2,000 stockholders.
The Company Charter does not contain any provision "opting out" of the
application of DGCL Section 203 and the Company has not taken any of the
actions necessary for it to "opt out" of such provision. As a result, the
provisions of Section 203 will remain applicable to transactions between the
Company and any of its "interested stockholders."
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The Company Charter also contains certain provisions which could make
a change in control of the Company more difficult. For example, the Company
Charter requires, subject to the rights, if any, of any class or series of
Preferred Stock, the affirmative vote of 66 2/3% of the total voting power of
the outstanding shares of Voting Securities, voting together as a single class,
to approve (i) a merger or consolidation of the Company with, or into, another
corporation, other than a merger or consolidation which does not require the
consent of stockholders under the DGCL or a merger or consolidation which has
been approved by 75% of the members of the Board of Directors (in which case,
in accordance with the DGCL, the affirmative vote of a majority of the total
voting power of the outstanding Voting Securities would, with certain
exceptions, be required for approval), (ii) the sale, lease or exchange of all
or substantially all of the property and assets of the Company or (iii) the
dissolution of the Company. "Voting Securities" is currently defined as the TCI
Group Common Stock, the Liberty Media Group Common Stock and any class or
series of Preferred Stock entitled to vote generally with the holders of Common
Stock on matters submitted to stockholders for a vote, and if the Telephony
Group Stock Proposal is approved, would include the Telephony Group Common
Stock. The Company Charter also provides for a Board of Directors of not less
than three members, divided into three classes of approximately equal size,
with each class to be elected for a three-year term at each special meeting of
stockholders. The exact number of directors, currently nine, is fixed by the
Board of Directors. The holders of TCI Group Common Stock, Liberty Media Group
Common Stock, Class B Preferred Stock, Series C Preferred Stock, Series G
Preferred Stock and Series H Preferred Stock, voting together as a single
class, vote in elections for directors. (The holders of the Company's Series F
Preferred Stock are entitled to vote in the election of directors; however, the
DGCL prohibits the voting of such shares because such shares are held by
subsidiaries of the Company.) Stockholders of the Company do not have
cumulative voting rights.
The Company Charter authorizes the issuance of 50,000,000 shares of
Series Preferred Stock, of which 33,901,240 remain available for issuance as
October 31, 1996. Under the Company Charter, the Board of Directors is
authorized, without further action by the stockholders of the Company, to
establish the preferences, limitations and relative rights of the Series
Preferred Stock. In addition, 1,900,000,000 shares of TCI Group Common Stock
and 825,000,000 shares of Liberty Media Group Common Stock are currently
authorized by the Company Charter, of which 1,129,860,837 and 657,603,601
remain available for issuance as of October 31, 1996 (without taking into
consideration shares reserved for issuance upon conversion, exchange or
exercise of outstanding convertible or exchangeable securities and options). If
the Telephony Group Stock Proposal is approved by stockholders, there would be
825,000,000 shares of Telephony Group Common Stock authorized. The issue and
sale of shares of TCI Group Common Stock and Liberty Media Group Common Stock,
Telephony Group Common Stock and/or Series Preferred Stock could occur in
connection with an attempt to acquire control of the Company, and the terms of
such shares of Series Preferred Stock could be designed in part to impede the
acquisition of such control.
The Company Charter requires the affirmative vote of 66 2/3% of the
total voting power of the outstanding shares of Voting Securities, voting
together as a single class, to approve any amendment, alteration or repeal of
any provision of the Company Charter or the addition or insertion of other
provisions therein.
The Company Charter and the Company's Bylaws provide that a special
meeting of stockholders will be held at any time, subject to the rights of the
holders of any class or series of Preferred Stock, upon the call of the
Secretary of the Company upon (i) the written request of the holders of not
less than 66 2/3% of the total voting power of the outstanding shares of Voting
Securities or (ii) at the request of not less than 75% of the members of the
Board of Directors. Subject to the rights of any class or series of Preferred
Stock, the Company's Bylaws require that written notice of the intent to make a
nomination at a meeting of stockholders must be received by the Secretary of
the Company, at the Company's principal executive offices, not later than (a)
with respect to an election of directors to be held at an annual meeting of
stockholders, 90 days in advance of such meeting, and (b) with respect to an
election of directors to be held at a special meeting of stockholders, the
close of business on the seventh day following the day on which notice of such
meeting is first given to stockholders. The notice must contain: (1) the name
and address of the stockholder who intends to make the nomination and of the
person or persons to be nominated; (2) a representation that the stockholder is
a holder of record of the Company's Voting Securities entitled to vote at the
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (3) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (4) such other
information regarding each nominee proposed by such stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Commission had each proposed nominee been nominated, or intended
to be nominated, by the Board of Directors; and (5) the consent of each nominee
to serve as a director of the Company if so elected. Any actions to remove
directors is required to be for "cause" (as defined in the Company Charter) and
be approved by the holders of 66 2/3% of the total voting power of the
outstanding shares entitled to vote in the election of directors.
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The Company believes that the Telephony Group Stock Proposal, if
approved by the stockholders, should not make a change in control of the
Company more difficult. Although the number of authorized shares of Common
Stock will increase, and the number of outstanding shares will increase upon
the issuance of the Telephony Group Common Stock, the cost to an acquiring
person of obtaining majority control would depend on the aggregate market value
and the terms of the outstanding shares. The Company cannot predict whether, to
what extent or during what periods of time such cost may increase or decrease.
See "Factors to be Considered--No Assurance as to Market Price."
Nevertheless, the existence of the Telephony Group Common Stock would
present complexities and could in certain circumstances pose obstacles,
financial and otherwise, to an acquiring person. For example, a potential
acquiror would have to take into consideration that holders of different series
of Common Stock might be more or less receptive to the acquiror's proposal,
that a tender offer would have to be structured so as to take into account
different prices at which shares of the different series might be acquired,
that a merger would require allocation of consideration among the different
series of Common Stock and the effects of actions the Company might take such
as causing a conversion of the Telephony Group Common Stock.
INDEPENDENT AUDITORS
The firm of KPMG Peat Marwick LLP serves as the Company's independent
certified public accountants. A partner of KPMG Peat Marwick LLP will be
present at the Special Meeting with the opportunity to make a statement if KPMG
Peat Marwick LLP so desires and will be available to respond to appropriate
questions.
INCORPORATION BY REFERENCE
The following documents previously filed by the Company with the SEC
under the Exchange Act are hereby incorporated by reference in this Proxy
Statement:
A. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995;
B. The Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996;
C. The Company's Current Report on Form 8-K, dated September 3,
1996.
Reference is made to the financial statements of TeleWest plc and
subsidiaries, the historical and pro forma financial statements for the
Company, and the combined financial statements of the Liberty Media Group which
are included in the above-referenced documents. All financial statements
included in any document filed by the Company with the SEC pursuant to Sections
13(a), 13(c), or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement and prior to the date on which the Special Meeting is held which
amend or supplement the financial statements or pro forma financial statements
incorporated by reference herein shall be deemed to be incorporated by
reference into this Proxy Statement as of the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof
except as so modified or superseded.
All information appearing in this Proxy Statement is qualified in its
entirety by the information and financial statements (including notes thereto)
incorporated herein by reference.
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ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy and information
statements and other information with the SEC. Such reports, proxy and
information statements and other information filed by the Company with the SEC
can be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the SEC located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained
from the SEC at prescribed rates by writing to the Public Reference Section of
the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. The SEC maintains a Web site on the Internet that contains reports,
proxy and information statements and other information regarding registrants
(including the Company) that file electronically with the SEC. The address of
the SEC's Web site is http://www.sec.gov. In addition, materials filed by the
Company should be available for inspection at the offices of the National
Association of Securities Dealers, Inc., Reports Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
OTHER MATTERS
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY ANY
PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM STEPHEN M. BRETT,
SENIOR VICE PRESIDENT, TELE-COMMUNICATIONS, INC., 5619 DTC PARKWAY, ENGLEWOOD,
COLORADO 80111-3000, (303) 267-5500. DOCUMENTS SO REQUESTED WILL BE PROVIDED BY
FIRST CLASS MAIL OR EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF
SUCH REQUEST.
Englewood, Colorado
_____________, 1997
86
<PAGE> 92
ANNEX I
GLOSSARY OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
IN THE
TERM PROXY STATEMENT
- ---- -------------------
<S> <C>
1996 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7
Adjusted Liberty Media Group Outstanding Interest Fraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-24
Adjusted Outstanding Shares of Liberty Media Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Adjusted Outstanding Shares of Telephony Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Amended Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
APC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-2
Appraisal Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-24
Appraiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-24
AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
Available Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Business Line Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Cable Parents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-2
Cable Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
Certificate of Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Class A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . .II-1
Class B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CLEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Comcast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Committed Acquisition Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-24
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-1
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company Charter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Company Earnings (Loss) Attributable to the Liberty Media Group . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
Contingency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Coversion Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Conversion Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-22
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-1
Corporation Earnings (Loss) Attributable to the Liberty Media Group . . . . . . . . . . . . . . . . . . . . . . . . II-25
Corporation Earnings (Loss) Attributable to the TCI Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Corporation Earnings (Loss) Attributable to the Telephony Group . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Cox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
DGCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Digital Satellite Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Dividend Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
FCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-8
First Appraiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Full Redemption Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
HFC Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Higher Appraised Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
ILECs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
Independent Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-25
Inter-Group Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Junior Exchange Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Liberty Media Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-26
Liberty Media Group Available Dividend Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-26
Liberty Media Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
I-1
<PAGE> 93
<TABLE>
<S> <C>
Liberty Media Group Common Stock Per Share Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-4
Liberty Media Group Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Liberty Media Group Inter-Group Interest Fraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Liberty Media Group Net Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Liberty Media Group Optional Conversion Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-4
Liberty Media Group Outstanding Interest Fraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Liberty Media Group Private Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-10
Liberty Media Group Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Liberty Media Group Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-10
Liquidation Preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Lower Appraised Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Market Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-27
Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-28
MTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
Mutually Appraised Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-28
Mutually Designated Appraiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-28
Net Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Nonresident Alien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Number of Shares Issuable with Respect to the Liberty Media Group Inter-Group Interest . . . . . . . . . . . . . . II-28
Number of Shares Issuable with Respect to the Telephony Group Inter-Group Interest . . . . . . . . . . . . . . . . II-29
Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV-1
Parents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
Partial Redemption Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-1
Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
PCS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PCS Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PhillieCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Pre-Distribution Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Qualifying Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Related Business Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-5
Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
Required Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-4
ResTel Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SBU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Second Appraiser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Selection Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
Series A Liberty Media Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series A TCI Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series A Telephony Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series B Liberty Media Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series B TCI Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series B Telephony Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series C Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Series D Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Series E Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Series F Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Series G Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Series H Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Series Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-1
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
share distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-7
SONET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Special Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Sprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<TABLE>
<S> <C>
Sprint PCS Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Stated Liquidation Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-7
Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
TCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
TCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TCI Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-30
TCI Group Available Dividend Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-32
TCI Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
TCI Telephony . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-32
Telephony Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Telephony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-32
Telephony Group Available Dividend Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
Telephony Group Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Telephony Group Common Stock Per Share Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .II-6
Telephony Group Inter-Group Interest Fraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
Telephony Group Net Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
Telephony Group Optional Conversion Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Telephony Group Outstanding Interest Fraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
Telephony Group Private Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
Telephony Group Stock Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Telephony Group Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-17
Telephony Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Teleport Class A Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
Teleport Class B Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III-6
The Inter-Group Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
TIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
TINTA Director Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
TINTA Series A Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
TINTA Series B Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Trading Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-33
UACI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Voting Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-34
WestMarc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
WestMarc Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
WTCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
WTCI Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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<PAGE> 95
ANNEX II
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION
OF
TELE-COMMUNICATIONS, INC.
TELE-COMMUNICATIONS, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
FIRST: That the Restated Certificate of Incorporation of the
Corporation is hereby amended as follows: (I) THE FIRST PARAGRAPH OF ARTICLE IV
OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE CORPORATION IS HEREBY
AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"AUTHORIZED STOCK
The total number of shares of capital stock which the Corporation
shall have authority to issue is three billion six hundred two million three
hundred seventy-five thousand ninety-six (3,602,375,096) shares, which shall be
divided into the following classes:
(a) Three billion five hundred fifty million
(3,550,000,000) shares shall be of a class designated Common Stock,
par value $1.00 per share ("Common Stock"), such class to be divided
into series as provided in Section E of this Article IV;
(b) Seven hundred thousand (700,000) shares shall be of a
class designated Class A Preferred Stock, par value $.01 per share
("Class A Preferred Stock");
(c) One million six hundred seventy-five thousand
ninety-six (1,675,096) shares shall be of a class designated Class B
6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par
value $.01 per share ("Class B 6% Cumulative Redeemable Exchangeable
Junior Preferred Stock"); and
(d) Fifty million (50,000,000) shares shall be of a class
designated Series Preferred Stock, par value $.01 per share ("Series
Preferred Stock"), such class to be issuable in series as provided in
Section D of this Article IV.
The Class A Preferred Stock, the Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock and the Series Preferred Stock are
collectively referred to as "Preferred Stock"."
(II) SECTION E OF ARTICLE IV OF THE RESTATED CERTIFICATE OF INCORPORATION OF
THE CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"SECTION E
SERIES A TCI GROUP COMMON STOCK, SERIES B TCI GROUP COMMON
STOCK, SERIES A LIBERTY MEDIA GROUP COMMON STOCK,
SERIES B LIBERTY MEDIA GROUP COMMON STOCK,
SERIES A TELEPHONY GROUP COMMON STOCK AND
SERIES B TELEPHONY GROUP COMMON STOCK
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<PAGE> 96
One billion seven hundred fifty million (1,750,000,000) shares of
Common Stock shall be of a series designated Tele-Communications, Inc. Series A
TCI Group Common Stock (the "Series A TCI Group Common Stock"), one hundred
fifty million (150,000,000) shares of Common Stock shall be of a series
designated Tele-Communications, Inc. Series B TCI Group Common Stock (the
"Series B TCI Group Common Stock"), seven hundred fifty million (750,000,000)
shares of Common Stock shall be of a series designated Tele-Communications,
Inc. Series A Liberty Media Group Common Stock (the "Series A Liberty Media
Group Common Stock"), seventy-five million (75,000,000) shares of Common Stock
shall be of a series designated Tele-Communications, Inc. Series B Liberty
Media Group Common Stock (the "Series B Liberty Media Group Common Stock"),
seven hundred fifty million (750,000,000) shares of Common Stock shall be of a
series designated Tele- Communications, Inc. Series A Telephony Group Common
Stock (the "Series A Telephony Group Common Stock") and seventy five million
(75,000,000) shares of Common Stock shall be of a series designated
Tele-Communications, Inc. Series B Telephony Group Common Stock (the "Series B
Telephony Group Common Stock").
Each share of Series A TCI Group Common Stock and each share of Series
B TCI Group Common Stock shall, except as otherwise provided in this Section E,
be identical in all respects and shall have equal rights, powers and
privileges.
Each share of Series A Liberty Media Group Common Stock and each share
of Series B Liberty Media Group Common Stock shall, except as otherwise
provided in this Section E, be identical in all respects and shall have equal
rights, powers and privileges.
Each share of Series A Telephony Group Common Stock and each share of
Series B Telephony Group Common Stock shall, except as otherwise provided in
this Section E, be identical in all respects and shall have equal rights,
powers and privileges.
1. Voting Rights.
Holders of Series A TCI Group Common Stock shall be entitled to one
vote for each share of such stock held, holders of Series B TCI Group Common
Stock shall be entitled to ten votes for each share of such stock held, holders
of Series A Liberty Media Group Common Stock shall be entitled to one vote for
each share of such stock held, holders of Series B Liberty Media Group Common
Stock shall be entitled to ten votes for each share of such stock held, holders
of Series A Telephony Group Common Stock shall be entitled to one vote for each
share of such stock held, and holders of Series B Telephony Group Common Stock
shall be entitled to ten votes for each share of such stock held, on all
matters presented to such stockholders. Except as may otherwise be required by
the laws of the State of Delaware or, with respect to any class of Preferred
Stock or any series of such a class, in this Certificate (including any
resolution or resolutions providing for the establishment of such class or
series pursuant to authority vested in the Board of Directors by this
Certificate), the holders of shares of Series A TCI Group Common Stock, the
holders of shares of Series B TCI Group Common Stock, the holders of shares of
Series A Liberty Media Group Common Stock, the holders of shares of Series B
Liberty Media Group Common Stock, the holders of shares of Series A Telephony
Group Common Stock, the holders of shares of Series B Telephony Group Common
Stock and the holders of shares of each class or series of Preferred Stock, if
any, entitled to vote thereon, 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 the Corporation (including, without limitation, any proposed
amendment to this Certificate that would increase the number of authorized
shares of Common Stock or any series thereof or of any other class or series of
stock or decrease the number of authorized shares of any class or series of
stock (but not below the number of shares thereof then outstanding)), and no
separate vote or consent of the holders of shares of Series A TCI Group Common
Stock, the holders of shares of Series B TCI Group Common Stock, the holders of
shares of Series A Liberty Media Group Common Stock, the holders of shares of
Series B Liberty Media Group Common Stock, the holders of shares of Series A
Telephony Group Common Stock, the holders of shares of Series B Telephony Group
Common Stock, or the holders of shares of any such class or series of Preferred
Stock shall be required for the approval of any such matter.
2. Conversion Rights.
(a) CONVERSION OF SERIES B TCI GROUP COMMON STOCK INTO SERIES A
TCI GROUP COMMON STOCK. Each share of Series B TCI Group Common Stock shall be
convertible, at the option of the holder thereof, into one share of Series A
TCI Group Common Stock. Any such conversion may be effected by any holder of
Series B TCI Group Common Stock by surrendering such holder's certificate or
certificates for the Series B TCI Group Common Stock to be converted, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
B TCI Group Common Stock, together with a written notice to the Corporation at
such office that such holder elects to convert all or a specified number of
shares of Series
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<PAGE> 97
B TCI Group Common Stock represented by such certificate and stating the name
or names in which such holder desires the certificate or certificates for
Series A TCI Group Common Stock to be issued. If so required by the
Corporation, any certificate for shares surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder of such shares or the duly authorized
representative of such holder. Promptly thereafter, the Corporation shall
issue and deliver to such holder or such holder's nominee or nominees, a
certificate or certificates for the number of shares of Series A TCI Group
Common Stock to which such holder shall be entitled as herein provided. Such
conversion shall be deemed to have been made at the close of business on the
date of receipt by the Corporation or any such transfer agent of the
certificate or certificates, notice and, if required, instruments of transfer
referred to above, and the person or persons entitled to receive the Series A
TCI Group Common Stock issuable on such conversion shall be treated for all
purposes as the record holder or holders of such Series A TCI Group Common
Stock on that date. A number of shares of Series A TCI Group Common Stock equal
to the number of shares of Series B TCI Group Common Stock outstanding from
time to time shall be set aside and reserved for issuance upon conversion of
shares of Series B TCI Group Common Stock. Shares of Series A TCI Group Common
Stock shall not be convertible into shares of Series B TCI Group Common Stock.
(b) CONVERSION OF SERIES B LIBERTY MEDIA GROUP COMMON STOCK INTO
SERIES A LIBERTY MEDIA GROUP COMMON STOCK. Each share of Series B Liberty
Media Group Common Stock shall be convertible, at the option of the holder
thereof, into one share of Series A Liberty Media Group Common Stock. Any such
conversion may be effected by any holder of Series B Liberty Media Group Common
Stock by surrendering such holder's certificate or certificates for the Series
B Liberty Media Group Common Stock to be converted, duly endorsed, at the
office of the Corporation or any transfer agent for the Series B Liberty Media
Group Common Stock, together with a written notice to the Corporation at such
office that such holder elects to convert all or a specified number of shares
of Series B Liberty Media Group Common Stock represented by such certificate
and stating the name or names in which such holder desires the certificate or
certificates for Series A Liberty Media Group Common Stock to be issued. If so
required by the Corporation, any certificate for shares surrendered for
conversion shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder of such shares or
the duly authorized representative of such holder. Promptly thereafter, the
Corporation shall issue and deliver to such holder or such holder's nominee or
nominees, a certificate or certificates for the number of shares of Series A
Liberty Media Group Common Stock to which such holder shall be entitled as
herein provided. Such conversion shall be deemed to have been made at the
close of business on the date of receipt by the Corporation or any such
transfer agent of the certificate or certificates, notice and, if required,
instruments of transfer referred to above, and the person or persons entitled
to receive the Series A Liberty Media Group Common Stock issuable on such
conversion shall be treated for all purposes as the record holder or holders of
such Series A Liberty Media Group Common Stock on that date. A number of shares
of Series A Liberty Media Group Common Stock equal to the number of shares of
Series B Liberty Media Group Common Stock outstanding from time to time shall
be set aside and reserved for issuance upon conversion of shares of Series B
Liberty Media Group Common Stock. Shares of Series A Liberty Media Group Common
Stock shall not be convertible into shares of Series B Liberty Media Group
Common Stock.
(c) CONVERSION OF SERIES B TELEPHONY GROUP COMMON STOCK INTO
SERIES A TELEPHONY GROUP COMMON STOCK. Each share of Series B Telephony Group
Common Stock shall be convertible, at the option of the holder thereof, into
one share of Series A Telephony Group Common Stock. Any such conversion may be
effected by any holder of Series B Telephony Group Common Stock by surrendering
such holder's certificate or certificates for the Series B Telephony Group
Common Stock to be converted, duly endorsed, at the office of the Corporation
or any transfer agent for the Series B Telephony Group Common Stock, together
with a written notice to the Corporation at such office that such holder elects
to convert all or a specified number of shares of Series B Telephony Group
Common Stock represented by such certificate and stating the name or names in
which such holder desires the certificate or certificates for Series A
Telephony Group Common Stock to be issued. If so required by the Corporation,
any certificate for shares surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the holder of such shares or the duly authorized representative of such
holder. Promptly thereafter, the Corporation shall issue and deliver to such
holder or such holder's nominee or nominees, a certificate or certificates for
the number of shares of Series A Telephony Group Common Stock to which such
holder shall be entitled as herein provided. Such conversion shall be deemed to
have been made at the close of business on the date of receipt by the
Corporation or any such transfer agent of the certificate or certificates,
notice and, if required, instruments of transfer referred to above, and the
person or persons entitled to receive the Series A Telephony Group Common Stock
issuable on such conversion shall be treated for all purposes as the record
holder or holders of such Series A Telephony Group Common Stock on that date. A
number of shares of Series A Telephony Group Common Stock equal to the number
of shares of Series B Telephony Group Common Stock outstanding from time to
time shall be set aside and reserved for issuance upon conversion of shares of
Series B Telephony Group Common Stock. Shares of Series A Telephony Group
Common Stock shall not be convertible into shares of Series B Telephony Group
Common Stock.
II-3
<PAGE> 98
(d) CONVERSION OF SERIES A LIBERTY MEDIA GROUP COMMON STOCK INTO
SERIES A TCI GROUP COMMON STOCK AND SERIES B LIBERTY MEDIA GROUP COMMON STOCK
INTO SERIES B TCI GROUP COMMON STOCK AT THE OPTION OF THE CORPORATION. (i) At
the option of the Corporation by action of its Board of Directors, (A) all
shares of Series A Liberty Media Group Common Stock shall be convertible into a
number (or fraction) of fully paid and nonassessable shares of Series A TCI
Group Common Stock equal to the Liberty Media Group Optional Conversion Ratio,
and (B) all shares of Series B Liberty Media Group Common Stock shall be
convertible into a number (or fraction) of fully paid and nonassessable shares
of Series B TCI Group Common Stock equal to the Liberty Media Group Optional
Conversion Ratio.
(ii) For purposes of this paragraph 2(d), the "Liberty Media Group
Optional Conversion Ratio" shall mean the quotient (calculated to the nearest
five decimal places) obtained by dividing (A) the Liberty Media Group Common
Stock Per Share Value by (B) the average Market Value of one share of Series A
TCI Group Common Stock over the 20-Trading Day period ending on the Trading Day
preceding the Appraisal Date.
(iii) In the event that the Corporation determines to establish the
Liberty Media Group Private Market Value, the Corporation shall designate the
First Appraiser, and the Independent Committee shall designate the Second
Appraiser. Not later than 20 days after the Selection Date, the First
Appraiser and the Second Appraiser shall each determine its initial view as to
the private market value of the Liberty Media Group as of the Appraisal Date
and shall consult with one another with respect thereto. Not later than the
30th day after the Selection Date, the First Appraiser and the Second Appraiser
shall each have determined its final view as to such private market value. If
the Higher Appraised Amount is not more than 120% of the Lower Appraised
Amount, the Liberty Media Group Private Market Value (subject to any adjustment
provided in subparagraph (iv) of this paragraph 2(d)) shall be the average of
those two amounts. If the Higher Appraised Amount is more than 120% of the
Lower Appraised Amount, the First Appraiser and the Second Appraiser shall
agree upon and jointly designate the Mutually Designated Appraiser to determine
such private market value. The Mutually Designated Appraiser shall not be
provided with any of the work of the First Appraiser and Second Appraiser. The
Mutually Designated Appraiser shall, no later than the 20th day after the date
the Mutually Designated Appraiser is designated, determine the Mutually
Appraised Amount, and the Liberty Media Group Private Market Value (subject to
any adjustment provided in subparagraph (iv) of this paragraph 2(d)) shall be
(A) if the Mutually Appraised Amount is between the Lower Appraised Amount
and the Higher Appraised Amount, (I) the average of (1) the Mutually
Appraised Amount and (2) the Lower Appraised Amount or the Higher Appraised
Amount, whichever is closer to the Mutually Appraised Amount, or (II) the
Mutually Appraised Amount, if neither the Lower Appraised Amount nor the
Higher Appraised Amount is closer to the Mutually Appraised Amount, or (B) if
the Mutually Appraised Amount is greater than the Higher Appraised Amount or
less than the Lower Appraised Amount, the average of the Higher Appraised
Amount and the Lower Appraised Amount. For these purposes, if any such
Appraiser expresses its final view of the private market value of the Liberty
Media Group as a range of values, such Appraiser's final view of such private
market value shall be deemed to be the midpoint of such range of values.
(iv) Following the determination of the Liberty Media Group Private
Market Value, the Appraiser or Appraisers whose final views of the private
market value of the Liberty Media Group were used in the calculation of the
Liberty Media Group Private Market Value shall determine the Adjusted
Outstanding Shares of Liberty Media Group Common Stock together with any
further appropriate adjustments to the Liberty Media Group Private Market Value
resulting from such determination. The "Adjusted Outstanding Shares of Liberty
Media Group Common Stock" shall mean a number, as determined by such
Appraiser(s) as of the Appraisal Date, equal to the sum of the number of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding, the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest, the number of Committed Acquisition
Shares issuable, the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock issuable upon the
conversion, exercise or exchange of all Pre-Distribution Convertible Securities
and the number of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock issuable upon the conversion,
exercise or exchange of those Convertible Securities (other than
Pre-Distribution Convertible Securities and other than Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares) the holders of which would derive an economic benefit from
conversion, exercise or exchange of such Convertible Securities which exceeds
the economic benefit of not converting, exercising or exchanging such
Convertible Securities. The "Liberty Media Group Common Stock Per Share Value"
shall mean the quotient obtained by dividing the Liberty Media Group Private
Market Value by the Adjusted Outstanding Shares of Liberty Media Group Common
Stock, provided that if such Appraiser(s) do not agree on the determinations
provided for in this subparagraph (iv), the Liberty Media Group Common Stock
Per Share Value shall be the average of the quotients so obtained on the basis
of the respective determinations of such firms.
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<PAGE> 99
(v) If the Corporation determines to convert shares of Series A
Liberty Media Group Common Stock into Series A TCI Group Common Stock and
shares of Series B Liberty Media Group Common Stock into Series B TCI Group
Common Stock at the Liberty Media Group Optional Conversion Ratio, such
conversion shall occur on a Conversion Date on or prior to the 120th day
following the Appraisal Date. If the Corporation determines not to undertake
such conversion, the Corporation may at any time thereafter undertake to
reestablish the Liberty Media Group Common Stock Per Share Value as of a
subsequent date.
(vi) The Corporation shall not convert shares of Series A Liberty
Media Group Common Stock into shares of Series A TCI Group Common Stock without
converting shares of Series B Liberty Media Group Common Stock into shares of
Series B TCI Group Common Stock, and the Corporation shall not convert shares
of Series B Liberty Media Group Common Stock into shares of Series B TCI Group
Common Stock without converting shares of Series A Liberty Media Group Common
Stock into shares of Series A TCI Group Common Stock. The Series A Liberty
Media Group Common Stock and the Series B Liberty Media Group Common Stock
shall also be convertible at the option of the Corporation in accordance with
paragraph 5(b)(iii) of this Section E.
(e) CONVERSION OF SERIES A TELEPHONY GROUP COMMON STOCK INTO
SERIES A TCI GROUP COMMON STOCK AND SERIES B TELEPHONY GROUP COMMON STOCK INTO
SERIES B TCI GROUP COMMON STOCK AT THE OPTION OF THE CORPORATION. (i) At the
option of the Corporation by action of its Board of Directors, (A) all shares
of Series A Telephony Group Common Stock shall be convertible into a number (or
fraction) of fully paid and nonassessable shares of Series A TCI Group Common
Stock equal to the Telephony Group Optional Conversion Ratio, and (B) all
shares of Series B Telephony Group Common Stock shall be convertible into a
number (or fraction) of fully paid and nonassessable shares of Series B TCI
Group Common Stock equal to the Telephony Group Optional Conversion Ratio.
(ii) For purposes of this paragraph 2(e), the "Telephony Group
Optional Conversion Ratio" shall mean the quotient (calculated to the nearest
five decimal places) obtained by dividing (A) the Telephony Group Common Stock
Per Share Value by (B) the average Market Value of one share of Series A TCI
Group Common Stock over the 20-Trading Day period ending on the Trading Day
preceding the Appraisal Date.
(iii) In the event that the Corporation determines to establish the
Telephony Group Private Market Value, the Corporation shall designate the First
Appraiser, and the Independent Committee shall designate the Second Appraiser.
Not later than 20 days after the Selection Date, the First Appraiser and the
Second Appraiser shall each determine its initial view as to the private market
value of the Telephony Group as of the Appraisal Date and shall consult with
one another with respect thereto. Not later than the 30th day after the
Selection Date, the First Appraiser and the Second Appraiser shall each have
determined its final view as to such private market value. If the Higher
Appraised Amount is not more than 120% of the Lower Appraised Amount, the
Telephony Group Private Market Value (subject to any adjustment provided in
subparagraph (iv) of this paragraph 2(e)) shall be the average of those two
amounts. If the Higher Appraised Amount is more than 120% of the Lower
Appraised Amount, the First Appraiser and the Second Appraiser shall agree upon
and jointly designate the Mutually Designated Appraiser to determine such
private market value. The Mutually Designated Appraiser shall not be provided
with any of the work of the First Appraiser and Second Appraiser. The Mutually
Designated Appraiser shall, no later than the 20th day after the date the
Mutually Designated Appraiser is designated, determine the Mutually Appraised
Amount and the Telephony Group Private Market Value (subject to any adjustment
provided in subparagraph (iv) of this paragraph 2(e)) shall be (A) if the
Mutually Appraised Amount is between the Lower Appraised Amount and the Higher
Appraised Amount, (I) the average of (1) the Mutually Appraised Amount and (2)
the Lower Appraised Amount or the Higher Appraised Amount, whichever is closer
to the Mutually Appraised Amount, or (II) the Mutually Appraised Amount, if
neither the Lower Appraised Amount nor the Higher Appraised Amount is closer to
the Mutually Appraised Amount, or (B) if the Mutually Appraised Amount is
greater than the Higher Appraised Amount or less than the Lower Appraised
Amount, the average of the Higher Appraised Amount and the Lower Appraised
Amount. For these purposes, if any such Appraiser expresses its final view of
the private market value of the Telephony Group as a range of values, such
Appraiser's final view of such private market value shall be deemed to be the
midpoint of such range of values.
(iv) Following the determination of the Telephony Group Private
Market Value, the Appraiser or Appraisers whose final views of the private
market value of the Telephony Group were used in the calculation of the
Telephony Group Private Market Value shall determine the Adjusted Outstanding
Shares of Telephony Group Common Stock together with any further appropriate
adjustments to the Telephony Group Private Market Value resulting from such
determination. The "Adjusted Outstanding Shares of Telephony Group Common
Stock" shall mean a number, as determined by such Appraiser(s) as of the
Appraisal Date, equal to the sum of the number of shares of Series A Telephony
Group Common Stock and Series
II-5
<PAGE> 100
B Telephony Group Common Stock outstanding, the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest, and the number of shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock issuable upon the conversion, exercise or exchange of those Convertible
Securities the holders of which would derive an economic benefit from
conversion, exercise or exchange of such Convertible Securities which exceeds
the economic benefit of not converting, exercising or exchanging such
Convertible Securities. The "Telephony Group Common Stock Per Share Value"
shall mean the quotient obtained by dividing the Telephony Group Private Market
Value by the Adjusted Outstanding Shares of Telephony Group Common Stock,
provided that if such Appraiser(s) do not agree on the determinations provided
for in this subparagraph (iv), the Telephony Group Common Stock Per Share Value
shall be the average of the quotients so obtained on the basis of the
respective determinations of such firms.
(v) If the Corporation determines to convert shares of Series A
Telephony Group Common Stock into Series A TCI Group Common Stock and shares of
Series B Telephony Group Common Stock into Series B TCI Group Common Stock at
the Telephony Group Optional Conversion Ratio, such conversion shall occur on a
Conversion Date on or prior to the 120th day following the Appraisal Date. If
the Corporation determines not to undertake such conversion, the Corporation
may at any time thereafter undertake to reestablish the Telephony Group Common
Stock Per Share Value as of a subsequent date.
(vi) The Corporation shall not convert shares of Series A Telephony
Group Common Stock into shares of Series A TCI Group Common Stock without
converting shares of Series B Telephony Group Common Stock into shares of
Series B TCI Group Common Stock, and the Corporation shall not convert shares
of Series B Telephony Group Common Stock into shares of Series B TCI Group
Common Stock without converting shares of Series A Telephony Group Common Stock
into shares of Series A TCI Group Common Stock. The Series A Telephony Group
Common Stock and the Series B Telephony Group Common Stock shall also be
convertible at the option of the Corporation in accordance with paragraph
6(b)(iii) of this Section E.
3. Dividends.
(a) DIVIDENDS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B TCI
GROUP COMMON STOCK. Dividends on the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock may be declared and paid only out of the lesser
of (i) assets of the Corporation legally available therefor and (ii) the TCI
Group Available Dividend Amount. Subject to paragraph 4 of this Section E,
whenever a dividend is paid to the holders of Series A TCI Group Common Stock,
the Corporation shall also pay to the holders of Series B TCI Group Common
Stock a dividend per share equal to the dividend per share paid to the holders
of Series A TCI Group Common Stock, and whenever a dividend is paid to the
holders of Series B TCI Group Common Stock, the Corporation shall also pay to
the holders of Series A TCI Group Common Stock a dividend per share equal to
the dividend per share paid to the holders of Series B TCI Group Common Stock.
(b) DIVIDENDS ON SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND
SERIES B LIBERTY MEDIA GROUP COMMON STOCK. Dividends on the Series A Liberty
Media Group Common Stock and the Series B Liberty Media Group Common Stock may
be declared and paid only out of the lesser of (i) assets of the Corporation
legally available therefor and (ii) the Liberty Media Group Available Dividend
Amount. Subject to paragraph 4 and the last sentence of paragraph 5(b) of this
Section E, whenever a dividend is paid to the holders of Series A Liberty Media
Group Common Stock, the Corporation shall also pay to the holders of Series B
Liberty Media Group Common Stock a dividend per share equal to the dividend per
share paid to the holders of Series A Liberty Media Group Common Stock, and
whenever a dividend is paid to the holders of Series B Liberty Media Group
Common Stock, the Corporation shall also pay to the holders of Series A Liberty
Media Group Common Stock a dividend per share equal to the dividend per share
paid to the holders of Series B Liberty Media Group Common Stock.
(c) DIVIDENDS ON SERIES A TELEPHONY GROUP COMMON STOCK AND SERIES
B TELEPHONY GROUP COMMON STOCK. Dividends on the Series A Telephony Group
Common Stock and the Series B Telephony Group Common Stock may be declared and
paid only out of the lesser of (i) assets of the Corporation legally available
therefor and (ii) the Telephony Group Available Dividend Amount. Subject to
paragraph 4 and the last sentence of paragraph 6(b) of this Section E, whenever
a dividend is paid to the holders of Series A Telephony Group Common Stock, the
Corporation shall also pay to the holders of Series B Telephony Group Common
Stock a dividend per share equal to the dividend per share paid to the holders
of Series A Telephony Group Common Stock, and whenever a dividend is paid to
the holders of Series B Telephony Group Common Stock, the Corporation shall
also pay to the holders of Series A Telephony Group Common Stock a dividend per
share equal to the dividend per share paid to the holders of Series B Telephony
Group Common Stock.
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(d) DISCRIMINATION BETWEEN OR AMONG SERIES OF COMMON STOCK. The
Board of Directors, subject to the provisions of paragraph 3(a), 3(b) and 3(c)
of this Section E, shall have the authority and discretion to declare and pay
dividends on (i) the Series A TCI Group Common Stock and Series B TCI Group
Common Stock, (ii) the Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock, or (iii) the Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, in equal or unequal amounts,
notwithstanding the relationship between the TCI Group Available Dividend
Amount, the Liberty Media Group Available Dividend Amount and the Telephony
Group Available Dividend Amount, the respective amounts of prior dividends
declared on, or the liquidation rights of, the Series A TCI Group Common Stock
and Series B TCI Group Common Stock, the Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, or the Series A Telephony
Group Common Stock and the Series B Telephony Group Common Stock, or any other
factor.
4. Share Distributions.
The Corporation may declare and pay a distribution consisting of
shares of Series A TCI Group Common Stock, Series B TCI Group Common Stock,
Series A Liberty Media Group Common Stock, Series B Liberty Media Group Common
Stock, Series A Telephony Group Common Stock, Series B Telephony Group Common
Stock or any other securities of the Corporation or any other Person
(hereinafter sometimes called a "share distribution") to holders of the Common
Stock only in accordance with the provisions of this paragraph 4.
(a) DISTRIBUTIONS ON SERIES A TCI GROUP COMMON STOCK AND SERIES B
TCI GROUP COMMON STOCK. If at any time a share distribution is to be made with
respect to the Series A TCI Group Common Stock or Series B TCI Group Common
Stock, such share distribution may be declared and paid only as follows:
(i) a share distribution consisting of shares of Series A
TCI Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Group Common
Stock) to holders of Series A TCI Group Common Stock and Series B TCI
Group Common Stock, on an equal per share basis; or consisting of
shares of Series B TCI Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
TCI Group Common Stock) to holders of Series A TCI Group Common Stock
and Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series A TCI Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A TCI Group Common Stock) to holders of Series A
TCI Group Common Stock and, on an equal per share basis, shares of
Series B TCI Group Common Stock (or like Convertible Securities
convertible into or exercisable or exchangeable for shares of Series B
TCI Group Common Stock) to holders of Series B TCI Group Common Stock;
(ii) subsequent to the Liberty Media Group Distribution, a
share distribution consisting of shares of Series A Liberty Media
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group
Common Stock) to holders of Series A TCI Group Common Stock and Series
B TCI Group Common Stock, on an equal per share basis; provided that
the sum of (A) the aggregate number of shares of Series A Liberty
Media Group Common Stock to be so issued (or the number of such shares
which would be issuable upon conversion, exercise or exchange of any
Convertible Securities to be so issued) and (B) the number of shares
of such series that are subject to issuance upon conversion, exercise
or exchange of any Convertible Securities then outstanding that are
attributed to the TCI Group (other than Pre-Distribution Convertible
Securities and other than Convertible Securities convertible into or
exercisable or exchangeable for Committed Acquisition Shares) is less
than or equal to the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest;
(iii) a share distribution consisting of shares of Series A
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock) to holders of Series A TCI Group Common Stock and
Series B TCI Group Common Stock, on an equal per share basis; or
consisting of shares of Series B Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series B Telephony Group Common Stock) to holders of
Series A TCI Group Common Stock and Series B TCI Group Common Stock,
on an equal per share basis; or consisting of shares of Series A
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock) to holders of Series A TCI Group Common Stock and,
on an equal per share basis, shares of Series B TCI Group Common Stock
(or like Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B TCI Group Common
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Stock) to holders of Series B TCI Group Common Stock; provided that
the sum of (A) the aggregate number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock to be so
distributed (or the number of such shares of Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock which would be
issuable upon conversion, exercise or exchange of any Convertible
Securities to be so distributed) and (B) the number of shares of
Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock that are subject to issuance upon conversion, exercise or
exchange of any Convertible Securities then outstanding that are
attributed to the TCI Group, is less than or equal to the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group
Interest.
(iv) a share distribution consisting of any class or
series of securities of the Corporation or any other Person other than
Series A TCI Group Common Stock, Series B TCI Group Common Stock,
Series A Liberty Media Group Common Stock, Series B Liberty Media
Group Common Stock, Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A TCI Group
Common Stock, Series B TCI Group Common Stock, Series A Liberty Media
Group Common Stock, Series B Liberty Media Group Common Stock, Series
A Telephony Group Common Stock or Series B Telephony Group Common
Stock), either on the basis of a distribution of identical securities,
on an equal per share basis, to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock or on the basis of a
distribution of one class or series of securities to holders of Series
A TCI Group Common Stock and another class or series of securities to
holders of Series B TCI Group Common Stock, provided that the
securities so distributed (and, if the distribution consists of
Convertible Securities, the securities into which such Convertible
Securities are convertible or for which they are exercisable or
exchangeable) do not differ in any respect other than their relative
voting rights and related differences in designation, conversion,
redemption and share distribution provisions, with holders of shares
of Series B TCI Group Common Stock receiving the class or series
having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A TCI
Group Common Stock and the Series B TCI Group Common Stock), provided
that if the securities so distributed constitute capital stock of a
Subsidiary of the Corporation, such rights shall not differ to a
greater extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A TCI Group Common Stock and the Series B TCI Group
Common Stock, and provided in each case that such distribution is
otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Series
A TCI Group Common Stock without reclassifying, subdividing or combining the
Series B TCI Group Common Stock, on an equal per share basis, and the
Corporation shall not reclassify, subdivide or combine the Series B TCI Group
Common Stock without reclassifying, subdividing or combining the Series A TCI
Group Common Stock, on an equal per share basis.
(b) DISTRIBUTIONS ON SERIES A LIBERTY MEDIA GROUP COMMON STOCK AND
SERIES B LIBERTY MEDIA GROUP COMMON STOCK. If at any time a share distribution
is to be made with respect to the Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock, such share distribution may be
declared and paid only as follows (or as permitted by paragraph 5 of this
Section E with respect to the redemptions and other distributions referred to
therein):
(i) a share distribution consisting of shares of Series A
Liberty Media Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series A
Liberty Media Group Common Stock) to holders of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock, on
an equal per share basis; or consisting of shares of Series B Liberty
Media Group Common Stock (or Convertible Securities convertible into
or exercisable or exchangeable for shares of Series B Liberty Media
Group Common Stock) to holders of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, on an equal per
share basis; or consisting of shares of Series A Liberty Media Group
Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A Liberty Media Group
Common Stock) to holders of Series A Liberty Media Group Common Stock
and, on an equal per share basis, shares of Series B Liberty Media
Group Common Stock (or like Convertible Securities convertible into or
exercisable or exchangeable for shares of Series B Liberty Media Group
Common Stock) to holders of Series B Liberty Media Group Common Stock;
and
(ii) a share distribution consisting of any class or
series of securities of the Corporation or any other Person other than
as described in clause (i) of this paragraph 4(b) and other than
Series A TCI Group Common Stock,
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Series B TCI Group Common Stock, Series A Telephony Group Common Stock
or Series B Telephony Group Common Stock (or Convertible Securities
convertible into or exercisable or exchangeable for shares of Series A
TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock)
either on the basis of a distribution of identical securities, on an
equal per share basis, to holders of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock or on the
basis of a distribution of one class or series of securities to
holders of Series A Liberty Media Group Common Stock and another class
or series of securities to holders of Series B Liberty Media Group
Common Stock, provided that the securities so distributed (and, if the
distribution consists of Convertible Securities, the securities into
which such Convertible Securities are convertible or for which they
are exercisable or exchangeable) do not differ in any respect other
than their relative voting rights and related differences in
designation, conversion, redemption and share distribution provisions,
with holders of shares of Series B Liberty Media Group Common Stock
receiving the class or series having the higher relative voting rights
(without regard to whether such rights differ to a greater or lesser
extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A Liberty Media Group Common Stock and the Series B
Liberty Media Group Common Stock), provided that if the securities so
distributed constitute capital stock of a Subsidiary of the
Corporation, such rights shall not differ to a greater extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock, and provided in each case that such distribution is
otherwise made on an equal per share basis.
The Corporation shall not reclassify, subdivide or combine the Series
A Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series B Liberty Media Group Common Stock, on an equal per share
basis, and the Corporation shall not reclassify, subdivide or combine the
Series B Liberty Media Group Common Stock without reclassifying, subdividing or
combining the Series A Liberty Media Group Common Stock, on an equal per share
basis.
(c) DISTRIBUTIONS ON SERIES A TELEPHONY GROUP COMMON STOCK AND
SERIES B TELEPHONY GROUP COMMON STOCK. If at any time a share distribution is
to be made with respect to the Series A Telephony Group Common Stock or Series
B Telephony Group Common Stock, such share distribution may be declared and
paid only as follows (or as permitted by paragraph 6 of this Section E with
respect to the redemptions and other distributions referred to therein):
(i) a share distribution consisting of shares of Series A
Telephony Group Common Stock (or Convertible Securities convertible
into or exercisable or exchangeable for shares of Series A Telephony
Group Common Stock) to holders of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, on an equal per share
basis; or consisting of shares of Series B Telephony Group Common
Stock (or Convertible Securities convertible into or exercisable or
exchangeable for shares of Series B Telephony Group Common Stock) to
holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, on an equal per share basis; or
consisting of shares of Series A Telephony Group Common Stock (or
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series A Telephony Group Common Stock) to holders of
Series A Telephony Group Common Stock and, on an equal per share
basis, shares of Series B Telephony Group Common Stock (or like
Convertible Securities convertible into or exercisable or exchangeable
for shares of Series B Telephony Group Common Stock) to holders of
Series B Telephony Group Common Stock; and
(ii) a share distribution consisting of any class or
series of securities of the Corporation or any other Person other than
as described in clause (i) of this paragraph 4(c) and other than
Series A TCI Group Common Stock, Series B TCI Group Common Stock,
Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock (or Convertible Securities convertible into or
exercisable or exchangeable for shares of Series A TCI Group Common
Stock, Series B TCI Group Common Stock, Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock) either on
the basis of a distribution of identical securities, on an equal per
share basis, to holders of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, or on the basis of a
distribution of one class or series of securities to holders of Series
A Telephony Group Common Stock and another class or series of
securities to holders of Series B Telephony Group Common Stock,
provided that the securities so distributed (and, if the distribution
consists of Convertible Securities, the securities into which such
Convertible Securities are convertible or for which they are
exercisable or exchangeable) do not differ in any respect other than
their relative voting rights and related differences in designation,
conversion, redemption and share distribution provisions, with holders
of shares of Series B Telephony Group Common Stock receiving the class
or
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series having the higher relative voting rights (without regard to
whether such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A
Telephony Group Common Stock and the Series B Telephony Group Common
Stock), provided that if the securities so distributed constitute
capital stock of a Subsidiary of the Corporation, such rights shall
not differ to a greater extent than the corresponding differences in
voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Telephony Group Common
Stock and the Series B Telephony Group Common Stock, and provided in
each case that such distribution is otherwise made on an equal per
share basis.
The Corporation shall not reclassify, subdivide or combine the Series
A Telephony Group Common Stock without reclassifying, subdividing or combining
the Series B Telephony Group Common Stock, on an equal per share basis, and the
Corporation shall not reclassify, subdivide or combine the Series B Telephony
Group Common Stock without reclassifying, subdividing or combining the Series A
Telephony Group Common Stock, on an equal per share basis.
5. Redemption and Other Provisions Relating to the Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock.
(a) REDEMPTION IN EXCHANGE FOR STOCK OF LIBERTY MEDIA GROUP
SUBSIDIARIES. At any time at which all of the assets and liabilities attributed
to the Liberty Media Group have become and continue to be held directly or
indirectly by any one or more corporations all of the capital stock of which is
owned by the Corporation (the "Liberty Media Group Subsidiaries"), the Board of
Directors may, subject to the availability of assets of the Corporation legally
available therefor, redeem, on a pro rata basis, all of the outstanding shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock in exchange for an aggregate number of outstanding fully paid and
nonassessable shares of common stock of each Liberty Media Group Subsidiary
equal to the product of the Adjusted Liberty Media Group Outstanding Interest
Fraction and the number of outstanding shares of common stock of such Liberty
Media Group Subsidiary held by the Corporation. Any such redemption shall occur
on a Redemption Date set forth in a notice to holders of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock and
Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities) pursuant to paragraph
5(d)(vi). In effecting such a redemption, the Board of Directors may determine
either to (i) redeem shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock in exchange for shares of separate
classes or series of common stock of each Liberty Media Group Subsidiary with
relative voting rights and related differences in designation, conversion,
redemption and share distribution provisions not greater than the corresponding
differences in voting rights, designation, conversion, redemption and share
distribution provisions between the Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, with holders of shares of Series
B Liberty Media Group Common Stock receiving the class or series having the
higher relative voting rights, or (ii) redeem shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock in exchange
for shares of a single class of common stock of each Liberty Media Group
Subsidiary without distinction between the shares distributed to the holders of
the Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock. If the Corporation determines to undertake a redemption as
described in clause (i) of the preceding sentence, the outstanding shares of
common stock of each Liberty Media Group Subsidiary not distributed to holders
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock shall consist solely of the class or series having the lower
relative voting rights.
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF
DISPOSITION OF LIBERTY MEDIA GROUP ASSETS. In the event of the Disposition, in
one transaction or a series of related transactions, by the Corporation and its
subsidiaries of all or substantially all of the properties and assets of the
Liberty Media Group to one or more persons, entities or groups (other than (w)
in connection with the Disposition by the Corporation of all of the
Corporation's properties and assets in one transaction or a series of related
transactions in connection with the liquidation, dissolution or winding up of
the Corporation within the meaning of paragraph 7 of this Section E, (x) a
dividend, other distribution or redemption in accordance with any provision of
paragraph 3, paragraph 4, paragraph 5(a) or paragraph 7 of this Section E, (y)
to any person, entity or group which the Corporation, directly or indirectly,
after giving effect to the Disposition, controls or (z) in connection with a
Related Business Transaction), the Corporation shall, on or prior to the 85th
Trading Day following the consummation of such Disposition, either:
(i) subject to paragraph 3(b) of this Section E, declare
and pay a dividend in cash and/or in securities or other property
(other than a dividend or distribution of Common Stock) to the holders
of the outstanding shares
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of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock equally on a share for share basis (subject
to the last sentence of this Section 5(b)), in an aggregate amount
equal to the product of the Liberty Media Group Outstanding Interest
Fraction as of the record date for determining the holders entitled to
receive such dividend and the Liberty Media Group Net Proceeds of such
Disposition; or
(ii) provided that there are assets of the Corporation
legally available therefor and the Liberty Media Group Available
Dividend Amount would have been sufficient to pay a dividend in lieu
thereof pursuant to clause (i) of this paragraph 5(b), then:
(A) if such Disposition involves all (not merely
substantially all) of the properties and assets of the Liberty
Media Group, redeem all outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group
Common Stock in exchange for cash and/or securities or other
property (other than Common Stock) in an aggregate amount
equal to the product of the Adjusted Liberty Media Group
Outstanding Interest Fraction as of the date of such
redemption and the Liberty Media Group Net Proceeds, such
aggregate amount to be allocated (subject to the last sentence
of this paragraph 5(b)) to shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common
Stock in the ratio of the number of shares of each such series
outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Liberty Media Group
Common Stock and each share of Series B Liberty Media Group
Common Stock is the same); or
(B) if such Disposition involves substantially all
(but not all) of the properties and assets of the Liberty
Media Group, apply an aggregate amount of cash and/or
securities or other property (other than Common Stock) equal
to the product of the Liberty Media Group Outstanding Interest
Fraction as of the date shares are selected for redemption and
the Liberty Media Group Net Proceeds to the redemption of
outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, such
aggregate amount to be allocated (subject to the last sentence
of this paragraph 5(b)) to shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common
Stock in the ratio of the number of shares of each such series
outstanding, and the number of shares of each such series to
be redeemed to equal the lesser of (x) the whole number
nearest the number determined by dividing the aggregate amount
so allocated to the redemption of such series by the average
Market Value of one share of Series A Liberty Media Group
Common Stock during the ten-Trading Day period beginning on
the 16th Trading Day following the consummation of such
Disposition and (y) the number of shares of such series
outstanding (so that the amount of consideration paid for the
redemption of each share of Series A Liberty Media Group
Common Stock and each share of Series B Liberty Media Group
Common Stock is the same);
such redemption to be effected in accordance with the applicable
provisions of paragraph 5(d) of this Section E; or
(iii) convert (A) each outstanding share of Series A
Liberty Media Group Common Stock into a number (or fraction) of fully
paid and nonassessable shares of Series A TCI Group Common Stock and
(B) each outstanding share of Series B Liberty Media Group Common
Stock into a number (or fraction) of fully paid and nonassessable
shares of Series B TCI Group Common Stock, in each case equal to 110%
of the average daily ratio (calculated to the nearest five decimal
places) of the Market Value of one share of Series A Liberty Media
Group Common Stock to the Market Value of one share of Series A TCI
Group Common Stock during the ten-Trading Day period referred to in
clause (ii)(B) of this paragraph 5(b).
For purposes of this paragraph 5(b):
(x) as of any date, "substantially all of the properties
and assets of the Liberty Media Group" shall mean a portion of such
properties and assets that represents at least 80% of the then-current
market value (as determined by the Board of Directors) of the
properties and assets of the Liberty Media Group as of such date;
(y) in the case of a Disposition of properties and assets
in a series of related transactions, such Disposition shall not be
deemed to have been consummated until the consummation of the last of
such transactions; and
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(z) the Corporation may pay the dividend or redemption
price referred to in clause (i) or (ii) of this subparagraph 5(b)
either in the same form as the proceeds of the Disposition were
received or in any other combination of cash or securities or other
property (other than Common Stock) that the Board of Directors
determines will have an aggregate market value on a fully distributed
basis, of not less than the amount of the Liberty Media Group Net
Proceeds. If the dividend or redemption price is paid in the form of
securities of an issuer other than the Corporation, the Board of
Directors may determine either to (1) pay the dividend or redemption
price in the form of separate classes or series of securities, with
one class or series of such securities to holders of Series A Liberty
Media Group Common Stock and another class or series of securities to
holders of Series B Liberty Media Group Common Stock, provided that
such securities (and, if such securities are convertible into or
exercisable or exchangeable for shares of another class or series of
securities, the securities so issuable upon such conversion, exercise
or exchange) do not differ in any respect other than their relative
voting rights and related differences in designation, conversion,
redemption and share distribution provisions, with holders of shares
of Series B Liberty Media Group Common Stock receiving the class or
series having the higher relative voting rights (without regard to
whether such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A
Liberty Media Group Common Stock and the Series B Liberty Media Group
Common Stock), provided that if such securities constitute capital
stock of a Subsidiary of the Corporation, such rights shall not differ
to a greater extent than the corresponding differences in voting
rights, designation, conversion, redemption and share distribution
provisions between the Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, and otherwise such
securities shall be distributed on an equal per share basis, or (2)
pay the dividend or redemption price in the form of a single class of
securities without distinction between the shares received by the
holders of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock.
(c) CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless
the provisions of any class or series of Pre-Distribution Convertible
Securities or Convertible Securities which are convertible into or exercisable
or exchangeable for Committed Acquisition Shares provide specifically to the
contrary, after any Conversion Date or Redemption Date on which all outstanding
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock were converted or redeemed, any share of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock that is
issued on conversion, exercise or exchange of any Pre-Distribution Convertible
Securities or any Convertible Securities which are convertible into or
exercisable or exchangeable for Committed Acquisition Shares shall, immediately
upon issuance pursuant to such conversion, exercise or exchange and without any
notice or any other action on the part of the Corporation or its Board of
Directors or the holder of such share of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock, be converted into (in case
all such outstanding shares were converted) or redeemed in exchange for (in
case all such outstanding shares were redeemed) the kind and amount of shares
of capital stock, cash and/or other securities or property that a holder of
such Pre-Distribution Convertible Securities or any Convertible Securities
which are convertible into or exercisable or exchangeable for Committed
Acquisition Shares would have been entitled to receive pursuant to the terms of
such securities had such terms provided that the conversion, exercise or
exchange privilege in effect immediately prior to any such conversion or
redemption of all outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock would be adjusted so that
the holder of any such Pre-Distribution Convertible Securities or any
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares thereafter surrendered for
conversion, exercise or exchange would be entitled to receive the kind and
amount of shares of capital stock, cash and/or other securities or property
such holder would have received as a result of such action had such securities
been converted, exercised or exchanged immediately prior thereto. With respect
to any Convertible Securities which are created, established or otherwise first
authorized for issuance subsequent to the record date for the Liberty
Distribution (other than Pre-Distribution Convertible Securities and
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares), the terms and provisions of
which do not provide for adjustments specifying the kind and amount of capital
stock, cash and/or securities or other property that such holder would be
entitled to receive upon the conversion, exercise or exchange of such
Convertible Securities following any Conversion Date or Redemption Date on
which all outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock were converted or redeemed, then upon
such conversion, exercise or exchange of such Convertible Securities, any share
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock that is issued on conversion, exercise or exchange of any such
Convertible Securities shall, immediately upon issuance pursuant to such
conversion, exercise or exchange and without any notice or any other action on
the part of the Corporation or its Board of Directors or the holder of such
share of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, be redeemed in exchange for, to the extent assets of the
Corporation are legally available therefor, the amount of $.01 per share in
cash.
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(d) GENERAL.
(i) Not later than the 10th Trading Day following the consummation
of a Disposition referred to in subparagraph 5(b) of this Section E, the
Corporation shall announce publicly by press release (A) the Net Proceeds of
such Disposition, (B) the number of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock, (C) the
number of shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock into or for which Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such Convertible
Securities constitute Pre-Distribution Convertible Securities or Convertible
Securities which are convertible into or exercisable or exchangeable for
Committed Acquisition Shares) and the number of Committed Acquisition Shares
issuable, (D) the Liberty Media Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice and (E) the Adjusted Liberty
Media Group Outstanding Interest Fraction as of a recent date preceding the
date of such notice. Not earlier than the 26th Trading Day and not later than
the 30th Trading Day following the consummation of such Disposition, the
Corporation shall announce publicly by press release which of the actions
specified in clauses (i), (ii) or (iii) of paragraph 5(b) of this Section E it
has irrevocably determined to take.
(ii) If the Corporation determines to pay a dividend pursuant to
clause (i) of subparagraph 5(b) of this Section E, the Corporation shall, not
later than the 30th Trading Day following the consummation of such Disposition,
cause to be given to each holder of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock, and to
each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) the record date for determining holders entitled to receive
such dividend, which shall be not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition,
(B) the anticipated payment date of such dividend (which shall not be more than
85 Trading Days following the consummation of such Disposition), (C) the kind
of shares of capital stock, cash and/or other securities or property to be
distributed in respect of shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock, (D) the Liberty Media Group Net
Proceeds of such Disposition, (E) the Liberty Media Group Outstanding Interest
Fraction as of a recent date preceding the date of such notice, (F) the number
of outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof and (G)
in the case of a notice to holders of Convertible Securities, a statement to
the effect that holders of such Convertible Securities shall be entitled to
receive such dividend only if they appropriately convert, exercise or exchange
them prior to the record date referred to in clause (A) of this sentence. Such
notice shall be sent by first-class mail, postage prepaid, at such holder's
address as the same appears on the transfer books of the Corporation.
(iii) If the Corporation determines to undertake a redemption of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock following a Disposition of all (not merely substantially
all) of the properties and assets of the Liberty Media Group pursuant to clause
(ii) (A) of paragraph 5(b) of this Section E, the Corporation shall cause to be
given to each holder of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock and to each holder
of Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities), a notice setting forth
(A) a statement that all shares of Series A Liberty Media Group Common Stock
and Series B Liberty Media Group Common Stock outstanding on the Redemption
Date shall be redeemed, (B) the Redemption Date (which shall not be more than
85 Trading Days following the consummation of such Disposition), (C) the kind
of shares of capital stock, cash and/or other securities or property to be paid
as a redemption price in respect of shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock outstanding on the
Redemption Date, (D) the Net Proceeds of such Disposition, (E) the Adjusted
Liberty Media Group Outstanding Interest Fraction as of a recent date preceding
the date of such notice, (F) the place or places where certificates for shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for delivery of
certificates for shares of such capital stock, cash and/or other securities or
property, (G) the number of outstanding shares of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock and the number of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock into or for which outstanding Convertible Securities are
then convertible, exercisable or exchangeable and the conversion, exercise or
exchange prices thereof (and stating which, if any, of such
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Convertible Securities constitute Pre-Distribution Convertible Securities or
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares) and the number of Committed
Acquisition Shares issuable, and (H) in the case of a notice to holders of
Convertible Securities, a statement to the effect that holders of such
Convertible Securities shall be entitled to participate in such redemption only
if such holders appropriately convert, exercise or exchange such Convertible
Securities on or prior to the Redemption Date referred to in clause (B) of this
sentence and a statement as to what, if anything, such holders shall be
entitled to receive pursuant to the terms of such Convertible Securities or, if
applicable, paragraph 5(c) of this Section E if such holders convert, exercise
or exchange such Convertible Securities following such Redemption Date. Such
notice shall be sent by first-class mail, postage prepaid, not less than 35
Trading Days nor more than 45 Trading Days prior to the Redemption Date, at
such holder's address as the same appears on the transfer books of the
Corporation.
(iv) If the Corporation determines to undertake a redemption of
shares of Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock following a Disposition of substantially all (but not all)
of the properties and assets of the Liberty Media Group pursuant to clause
(ii)(B) of paragraph 5(b) of this Section E, the Corporation shall, not later
than the 30th Trading Day following the consummation of such Disposition, cause
to be given to each holder of record of outstanding shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock, and to
each holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) a date not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition which
shall be the date on which shares of the Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock then outstanding shall be
selected for redemption, (B) the anticipated Redemption Date (which shall not
be more than 85 Trading Days following the consummation of such Disposition),
(C) the kind of shares of capital stock, cash and/or other securities or
property to be paid as a redemption price in respect of shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
selected for redemption, (D) the Net Proceeds of such Disposition, (E) the
Liberty Media Group Outstanding Interest Fraction as of a recent date preceding
the date of such notice, (F) the number of outstanding shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
and the number of shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion or exercise prices thereof, (G) in the case of a notice to
holders of Convertible Securities, a statement to the effect that holders of
such Convertible Securities shall be entitled to participate in such selection
for redemption only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the date referred to in clause (A)
of this sentence and a statement as to what, if anything, such holders shall be
entitled to receive pursuant to the terms of such Convertible Securities if
such holders convert, exercise or exchange such Convertible Securities
following such date and (H) a statement that the Corporation will not be
required to register a transfer of any shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock for a period of 15
Trading Days next preceding the date referred to in clause (A) of this
sentence. Promptly following the date referred to in clause (A) of the
preceding sentence, but not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition, the
Corporation shall cause to be given to each holder of shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
to be so redeemed, a notice setting forth (A) the number of shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
held by such holder to be redeemed, (B) a statement that such shares of Series
A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock shall be redeemed, (C) the Redemption Date (which shall not be more than
85 Trading Days following the consummation of such Disposition), (D) the kind
and per share amount of shares of capital stock, cash and/or other securities
or property to be received by such holder with respect to each share of such
Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock to be redeemed, including details as to the calculation thereof,
and (E) the place or places where certificates for shares of such Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property. The notices
referred to in this clause (iv) shall be sent by first-class mail, postage
prepaid, at such holder's address as the same appears on the transfer books of
the Corporation. The outstanding shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock to be redeemed shall be
redeemed by the Corporation pro rata among the holders of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock or by
such other method as may be determined by the Board of Directors to be
equitable.
(v) In the event of any conversion pursuant to paragraph 2(c) of
this Section E or pursuant to this paragraph 5 (other than pursuant to
paragraph 5(c)), the Corporation shall cause to be given to each holder of
outstanding shares of Series
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A Liberty Media Group Common Stock and Series B Liberty Media Group Common
Stock and to each holder of Convertible Securities convertible into or
exercisable or exchangeable for shares of either such series (unless provision
for such notice is otherwise made pursuant to the terms of such Convertible
Securities), a notice setting forth (A) a statement that all outstanding shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock shall be converted, (B) the Conversion Date (which shall not be
more than 85 Trading Days following the consummation of such Disposition in the
event of a conversion pursuant to paragraph 5(b) and which shall not be more
than 120 days after the Appraisal Date in the event of a conversion pursuant to
paragraph 2(c)), (C) the per share number of shares of Series A TCI Group
Common Stock or Series B TCI Group Common Stock, as applicable, to be received
with respect to each share of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock, including details as to the
calculation thereof, (D) the place or places where certificates for shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation shall waive such requirement), are to be surrendered, (E) the
number of outstanding shares of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, the number of Committed Acquisition
Shares issuable and the number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof and (F) in
the case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities shall be entitled to
participate in such conversion only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Conversion
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 5(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following such Conversion Date. Such notice shall be sent by first-class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Conversion Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(vi) If the Corporation determines to redeem shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock
pursuant to subparagraph (a) of this paragraph 5, the Corporation shall
promptly cause to be given to each holder of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock and to each holder
of Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for such notice is otherwise
made pursuant to the terms of such Convertible Securities), a notice setting
forth (A) a statement that all outstanding shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock shall be
redeemed in exchange for shares of common stock of the Liberty Media Group
Subsidiaries, (B) the Redemption Date, (C) the Adjusted Liberty Media Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, (D) the place or places where certificates for shares of Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for
shares of common stock of the Liberty Media Group Subsidiaries, (E) the number
of outstanding shares of Series A Liberty Media Group Common Stock and Series B
Liberty Media Group Common Stock and the number of shares of Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock into or
for which outstanding Convertible Securities are then convertible, exercisable
or exchangeable and the conversion, exercise or exchange prices thereof (and
stating which, if any, of such Convertible Securities constitute
Pre-Distribution Convertible Securities or Convertible Securities which are
convertible into or exercisable or exchangeable for Committed Acquisition
Shares) and the number of Committed Acquisition Shares issuable, and (F) in the
case of a notice to holders of Convertible Securities, a statement to the
effect that holders of such Convertible Securities shall be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Redemption
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 5(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following the Redemption Date. Such notice shall be sent by first-class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Redemption Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(vii) Neither the failure to mail any notice required by this
paragraph 5(d) to any particular holder of Series A Liberty Media Group Common
Stock, Series B Liberty Media Group Common Stock or of Convertible Securities
nor any defect therein shall affect the sufficiency thereof with respect to any
other holder of outstanding shares of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock or of Convertible Securities, or
the validity of any conversion or redemption.
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<PAGE> 110
(viii) The Corporation shall not be required to issue or deliver
fractional shares of any class of capital stock or any fractional securities to
any holder of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock upon any conversion, redemption, dividend or other
distribution pursuant to paragraph 2(c) of this Section E or pursuant to this
paragraph 5. In connection with the determination of the number of shares of
any class of capital stock that shall be issuable or the amount of securities
that shall be deliverable to any holder of record upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares
or securities), the Corporation may aggregate the number of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
held at the relevant time by such holder of record. If the number of shares of
any class of capital stock or the amount of securities remaining to be issued
or delivered to any holder of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock is a fraction, the Corporation shall,
if such fraction is not issued or delivered to such holder, pay a cash
adjustment in respect of such fraction in an amount equal to the fair market
value of such fraction on the fifth Trading Day prior to the date such payment
is to be made (without interest). For purposes of the preceding sentence,
"fair market value" of any fraction shall be (A) in the case of any fraction of
a share of capital stock of the Corporation, the product of such fraction and
the Market Value of one share of such capital stock and (B) in the case of any
other fractional security, such value as is determined by the Board of
Directors.
(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock; provided, however, that if
the Conversion Date or the Redemption Date with respect to the Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock shall be
subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
at the close of business on such record date shall be entitled to receive the
dividend or other distribution payable on or with respect to such shares on the
date set for payment of such dividend or other distribution, notwithstanding
the conversion or redemption of such shares or the Corporation's default in
payment of the dividend or distribution due on such date.
(x) Before any holder of shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock shall be entitled to
receive certificates representing shares of any kind of capital stock or cash
and/or securities or other property to be received by such holder with respect
to shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock pursuant to paragraph 2(c) of this Section E or
pursuant to this paragraph 5, such holder shall surrender at such place as the
Corporation shall specify certificates for such shares of Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock, properly
endorsed or assigned for transfer (unless the Corporation shall waive such
requirement). The Corporation shall as soon as practicable after such surrender
of certificates representing shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock deliver to the person for
whose account shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock were so surrendered, or to the nominee or
nominees of such person, certificates representing the number of whole shares
of the kind of capital stock or cash and/or securities or other property to
which such person shall be entitled as aforesaid, together with any payment for
fractional securities contemplated by paragraph 5(d)(viii). If less than all of
the shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock represented by any one certificate are to be redeemed,
the Corporation shall issue and deliver a new certificate for the shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock not redeemed. The Corporation shall not be required to register a
transfer of (1) any shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock for a period of 15 Trading Days next
preceding any selection of shares of Series A Liberty Media Group Common Stock
or Series B Liberty Media Group Common Stock to be redeemed or (2) any shares
of Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock selected or called for redemption. Shares selected for redemption
may not thereafter be converted pursuant to paragraph 2(b) of this Section E.
(xi) From and after any applicable Conversion Date or Redemption
Date, all rights of a holder of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock that were converted or
redeemed shall cease except for the right, upon surrender of the certificates
representing shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, to receive certificates representing shares
of the kind and amount of capital stock or cash and/or securities or other
property for which such shares were converted or redeemed, together with any
payment for fractional securities contemplated by paragraph 5(d)(viii) of this
Section E and such holder shall have no other or further rights in respect of
the shares of Series A Liberty Media Group Common Stock or Series B Liberty
Media Group Common Stock so converted or redeemed, including, but not limited
to, any rights with respect to any cash, securities or other properties which
are reserved or otherwise designated by the Corporation as being held for the
satisfaction of the
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Corporation's obligations to pay or deliver any cash, securities or other
property upon the conversion, exercise or exchange of any Convertible
Securities outstanding as of the date of such conversion or redemption or any
Committed Acquisition Shares which may then be issuable. No holder of a
certificate that, immediately prior to the applicable Conversion Date or
Redemption Date for the Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, represented shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock shall be
entitled to receive any dividend or other distribution with respect to shares
of any kind of capital stock into or in exchange for which the Series A Liberty
Media Group Common Stock or Series B Liberty Media Group Common Stock was
converted or redeemed until surrender of such holder's certificate for a
certificate or certificates representing shares of such kind of capital stock.
Upon such surrender, there shall be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable with respect to a record date after the Conversion Date or Redemption
Date, as the case may be, but that were not paid by reason of the foregoing,
with respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such surrender. From
and after a Conversion Date or Redemption Date, as the case may be, for any
shares of Series A Liberty Media Group Common Stock or Series B Liberty Media
Group Common Stock, the Corporation shall, however, be entitled to treat the
certificates for shares of Series A Liberty Media Group Common Stock or Series
B Liberty Media Group Common Stock that have not yet been surrendered for
conversion or redemption as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock for which the shares of Series A
Liberty Media Group Common Stock or Series B Liberty Media Group Common Stock
represented by such certificates shall have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
(xii) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of capital stock and/or other securities on conversion
or redemption of shares of Series A Liberty Media Group Common Stock or Series
B Liberty Media Group Common Stock pursuant to this Section E. The Corporation
shall not, however, be required to pay any tax that may be payable in respect
of any transfer involved in the issue and delivery of any shares of capital
stock in a name other than that in which the shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock so converted or
redeemed were registered and no such issue or delivery shall be made unless and
until the person requesting such issue has paid to the Corporation the amount
of any such tax, or has established to the satisfaction of the Corporation that
such tax has been paid.
6. Redemption and Other Provisions Relating to the Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock.
(a) REDEMPTION IN EXCHANGE FOR STOCK OF TELEPHONY GROUP
SUBSIDIARIES. At any time at which all of the assets and liabilities attributed
to the Telephony Group have become and continue to be held directly or
indirectly by any one or more Qualifying Subsidiaries (the "Telephony Group
Subsidiaries"), the Board of Directors may, subject to the availability of
assets of the Corporation legally available therefor, redeem, on a pro rata
basis, all of the outstanding shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock in exchange for an aggregate number
of outstanding fully paid and nonassessable shares of common stock of each
Telephony Group Subsidiary equal to the product of the Telephony Group
Outstanding Interest Fraction and the number of outstanding shares of common
stock of such Telephony Group Subsidiary held by the Corporation. Any such
redemption shall occur on a Redemption Date set forth in a notice to holders of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
and Convertible Securities convertible into or exercisable or exchangeable for
shares of either such series (unless provision for notice is otherwise made
pursuant to the terms of such Convertible Securities) pursuant to paragraph
6(d)(vi). In effecting such a redemption, the Board of Directors may determine
either to (i) redeem shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock in exchange for shares of separate classes or
series of common stock of each Telephony Group Subsidiary with relative voting
rights and related differences in designation, conversion, redemption and share
distribution provisions not greater than the corresponding differences in
voting rights, designation, conversion, redemption and share distribution
provisions between the Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, with holders of shares of Series B Telephony
Group Common Stock receiving the class or series having the higher relative
voting rights, or (ii) redeem shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock in exchange for shares of a single
class of common stock of each Telephony Group Subsidiary without distinction
between the shares distributed to the holders of the Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock.
(b) MANDATORY DIVIDEND, REDEMPTION OR CONVERSION IN CASE OF
DISPOSITION OF TELEPHONY GROUP ASSETS. In the event of the Disposition, in one
transaction or a series of related transactions, by the Corporation and its
subsidiaries of
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all or substantially all of the properties and assets of the Telephony Group to
one or more persons, entities or groups (other than (w) in connection with the
Disposition by the Corporation of all of the Corporation's properties and
assets in one transaction or a series of related transactions in connection
with the liquidation, dissolution or winding up of the Corporation within the
meaning of paragraph 7 of this Section E, (x) a dividend, other distribution or
redemption in accordance with any provision of paragraph 3, paragraph 4,
paragraph 6(a) or paragraph 7 of this Section E, (y) to any person, entity or
group which the Corporation, directly or indirectly, after giving effect to the
Disposition, controls or (z) in connection with a Related Business
Transaction), the Corporation shall, on or prior to the 85th Trading Day
following the consummation of such Disposition, either:
(i) subject to paragraph 3(c) of this Section E, declare
and pay a dividend in cash and/or in securities or other property
(other than a dividend or distribution of Common Stock) to the holders
of the outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock equally on a share for share
basis (subject to the last sentence of this Section 6(b)), in an
aggregate amount equal to the product of the Telephony Group
Outstanding Interest Fraction as of the record date for determining
the holders entitled to receive such dividend and the Net Proceeds of
such Disposition; or
(ii) provided that there are assets of the Corporation
legally available therefor and the Telephony Group Available Dividend
Amount would have been sufficient to pay a dividend in lieu thereof
pursuant to clause (i) of this paragraph 6(b), then:
(A) if such Disposition involves all (not merely
substantially all) of the properties and assets of the
Telephony Group, redeem all outstanding shares of Series A
Telephony Group Common Stock and Series B Telephony Group
Common Stock in exchange for cash and/or securities or other
property (other than Common Stock) in an aggregate amount
equal to the product of the Telephony Group Outstanding
Interest Fraction as of the date of such redemption and the
Telephony Group Net Proceeds, such aggregate amount to be
allocated (subject to the last sentence of this paragraph
6(b)) to shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock in the ratio of the
number of shares of each such series outstanding (so that the
amount of consideration paid for the redemption of each share
of Series A Telephony Group Common Stock and each share of
Series B Telephony Group Common Stock is the same); or
(B) if such Disposition involves substantially all
(but not all) of the properties and assets of the Telephony
Group, apply an aggregate amount of cash and/or securities or
other property (other than Common Stock) equal to the product
of the Telephony Group Outstanding Interest Fraction as of the
date shares are selected for redemption and the Telephony
Group Net Proceeds to the redemption of outstanding shares of
Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock, such aggregate amount to be allocated
(subject to the last sentence of this paragraph 6(b)) to
shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock in the ratio of the number of
shares of each such series outstanding, and the number of
shares of each such series to be redeemed to equal the lesser
of (x) the whole number nearest the number determined by
dividing the aggregate amount so allocated to the redemption
of such series by the average Market Value of one share of
Series A Telephony Group Common Stock during the ten-Trading
Day period beginning on the 16th Trading Day following the
consummation of such Disposition and (y) the number of shares
of such series outstanding (so that the amount of
consideration paid for the redemption of each share of Series
A Telephony Group Common Stock and each share of Series B
Telephony Group Common Stock is the same);
such redemption to be effected in accordance with the applicable
provisions of paragraph 6(d) of this Section E; or
(iii) convert (A) each outstanding share of Series A
Telephony Group Common Stock into a number (or fraction) of fully paid
and nonassessable shares of Series A TCI Group Common Stock and (B)
each outstanding share of Series B Telephony Group Common Stock into a
number (or fraction) of fully paid and nonassessable shares of Series
B TCI Group Common Stock, in each case equal to 110% of the average
daily ratio (calculated to the nearest five decimal places) of the
Market Value of one share of Series A Telephony Group Common Stock to
the Market Value of one share of Series A TCI Group Common Stock
during the ten-Trading Day period referred to in clause (ii)(B) of
this paragraph 6(b).
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For purposes of this paragraph 6(b):
(x) as of any date, "substantially all of the properties
and assets of the Telephony Group" shall mean a portion of such
properties and assets that represents at least 80% of the then-current
market value (as determined by the Board of Directors) of the
properties and assets of the Telephony Group as of such date;
(y) in the case of a Disposition of properties and assets
in a series of related transactions, such Disposition shall not be
deemed to have been consummated until the consummation of the last of
such transactions; and
(z) the Corporation may pay the dividend or redemption
price referred to in clause (i) or (ii) of this subparagraph 6(b)
either in the same form as the proceeds of the Disposition were
received or in any other combination of cash or securities or other
property (other than Common Stock) that the Board of Directors
determines will have an aggregate market value on a fully distributed
basis, of not less than the amount of the Telephony Group Net
Proceeds. If the dividend or redemption price is paid in the form of
securities of an issuer other than the Corporation, the Board of
Directors may determine either to (1) pay the dividend or redemption
price in the form of separate classes or series of securities, with
one class or series of such securities to holders of Series A
Telephony Group Common Stock and another class or series of securities
to holders of Series B Telephony Group Common Stock, provided that
such securities (and, if such securities are convertible into or
exercisable or exchangeable for shares of another class or series of
securities, the securities so issuable upon such conversion, exercise
or exchange) do not differ in any respect other than their relative
voting rights and related differences in designation, conversion,
redemption and share distribution provisions, with holders of shares
of Series B Telephony Group Common Stock receiving the class or series
having the higher relative voting rights (without regard to whether
such rights differ to a greater or lesser extent than the
corresponding differences in voting rights, designation, conversion,
redemption and share distribution provisions between the Series A
Telephony Group Common Stock and the Series B Telephony Group Common
Stock), provided that if such securities constitute capital stock of a
Subsidiary of the Corporation, such rights shall not differ to a
greater extent than the corresponding differences in voting rights,
designation, conversion, redemption and share distribution provisions
between the Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, and otherwise such securities shall be
distributed on an equal per share basis, or (2) pay the dividend or
redemption price in the form of a single class of securities without
distinction between the shares received by the holders of Series A
Telephony Group Common Stock and Series B Telephony Group Common
Stock.
(c) CERTAIN PROVISIONS RESPECTING CONVERTIBLE SECURITIES. Unless
the provisions of any class or series of Convertible Securities which are or
become convertible into or exercisable or exchangeable for shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock provide
specifically to the contrary, after any Conversion Date or Redemption Date on
which all outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock were converted or redeemed, any share of
Series A Telephony Group Common Stock or Series B Telephony Group Common Stock
that is issued on conversion, exercise or exchange of any such Convertible
Securities will, immediately upon issuance pursuant to such conversion,
exercise or exchange and without any notice or any other action on the part of
the Corporation or its Board of Directors or the holder of such share of Series
A Telephony Group Common Stock or Series B Telephony Group Common Stock, be
redeemed in exchange for, to the extent assets of the Corporation are legally
available therefor, the amount of $.01 per share in cash.
(d) GENERAL.
(i) Not later than the 10th Trading Day following the consummation
of a Disposition referred to in subparagraph 6(b) of this Section E, the
Corporation shall announce publicly by press release (A) the Net Proceeds of
such Disposition, (B) the number of outstanding shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, (C) the number of
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock into or for which Convertible Securities are then convertible,
exercisable or exchangeable and the conversion, exercise or exchange prices
thereof, and (D) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice. Not earlier than the 26th
Trading Day and not later than the 30th Trading Day following the consummation
of such Disposition, the Corporation shall announce publicly by press release
which of the actions specified in clauses (i), (ii) or (iii) of paragraph 6(b)
of this Section E it has irrevocably determined to take.
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(ii) If the Corporation determines to pay a dividend pursuant to
clause (i) of subparagraph 6(b) of this Section E, the Corporation shall, not
later than the 30th Trading Day following the consummation of such Disposition,
cause to be given to each holder of outstanding shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, and to each
holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) the record date for determining holders entitled to receive
such dividend, which shall be not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition,
(B) the anticipated payment date of such dividend (which shall not be more than
85 Trading Days following the consummation of such Disposition), (C) the kind
of shares of capital stock, cash and/or other securities or property to be
distributed in respect of shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, (D) the Telephony Group Net Proceeds of
such Disposition, (E) the Telephony Group Outstanding Interest Fraction as of a
recent date preceding the date of such notice, (F) the number of outstanding
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock and the number of shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion, exercise or exchange prices thereof and (G) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities shall be entitled to receive such
dividend only if they appropriately convert, exercise or exchange them prior to
the record date referred to in clause (A) of this sentence. Such notice shall
be sent by first-class mail, postage prepaid, at such holder's address as the
same appears on the transfer books of the Corporation.
(iii) If the Corporation determines to undertake a redemption of
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock following a Disposition of all (not merely substantially all) of
the properties and assets of the Telephony Group pursuant to clause (ii) (A) of
paragraph 6(b) of this Section E, the Corporation shall cause to be given to
each holder of outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock and to each holder of Convertible
Securities convertible into or exercisable or exchangeable for shares of either
such series (unless provision for notice is otherwise made pursuant to the
terms of such Convertible Securities), a notice setting forth (A) a statement
that all shares of Series A Telephony Group Common Stock and Series B Telephony
Group Common Stock outstanding on the Redemption Date shall be redeemed, (B)
the Redemption Date (which shall not be more than 85 Trading Days following the
consummation of such Disposition), (C) the kind of shares of capital stock,
cash and/or other securities or property to be paid as a redemption price in
respect of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock outstanding on the Redemption Date, (D) the
Telephony Group Net Proceeds of such Disposition, (E) the Telephony Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, (F) the place or places where certificates for shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of certificates for shares of
such capital stock, cash and/or other securities or property, (G) the number of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof, and (H)
in the case of a notice to holders of Convertible Securities, a statement to
the effect that holders of such Convertible Securities shall be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Redemption
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 6(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following such Redemption Date. Such notice shall be sent by first-class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Redemption Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(iv) If the Corporation determines to undertake a redemption of
shares of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock following a Disposition of substantially all (but not all) of the
properties and assets of the Telephony Group pursuant to clause (ii)(B) of
paragraph 6(b) of this Section E, the Corporation shall, not later than the
30th Trading Day following the consummation of such Disposition, cause to be
given to each holder of record of outstanding shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, and to each
holder of Convertible Securities convertible into or exercisable or
exchangeable for shares of either such series (unless provision for notice is
otherwise made pursuant to the terms of such Convertible Securities), a notice
setting forth (A) a date not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition which
shall be the date on which shares of the Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock then outstanding shall be selected
for redemption, (B) the anticipated Redemption Date (which shall not be
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more than 85 Trading Days following the consummation of such Disposition), (C)
the kind of shares of capital stock, cash and/or other securities or property
to be paid as a redemption price in respect of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock selected for
redemption, (D) the Net Proceeds of such Disposition, (E) the Telephony Group
Outstanding Interest Fraction as of a recent date preceding the date of such
notice, (F) the number of outstanding shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock and the number of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
into or for which outstanding Convertible Securities are then convertible,
exercisable or exchangeable and the conversion or exercise prices thereof, (G)
in the case of a notice to holders of Convertible Securities, a statement to
the effect that holders of such Convertible Securities shall be entitled to
participate in such selection for redemption only if such holders appropriately
convert, exercise or exchange such Convertible Securities on or prior to the
date referred to in clause (A) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities if such holders convert, exercise or exchange such
Convertible Securities following such date and (H) a statement that the
Corporation will not be required to register a transfer of any shares of Series
A Telephony Group Common Stock or Series B Telephony Group Common Stock for a
period of 15 Trading Days next preceding the date referred to in clause (A) of
this sentence. Promptly following the date referred to in clause (A) of the
preceding sentence, but not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition, the
Corporation shall cause to be given to each holder of shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock to be so
redeemed, a notice setting forth (A) the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock held by such
holder to be redeemed, (B) a statement that such shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock shall be redeemed,
(C) the Redemption Date (which shall not be more than 85 Trading Days following
the consummation of such Disposition), (D) the kind and per share amount of
shares of capital stock, cash and/or other securities or property to be
received by such holder with respect to each share of such Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock to be redeemed,
including details as to the calculation thereof, and (E) the place or places
where certificates for shares of such Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be
surrendered for delivery of certificates for shares of such capital stock, cash
and/or other securities or property. The notices referred to in this clause
(iv) shall be sent by first-class mail, postage prepaid, at such holder's
address as the same appears on the transfer books of the Corporation. The
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock to be redeemed shall be redeemed by the
Corporation pro rata among the holders of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock or by such other method as may be
determined by the Board of Directors to be equitable.
(v) In the event of any conversion pursuant to paragraph 2(c) of
this Section E or pursuant to this paragraph 6 (other than pursuant to
paragraph 6(c)), the Corporation shall cause to be given to each holder of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such
series (unless provision for such notice is otherwise made pursuant to the
terms of such Convertible Securities), a notice setting forth (A) a statement
that all outstanding shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock shall be converted, (B) the Conversion Date
(which shall not be more than 85 Trading Days following the consummation of
such Disposition in the event of a conversion pursuant to paragraph 6(b) and
which shall not be more than 120 days after the Appraisal Date in the event of
a conversion pursuant to paragraph 2(c)), (C) the per share number of shares of
Series A TCI Group Common Stock or Series B TCI Group Common Stock, as
applicable, to be received with respect to each share of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock, including details
as to the calculation thereof, (D) the place or places where certificates for
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock, properly endorsed or assigned for transfer (unless the
Corporation shall waive such requirement), are to be surrendered, (E) the
number of outstanding shares of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock, the number of Committed Acquisition
Shares issuable and the number of shares of Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock into or for which outstanding
Convertible Securities are then convertible, exercisable or exchangeable and
the conversion, exercise or exchange prices thereof and (F) in the case of a
notice to holders of Convertible Securities, a statement to the effect that
holders of such Convertible Securities shall be entitled to participate in such
conversion only if such holders appropriately convert, exercise or exchange
such Convertible Securities on or prior to the Conversion Date referred to in
clause (B) of this sentence and a statement as to what, if anything, such
holders shall be entitled to receive pursuant to the terms of such Convertible
Securities or, if applicable, paragraph 6(c) of this Section E if such holders
convert, exercise or exchange such Convertible Securities following such
Conversion Date. Such notice shall be sent by first-class mail, postage
prepaid, not less than 35 Trading Days nor more than 45 Trading Days prior to
the Conversion Date, at such holder's address as the same appears on the
transfer books of the Corporation.
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(vi) If the Corporation determines to redeem shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock pursuant
to subparagraph (a) of this paragraph 6, the Corporation shall promptly cause
to be given to each holder of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock and to each holder of Convertible Securities
convertible into or exercisable or exchangeable for shares of either such
series (unless provision for such notice is otherwise made pursuant to the
terms of such Convertible Securities), a notice setting forth (A) a statement
that all outstanding shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock shall be redeemed in exchange for shares of
common stock of the Telephony Group Subsidiaries, (B) the Redemption Date, (C)
the Telephony Group Outstanding Interest Fraction as of a recent date preceding
the date of such notice, (D) the place or places where certificates for shares
of Series A Telephony Group Common Stock and Series B Telephony Group Common
Stock, properly endorsed or assigned for transfer (unless the Corporation shall
waive such requirement), are to be surrendered for delivery of certificates for
shares of common stock of the Telephony Group Subsidiaries, (E) the number of
outstanding shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and the number of shares of Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock into or for which
outstanding Convertible Securities are then convertible, exercisable or
exchangeable and the conversion, exercise or exchange prices thereof, and (F)
in the case of a notice to holders of Convertible Securities, a statement to
the effect that holders of such Convertible Securities shall be entitled to
participate in such redemption only if such holders appropriately convert,
exercise or exchange such Convertible Securities on or prior to the Redemption
Date referred to in clause (B) of this sentence and a statement as to what, if
anything, such holders shall be entitled to receive pursuant to the terms of
such Convertible Securities or, if applicable, paragraph 6(c) of this Section E
if such holders convert, exercise or exchange such Convertible Securities
following the Redemption Date. Such notice shall be sent by first-class mail,
postage prepaid, not less than 35 Trading Days nor more than 45 Trading Days
prior to the Redemption Date, at such holder's address as the same appears on
the transfer books of the Corporation.
(vii) Neither the failure to mail any notice required by this
paragraph 5(d) to any particular holder of Series A Telephony Group Common
Stock, Series B Telephony Group Common Stock or of Convertible Securities nor
any defect therein shall affect the sufficiency thereof with respect to any
other holder of outstanding shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock or of Convertible Securities, or the
validity of any conversion or redemption.
(viii) The Corporation shall not be required to issue or deliver
fractional shares of any class of capital stock or any fractional securities to
any holder of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock upon any conversion, redemption, dividend or other distribution
pursuant to paragraph 2(c) of this Section E or pursuant to this paragraph 6.
In connection with the determination of the number of shares of any class of
capital stock that shall be issuable or the amount of securities that shall be
deliverable to any holder of record upon any such conversion, redemption,
dividend or other distribution (including any fractions of shares or
securities), the Corporation may aggregate the number of shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock held at
the relevant time by such holder of record. If the number of shares of any
class of capital stock or the amount of securities remaining to be issued or
delivered to any holder of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock is a fraction, the Corporation shall, if such
fraction is not issued or delivered to such holder, pay a cash adjustment in
respect of such fraction in an amount equal to the fair market value of such
fraction on the fifth Trading Day prior to the date such payment is to be made
(without interest). For purposes of the preceding sentence, "fair market value"
of any fraction shall be (A) in the case of any fraction of a share of capital
stock of the Corporation, the product of such fraction and the Market Value of
one share of such capital stock and (B) in the case of any other fractional
security, such value as is determined by the Board of Directors.
(ix) No adjustments in respect of dividends shall be made upon the
conversion or redemption of any shares of Series A Telephony Group Common Stock
or Series B Telephony Group Common Stock; provided, however, that if the
Conversion Date or the Redemption Date with respect to the Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock shall be subsequent
to the record date for the payment of a dividend or other distribution thereon
or with respect thereto, the holders of shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock at the close of business
on such record date shall be entitled to receive the dividend or other
distribution payable on or with respect to such shares on the date set for
payment of such dividend or other distribution, notwithstanding the conversion
or redemption of such shares or the Corporation's default in payment of the
dividend or distribution due on such date.
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(x) Before any holder of shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock shall be entitled to receive
certificates representing shares of any kind of capital stock or cash and/or
securities or other property to be received by such holder with respect to
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock pursuant to paragraph 2(c) of this Section E or pursuant to this
paragraph 6, such holder shall surrender at such place as the Corporation shall
specify certificates for such shares of Series A Telephony Group Common Stock
or Series B Telephony Group Common Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement). The Corporation
shall as soon as practicable after such surrender of certificates representing
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock deliver to the person for whose account shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock were so
surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock or cash
and/or securities or other property to which such person shall be entitled as
aforesaid, together with any payment for fractional securities contemplated by
paragraph 6(d)(viii). If less than all of the shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock represented by any
one certificate are to be redeemed, the Corporation shall issue and deliver a
new certificate for the shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock not redeemed. The Corporation shall not
be required to register a transfer of (1) any shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock for a period of 15
Trading Days next preceding any selection of shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock to be redeemed or (2) any
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock selected or called for redemption. Shares selected for redemption
may not thereafter be converted pursuant to paragraph 2(b) of this Section E.
(xi) From and after any applicable Conversion Date or Redemption
Date, all rights of a holder of shares of Series A Telephony Group Common Stock
or Series B Telephony Group Common Stock that were converted or redeemed shall
cease except for the right, upon surrender of the certificates representing
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock, to receive certificates representing shares of the kind and
amount of capital stock or cash and/or securities or other property for which
such shares were converted or redeemed, together with any payment for
fractional securities contemplated by paragraph 6(d)(viii) of this Section E
and such holder shall have no other or further rights in respect of the shares
of Series A Telephony Group Common Stock or Series B Telephony Group Common
Stock so converted or redeemed, including, but not limited to, any rights with
respect to any cash, securities or other properties which are reserved or
otherwise designated by the Corporation as being held for the satisfaction of
the Corporation's obligations to pay or deliver any cash, securities or other
property upon the conversion, exercise or exchange of any Convertible
Securities outstanding as of the date of such conversion or redemption. No
holder of a certificate that, immediately prior to the applicable Conversion
Date or Redemption Date for the Series A Telephony Group Common Stock or Series
B Telephony Group Common Stock, represented shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock shall be entitled to
receive any dividend or other distribution with respect to shares of any kind
of capital stock into or in exchange for which the Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock was converted or redeemed
until surrender of such holder's certificate for a certificate or certificates
representing shares of such kind of capital stock. Upon such surrender, there
shall be paid to the holder the amount of any dividends or other distributions
(without interest) which theretofore became payable with respect to a record
date after the Conversion Date or Redemption Date, as the case may be, but that
were not paid by reason of the foregoing, with respect to the number of whole
shares of the kind of capital stock represented by the certificate or
certificates issued upon such surrender. From and after a Conversion Date or
Redemption Date, as the case may be, for any shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock, the Corporation shall,
however, be entitled to treat the certificates for shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock that have not yet
been surrendered for conversion or redemption as evidencing the ownership of
the number of whole shares of the kind or kinds of capital stock for which the
shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock represented by such certificates shall have been converted or
redeemed, notwithstanding the failure to surrender such certificates.
(xii) The Corporation shall pay any and all documentary, stamp or
similar issue or transfer taxes that may be payable in respect of the issue or
delivery of any shares of capital stock and/or other securities on conversion
or redemption of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock pursuant to this Section E. The Corporation shall
not, however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue and delivery of any shares of capital stock in a
name other than that in which the shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock so converted or redeemed were
registered and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Corporation the amount of any such
tax, or has established to the satisfaction of the Corporation that such tax
has been paid.
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7. Liquidation.
In the event of a liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of the Corporation and subject to
the prior payment in full of the preferential amounts to which any class or
series of Preferred Stock is entitled, (a) the holders of the shares of Series
A TCI Group Common Stock and the holders of the shares of Series B TCI Group
Common Stock shall share equally, on a share for share basis, in a percentage
of the funds of the Corporation remaining for distribution to its common
stockholders equal to 100% multiplied by the average daily ratio (expressed as
a decimal) of W/Z for the 20-Trading Day period ending on the Trading Day prior
to the date of the public announcement of such liquidation, dissolution or
winding up, (b) the holders of the shares of Series A Liberty Media Group
Common Stock and the holders of the shares of Series B Liberty Media Group
Common Stock shall share equally, on a share for share basis, in a percentage
of the funds of the Corporation remaining for distribution to its common
stockholders equal to 100% multiplied by the average daily ratio (expressed as
a decimal) of X/Z for such 20-Trading Day period, and (c) the holders of the
shares of Series A Telephony Group Common Stock and the holders of the Series B
Telephony Group Common Stock shall share equally, on a share for share basis,
in a percentage of the funds of the Corporation remaining for distribution to
its common stockholders equal to 100% multiplied by the average daily ratio
(expressed as a decimal) of Y/Z for such 20-Trading Day period, where W is the
aggregate Market Capitalization of the Series A TCI Group Common Stock and the
Series B TCI Group Common Stock, X is the aggregate Market Capitalization of
the Series A Liberty Media Group Common Stock and the Series B Liberty Media
Group Common Stock, Y is the aggregate Market Capitalization of the Series A
Telephony Group Common Stock and the Series B Telephony Group Common Stock, and
Z is the aggregate Market Capitalization of the Series A TCI Group Common
Stock, the Series B TCI Group Common Stock, the Series A Liberty Media Group
Common Stock, the Series B Liberty Media Group Common Stock, the Series A
Telephony Group Common Stock and the Series B Telephony Group Common Stock.
Neither the consolidation or merger of the Corporation with or into any other
corporation or corporations nor the sale, transfer or lease of all or
substantially all of the assets of the Corporation shall itself be deemed to be
a liquidation, dissolution or winding up of the Corporation within the meaning
of this paragraph 7.
8. Determinations by the Board of Directors.
Any determinations made by the Board of Directors under any provision
in this Section E shall be final and binding on all stockholders of the
Corporation, except as may otherwise be required by law. The Corporation shall
prepare a statement of any such determination by the Board of Directors
respecting the fair market value of any properties, assets or securities and
shall file such statement with the Secretary of the Corporation.
9. Certain Definitions.
Unless the context otherwise requires, the terms defined in this
paragraph 8 shall have, for all purposes of this Section E, the meanings herein
specified:
"Adjusted Liberty Media Group Outstanding Interest Fraction", as of
any date, shall mean a fraction the numerator of which is the aggregate number
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock outstanding on such date and the denominator of which
is the sum of (a) such aggregate number of shares of Series A Liberty Media
Group Common Stock and Series B Liberty Media Group Common Stock outstanding on
such date, (b) the Number of Shares Issuable with Respect to the Liberty Media
Group Inter-Group Interest as of such date, (c) the aggregate number of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock issuable, determined as of such date, upon conversion, exercise or
exchange of Pre-Distribution Convertible Securities and (d) the number of
Committed Acquisition Shares issuable, determined as of such date.
"Appraisal Date", with respect to any determination of the Liberty
Media Group Private Market Value or the Telephony Group Private Market Value,
shall mean the last day of the calendar month preceding the month in which the
Selection Date occurs.
"Appraiser" means each of the First Appraiser, the Second Appraiser
and the Mutually Designated Appraiser.
"Committed Acquisition Shares" shall mean (a) the shares of Series A
Liberty Media Group Common Stock that the Corporation had, prior to the record
date for the Liberty Media Group Distribution, agreed to issue, but as of such
record date had not issued, and (b) the shares of Series A Liberty Media Group
Common Stock that are issuable upon conversion, exercise
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or exchange of Convertible Securities that the Corporation had, prior to the
record date for the Liberty Media Group Distribution, agreed to issue, but as
of such record date has not issued, in each case including obligations of the
Corporation to issue shares of the Corporation's Class A Common Stock, par
value $1.00 per share, which as a result of the Liberty Media Group
Distribution, constitute obligations to issue, among other securities, Series A
Liberty Media Group Common Stock or Convertible Securities which are
convertible into or exercisable or exchangeable for Series A Liberty Media
Group Common Stock; provided, however, that Committed Acquisition Shares shall
not include any shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock issuable upon conversion, exercise or exchange
of Pre-Distribution Convertible Securities. The type and amount of Committed
Acquisition Shares issuable shall be appropriately adjusted to reflect
subdivisions and combinations of the Series A Liberty Media Group Common Stock
and dividends or distributions of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock to holders of Series A
Liberty Media Group Common Stock and other reclassifications of the Series A
Liberty Media Group Common Stock, in each case occurring (or the record date
for which occurs) after the Liberty Media Group Distribution.
"Conversion Date" shall mean any date fixed by the Board of Directors
for a conversion of shares of (i) Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, or (ii) Series A Telephony Group
Common Stock and Series B Telephony Group Common Stock, as the case may be, as
set forth in a notice to holders of the applicable series of Common Stock
pursuant to paragraph 5(d) or 6(d), as applicable, of this Section E.
"Convertible Securities" shall mean any securities of the Corporation
(other than any series of Common Stock) that are convertible into, exchangeable
for or evidence the right to purchase any shares of any series of Common Stock,
whether upon conversion, exercise, exchange, pursuant to antidilution
provisions of such securities or otherwise.
"Corporation Earnings (Loss) Attributable to the Liberty Media Group",
for any period, shall mean the net earnings or loss of the Liberty Media Group
for such period determined on a basis consistent with the determination of the
net earnings or loss of the Liberty Media Group for such period as presented in
the combined financial statements of the Liberty Media Group for such period,
including income and expenses of the Corporation attributed to the operations
of the Liberty Media Group on a substantially consistent basis, including
without limitation, corporate administrative costs, net interest and income
taxes.
"Corporation Earnings (Loss) Attributable to the TCI Group", for any
period, shall mean the net earnings or loss of the TCI Group for such period
determined on a basis consistent with the determination of the net earnings or
loss of the TCI Group for such period as presented in the combined financial
statements of the TCI Group for such period, including income and expenses of
the Corporation attributed to the operations of the TCI Group on a
substantially consistent basis, including without limitation, corporate
administrative costs, net interest and income taxes.
"Corporation Earnings (Loss) Attributable to the Telephony Group", for
any period, shall mean the net earnings or loss of the Telephony Group for such
period determined on a basis consistent with the determination of the net
earnings or loss of the Telephony Group for such period as presented in the
combined financial statements of the Telephony Group for such period, including
income and expenses of the Corporation attributed to the operations of the
Telephony Group on a substantially consistent basis, including without
limitation, corporate administrative costs, net interest and income taxes.
"Disposition" shall mean the sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets
or stock or otherwise) of properties or assets.
"First Appraiser" means, with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private Market
Value, an investment banking firm of recognized national standing selected by
the Corporation to make such determination.
"Higher Appraised Amount", with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private Market
Value, the higher of the respective final views of the First Appraiser and the
Second Appraiser as to such private market value.
"Independent Committee" means a committee of the Board of Directors of
the Corporation formed in order to select the Second Appraiser, all of whose
members are "independent directors" as determined under Nasdaq National Market
rules.
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"Liberty Media Group" shall mean, as of any date that any shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock have been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its
subsidiaries in Liberty Media Corporation or any of its subsidiaries
(including any successor thereto by merger, consolidation or sale of
all or substantially all of its assets, whether or not in connection
with a Related Business Transaction) and their respective properties
and assets,
(b) all assets and liabilities of the Corporation or any
of its subsidiaries to the extent attributed to any of the properties
or assets referred to in clause (a) of this sentence, whether or not
such assets or liabilities are assets and liabilities of Liberty Media
Corporation or any of its subsidiaries (or a successor as described in
clause (a) of this sentence),
(c) all assets and properties contributed or otherwise
transferred to the Liberty Media Group from the TCI Group, and
(d) the interest of the Corporation or any of its
subsidiaries in the businesses, assets and liabilities acquired by the
Corporation or any of its subsidiaries for the Liberty Media Group, as
determined by the Board of Directors;
provided that (i) from and after any dividend or other distribution with
respect to any shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock (other than a dividend or other distribution
payable in shares of Series A Liberty Media Group Common Stock or Series B
Liberty Media Group Common Stock, with respect to which adjustment shall be
made as provided in clause (a) of the definition of "Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest", or in other
securities of the Corporation attributed to the Liberty Media Group for which
provision shall be made as set forth in the penultimate sentence of this
definition), the Liberty Media Group shall no longer include an amount of
assets or properties equal to the aggregate amount of such kind of assets or
properties so paid in respect of shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock multiplied by a fraction the
numerator of which is equal to the Liberty Media Group Inter-Group Interest
Fraction in effect immediately prior to the record date for such dividend or
other distribution and the denominator of which is equal to the Liberty Media
Group Outstanding Interest Fraction in effect immediately prior to the record
date for such dividend or other distribution and (ii) from and after any
transfer of assets or properties from the Liberty Media Group to the TCI Group,
the Liberty Media Group shall no longer include the assets or properties so
transferred. If the Corporation shall pay a dividend or make any other
distribution with respect to shares of Series A Liberty Media Group Common
Stock or Series B Liberty Media Group Common Stock payable in securities of the
Corporation attributed to the Liberty Media Group other than Series A Liberty
Media Group Common Stock and Series B Liberty Media Group Common Stock, the TCI
Group shall be deemed to hold an amount of such other securities equal to the
amount so distributed multiplied by the fraction specified in clause (i) of
this definition (determined as of a time immediately prior to the record date
for such dividend or other distribution), and to the extent interest or
dividends are paid or other distributions are made on such other securities so
distributed to the holders of Series A Liberty Media Group Common Stock and
Series B Liberty Media Group Common Stock, the Liberty Media Group shall no
longer include a corresponding ratable amount of the kind of assets paid as
such interest or dividends or other distributions in respect of such securities
so deemed to be held by the TCI Group. The Corporation may also, to the extent
any such other securities constitute Convertible Securities which are at the
time convertible, exercisable or exchangeable, cause such Convertible
Securities deemed to be held by the TCI Group to be deemed to be converted,
exercised or exchanged (and to the extent the terms of such Convertible
Securities require payment or delivery of consideration in order to effect such
conversion, exercise or exchange, the Liberty Media Group shall in such case
include an amount of the kind of properties or assets required to be paid or
delivered as such consideration for the amount of the Convertible Securities
deemed converted, exercised or exchanged as if such Convertible Securities were
outstanding), in which case such Convertible Securities shall no longer be
deemed to be held by the TCI Group or attributed to the Liberty Media Group.
"Liberty Media Group Available Dividend Amount", as of any date, shall
mean the product of the Liberty Media Group Outstanding Interest Fraction and
either: (a) the excess of (i) an amount equal to the total assets of the
Liberty Media Group less the total liabilities (not including preferred stock)
of the Liberty Media Group as of such date over (ii) the aggregate par value
of, or any greater amount determined to be capital in respect of, all
outstanding shares of Series A Liberty Media Group Common Stock, Series B
Liberty Media Group Common Stock and each class or series of Preferred Stock
attributed to the Liberty Media Group or (b) in case there is no such excess,
an amount equal to the Corporation Earnings (Loss)
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Attributable to the Liberty Media Group (if positive) for the fiscal year in
which such date occurs and/or the preceding fiscal year.
"Liberty Media Group Distribution" shall mean the share distribution
of shares of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock made to the holders of record of Series A TCI Group
Common Stock and Series B TCI Group Common Stock as of the close of business on
August 4, 1995.
"Liberty Media Group Inter-Group Interest Fraction", as of any date,
shall mean a fraction the numerator of which is the Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest as of such date
and the denominator of which is the sum of (a) such Number of Shares Issuable
with Respect to the Liberty Media Group Inter-Group Interest as of such date
and (b) the aggregate number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock outstanding as of such
date.
"Liberty Media Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the Liberty
Media Group, an amount, if any, equal to the gross proceeds of such Disposition
after any payment of, or reasonable provision for, (a) any taxes payable by the
Corporation in respect of such Disposition or in respect of any resulting
dividend or redemption pursuant to clause (i) or (ii), respectively, of
paragraph 5(b) of this Section E (or which would have been payable but for the
utilization of tax benefits attributable to the TCI Group or the Telephony
Group), (b) any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses and (c) any liabilities and
other obligations (contingent or otherwise) of, or attributed to, the Liberty
Media Group, including, without limitation, any indemnity or guarantee
obligations incurred in connection with the Disposition or any liabilities for
future purchase price adjustments and any preferential amounts plus any
accumulated and unpaid dividends and other obligations (without duplication of
amounts allocated for the satisfaction of the Corporation's obligations with
respect to Pre-Distribution Convertible Securities and Committed Acquisition
Shares issuable which are included in the determination of the Adjusted Liberty
Media Group Outstanding Interest Fraction) in respect of Preferred Stock
attributed to the Liberty Media Group. For purposes of this definition, any
properties and assets of the Liberty Media Group remaining after such
Disposition shall constitute "reasonable provision" for such amount of taxes,
costs and liabilities (contingent or otherwise) as can be supported by such
properties and assets. To the extent the proceeds of any Disposition include
any securities or other property other than cash, the Board of Directors shall
determine the value of such securities or property, including for the purpose
of determining the equivalent value thereof if the Board of Directors
determines to pay a dividend or redemption price in cash or securities or other
property as provided in clause (z) of paragraph 5(b) of this Section E.
"Liberty Media Group Outstanding Interest Fraction", as of any date,
shall mean a fraction the numerator of which is the aggregate number of shares
of Series A Liberty Media Group Common Stock and Series B Liberty Media Group
Common Stock outstanding on such date and the denominator of which is the sum
of (a) such aggregate number of shares of Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock outstanding on such date
and (b) the Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest as of such date.
"Liberty Media Group Private Market Value" shall mean an amount equal
to the private market value of the Liberty Media Group as of the Appraisal
Date. Each of the First Appraiser, the Second Appraiser and the Mutually
Designated Appraiser, if any, shall be instructed to determine the private
market value of the Liberty Media Group as of the Appraisal Date based upon the
amount a willing purchaser would pay to a willing seller, in an arm's length
transaction, if it were acquiring the Liberty Media Group, as if the Liberty
Media Group were a publicly traded non-controlled corporation and the purchaser
was acquiring all of the capital stock of such corporation, and without
consideration of any potential regulatory constraints limiting the potential
purchasers of the Liberty Media Group other than that which would have existed
if the Liberty Media Group were a publicly traded non-controlled entity.
"Lower Appraised Amount", with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private Market
Value, the lower of the respective final views of the First Appraiser and the
Second Appraiser as to such private market value.
"Market Capitalization" of any class or series of capital stock of the
Corporation on any Trading Day shall mean the product of (i) the Market Value
of one share of such class or series on such Trading Day and (ii) the number of
shares of such class or series outstanding on such Trading Day.
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"Market Value" of any class or series of capital stock of the
Corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such day (if
such day is a Trading Day, and if such day is not a Trading Day, on the Trading
Day immediately preceding such day) or in case no such reported sale takes
place on such Trading Day the average of the reported closing bid and asked
prices regular way of a share of such class or series on such Trading Day, in
either case on the Nasdaq National Market, or if the shares of such class or
series are not quoted on such Nasdaq National Market on such Trading Day, the
average of the closing bid and asked prices of a share of such class or series
in the over-the-counter market on such Trading Day as furnished by any New York
Stock Exchange member firm selected from time to time by the Corporation, or if
such closing bid and asked prices are not made available by any such New York
Stock Exchange member firm on such Trading Day, the market value of a share of
such class or series as determined by the Board of Directors; provided that for
purposes of determining the ratios set forth in paragraphs 2(c), 5(b) and 6 of
this Section E, (a) the "Market Value" of any share of any series of Common
Stock on any day prior to the "ex" date or any similar date for any dividend or
distribution paid or to be paid with respect to such series of Common Stock
shall be reduced by the fair market value of the per share amount of such
dividend or distribution as determined by the Board of Directors and (b) the
"Market Value" of any share of any series of Common Stock on any day prior to
(i) the effective date of any subdivision (by stock split or otherwise) or
combination (by reverse stock split or otherwise) of outstanding shares of such
series of Common Stock or (ii) the "ex" date or any similar date for any
dividend or distribution with respect to any such series of Common Stock in
shares of such series of Common Stock shall be appropriately adjusted to
reflect such subdivision, combination, dividend or distribution; and provided,
further, that to the extent that any assets or properties of the TCI Group are
transferred to the Telephony Group prior to there being any shares of Series A
Telephony Group Common Stock or Series B Telephony Group Common Stock issued
and outstanding, the Market Value of a share of Series A Telephony Group Common
Stock shall be as determined in good faith by the Board of Directors for
purposes of determining the increase in the Number of Shares Issuable in
Respect of the Telephony Group Inter-Group Interest.
"Mutually Appraised Amount", with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private Market
Value, the determination by the Mutually Designated Appraiser of such private
market value.
"Mutually Designated Appraiser" shall mean, if required with respect
to any determination of the Liberty Media Group Private Market Value or the
Telephony Group Private Market Value, the investment banking firm of recognized
national standing jointly designated by the First Appraiser and the Second
Appraiser to make such determination.
"Number of Shares Issuable with Respect to the Liberty Media Group
Inter-Group Interest" after the Liberty Media Group Distribution shall be zero
and shall from time to time thereafter, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by
stock split or otherwise) and combinations (by reverse stock split or
otherwise) of the Series A Liberty Media Group Common Stock and
dividends or distributions of shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock to holders
of Series A Liberty Media Group Common Stock and other
reclassifications of Series A Liberty Media Group Common Stock,
(b) decreased (but not to less than zero) by (i) the
aggregate number of shares of Series A Liberty Media Group Common
Stock issued or sold by the Corporation after the Liberty Media Group
Distribution other than Committed Acquisition Shares, the proceeds of
which are attributed to the TCI Group, (ii) the aggregate number of
shares of Series A Liberty Media Group Common Stock issued or
delivered upon conversion, exercise or exchange of Convertible
Securities (other than Pre-Distribution Convertible Securities and
Convertible Securities which are convertible into or exercisable or
exchangeable for Committed Acquisition Shares), the proceeds of which
are attributed to the TCI Group, (iii) the aggregate number of shares
of Series A Liberty Media Group Common Stock issued or delivered by
the Corporation as a dividend or distribution to holders of Series A
TCI Group Common Stock and Series B TCI Group Common Stock, (iv) the
aggregate number of shares of Series A Liberty Media Group Common
Stock issued or delivered upon the conversion, exercise or exchange of
any Convertible Securities (other than Pre-Distribution Convertible
Securities and Convertible Securities which are convertible into or
exercisable or exchangeable for Committed Acquisition Shares) issued
or delivered by the Corporation after the Liberty Media Group
Distribution as a dividend or distribution or by reclassification or
exchange to holders of Series A TCI Group Common Stock and Series B
TCI Group Common Stock and (v) the aggregate number of shares of
Series A Liberty Media Group Common Stock (rounded, if necessary, to
the nearest whole number), equal to the aggregate fair value (as
determined by the Board of Directors) of assets or properties
attributed to the Liberty Media Group that are
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transferred from the Liberty Media Group to the TCI Group in
consideration of a reduction in the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest, divided by
the Market Value of one share of Series A Liberty Media Group Common
Stock as of the date of such transfer, and
(c) increased by (i) the aggregate number of any shares
of Series A Liberty Media Group Common Stock and Series B Liberty
Media Group Common Stock which are retired or otherwise cease to be
outstanding following their purchase with funds attributed to the TCI
Group, (ii) a number (rounded, if necessary, to the nearest whole
number), equal to the fair value (as determined by the Board of
Directors) of assets or properties, theretofore attributed to the TCI
Group that are contributed to the Liberty Media Group in consideration
of an increase in the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest, divided by the Market Value
of one share of Series A Liberty Media Group Common Stock as of the
date of such contribution and (iii) the aggregate number of shares of
Series A Liberty Media Group Common Stock and Series B Liberty Media
Group Common Stock into or for which Convertible Securities are deemed
to be converted, exercised or exchanged pursuant to the last sentence
of the definition of "TCI Group" in this paragraph 9. The Corporation
shall not issue or sell shares of Series B Liberty Media Group Common
Stock in respect of a reduction in the Number of Shares Issuable with
Respect to the Liberty Media Group Inter-Group Interest.
Whenever a change in the Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest occurs, the Corporation shall prepare
and file a statement of such change with the Secretary of the Corporation.
"Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest" shall initially be that number of shares of Series A
Telephony Group Common Stock and Series B Telephony Group Common Stock which
represent 100% of the common stockholders' equity value of the Corporation
attributable to the Telephony Group, as determined by the Board of Directors of
the Corporation prior to the first issuance of shares of Series A Telephony
Group Common Stock or Series B Telephony Group Common Stock, and shall from
time to time thereafter, as applicable, be
(a) adjusted as appropriate to reflect subdivisions (by
stock split or otherwise) and combinations (by reverse stock split or
otherwise) of the Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock and dividends or distributions of shares
of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock to holders of Series A Telephony Group Common Stock and
Series B Telephony Group Common Stock and other reclassifications of
the Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock,
(b) decreased (but not to less than zero) by (i) the
aggregate number of shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock issued or sold by the
Corporation the proceeds of which are attributed to the TCI Group,
(ii) the aggregate number of shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock issued or delivered
upon conversion, exercise or exchange of Convertible Securities, the
proceeds of which are attributed to the TCI Group, (iii) the aggregate
number of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock issued or delivered by the Corporation as
a dividend or distribution to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock, (iv) the aggregate number
of shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock issued or delivered upon the conversion,
exercise or exchange of any Convertible Securities issued or delivered
by the Corporation as a dividend or distribution or by
reclassification or exchange to holders of Series A TCI Group Common
Stock and Series B TCI Group Common Stock and (v) the aggregate number
of shares of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock (rounded, if necessary, to the nearest
whole number), equal to the aggregate fair value (as determined by the
Board of Directors) of assets or properties attributed to the
Telephony Group that are transferred from the Telephony Group to the
TCI Group in consideration of a reduction in the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest,
divided by the Market Value of one share of Series A Telephony Group
Common Stock as of the date of such transfer, and
(c) increased by (i) the aggregate number of any shares
of Series A Telephony Group Common Stock and Series B Telephony Group
Common Stock which are retired or otherwise cease to be outstanding
following their purchase with funds attributed to the TCI Group, (ii)
a number (rounded, if necessary, to the nearest whole number), equal
to the fair value (as determined by the Board of Directors) of assets
or properties, theretofore attributed to the TCI Group that are
contributed to the Telephony Group in consideration of an increase in
the Number of Shares
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Issuable with Respect to the Telephony Group Inter-Group Interest,
divided by the Market Value of one share of Series A Telephony Group
Common Stock as of the date of such contribution and (iii) the
aggregate number of shares of Series A Telephony Group Common Stock
and Series B Telephony Group Common Stock into or for which
Convertible Securities are deemed to be converted, exercised or
exchanged pursuant to the last sentence of the definition of "TCI
Group" in this paragraph 9.
Whenever a change in the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest occurs, the Corporation shall prepare and
file a statement of such change with the Secretary of the Corporation.
"Pre-Distribution Convertible Securities" shall mean Convertible
Securities that were outstanding on the record date for the Liberty Media Group
Distribution and were, prior to such date, convertible into or exercisable or
exchangeable for shares of the Class A Common Stock, par value $1.00 per share,
of the Corporation.
"Qualifying Subsidiary" shall mean a Subsidiary of the Corporation in
which (x) the Corporation's ownership and voting interest is sufficient to
satisfy the requirements of the Internal Revenue Service for a tax free
distribution of the Corporation's interest in such Subsidiary to the holders of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
or (y) the Corporation owns, directly or indirectly, all of the issued and
outstanding capital stock.
"Redemption Date" shall mean any date fixed for a redemption or
purchase of shares of (i) Series A Liberty Media Group Common Stock and Series
B Liberty Media Group Common Stock or (ii) Series A Telephony Group Common
Stock and Series B Telephony Group Common Stock, as the case may be, as set
forth in a notice to holders of such series pursuant to this Certificate.
"Related Business Transaction" shall mean any Disposition of all or
substantially all of the properties and assets of the Liberty Media Group or
the Telephony Group, as the case may be, in which the Corporation receives as
proceeds of such Disposition primarily equity securities (including, without
limitation, capital stock, convertible securities, partnership or limited
partnership interests and other types of equity securities, without regard to
the voting power or contractual or other management or governance rights
related to such equity securities) of the purchaser or acquiror of such assets
and properties of the Liberty Media Group or the Telephony Group, as the case
may be, any entity which succeeds (by merger, formation of a joint venture
enterprise or otherwise) to such assets and properties of the Liberty Media
Group or the Telephony Group, as the case may be, or a third party issuer,
which purchaser, acquiror or other issuer is engaged or proposes to engage
primarily in one or more businesses similar or complementary to the businesses
conducted by the Liberty Media Group or the Telephony Group, as the case may
be, prior to such Disposition, as determined in good faith by the Board of
Directors.
"Second Appraiser" means, with respect to any determination of the
Liberty Media Group Private Market Value or the Telephony Group Private Market
Value, an investment banking firm of recognized national standing selected by
the Independent Committee to make such determination.
"Selection Date", with respect to any determination of the Liberty
Media Group Private Market Value or the Telephony Group Private Market Value,
shall mean the date upon which the Second Appraiser for such determination is
selected by the Independent Committee.
"Subsidiary" shall mean, with respect to any person or entity, any
corporation or partnership 50% or more of whose outstanding voting securities
or partnership interests, as the case may be, are directly or indirectly owned
by such person or entity.
"TCI Group" shall mean, as of any date:
(a) the interest of the Corporation or any of its
subsidiaries in all of the businesses in which the Corporation or any
of its subsidiaries (or any of their predecessors or successors) is or
has been engaged, directly or indirectly, and the respective assets
and liabilities of the Corporation or any of its subsidiaries, other
than any businesses, assets or liabilities of the Liberty Media Group
or the Telephony Group;
(b) a proportionate interest in the businesses, assets
and liabilities of the Liberty Media Group equal to the Liberty Media
Group Inter-Group Interest Fraction as of such date;
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(c) a proportionate interest in the businesses, assets
and liabilities of the Telephony Group equal to the Telephony Group
Inter-Group Interest Fraction as of such date;
(d) from and after any dividend or other distribution
with respect to shares of Series A Liberty Media Group Common Stock or
Series B Liberty Media Group Common Stock (other than a dividend or
other distribution payable in shares of Series A Liberty Media Group
Common Stock or Series B Liberty Media Group Common Stock, with
respect to which adjustment shall be made as provided in clause (a) of
the definition of "Number of Shares Issuable with Respect to the
Liberty Media Group Inter-Group Interest", or in other securities of
the Corporation attributed to the Liberty Media Group, for which
provision shall be made as set forth in the penultimate sentence of
this definition), an amount of assets or properties theretofore
included in the Liberty Media Group equal to the aggregate amount of
such kind of assets or properties so paid in respect of such dividend
or other distribution with respect to shares of Series A Liberty Media
Group Common Stock or Series B Liberty Media Group Common Stock
multiplied by a fraction the numerator of which is equal to the
Liberty Media Group Inter-Group Interest Fraction in effect
immediately prior to the record date for such dividend or other
distribution and the denominator of which is equal to the Liberty
Media Group Outstanding Interest Fraction in effect immediately prior
to the record date for such dividend or other distribution; and
(e) from and after any dividend or other distribution
with respect to shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock (other than a dividend or other
distribution payable in shares of Series A Telephony Group Common
Stock or Series B Telephony Group Common Stock, with respect to which
adjustment shall be made as provided in clause (a) of the definition
of "Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest", or in other securities of the Corporation
attributed to the Telephony Group, for which provision shall be made
as set forth in the penultimate sentence of this definition), an
amount of assets or properties theretofore included in the Telephony
Group equal to the aggregate amount of such kind of assets or
properties so paid in respect of such dividend or other distribution
with respect to shares of Series A Telephony Group Common Stock or
Series B Telephony Group Common Stock multiplied by a fraction the
numerator of which is equal to the Telephony Group Inter-Group
Interest Fraction in effect immediately prior to the record date for
such dividend or other distribution and the denominator of which is
equal to the Telephony Group Outstanding Interest Fraction in effect
immediately prior to the record date for such dividend or other
distribution; and
(f) any assets or properties transferred from the Liberty
Media Group or the Telephony Group to the TCI Group;
provided that, from and after any contribution or transfer of any assets or
properties from the TCI Group to the Liberty Media Group or the Telephony
Group, the TCI Group shall no longer include such assets or properties so
contributed or transferred (other than pursuant to its interest in the
businesses, assets and liabilities of the Liberty Media Group or the Telephony
Group pursuant to clauses (b) or (c), respectively, above). If the Corporation
shall pay a dividend or make any other distribution with respect to shares of
Series A Liberty Media Group Common Stock or Series B Liberty Media Group
Common Stock payable in other securities of the Corporation attributed to the
Liberty Media Group, the TCI Group shall be deemed to hold an amount of such
other securities equal to the amount so distributed multiplied by the fraction
specified in clause (d) of this definition (determined as of a time immediately
prior to the record date for such dividend or other distribution), and to the
extent interest or dividends are paid or other distributions are made on such
other securities so distributed to holders of Series A Liberty Media Group
Common Stock and Series B Liberty Media Group Common Stock, the TCI Group shall
include a corresponding ratable amount of the kind of assets paid as such
interest or dividends or other distributions in respect of such securities so
deemed to be held by the TCI Group. If the Corporation shall pay a dividend or
make any other distribution with respect to shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock payable in other
securities of the Corporation attributed to the Telephony Group, the TCI Group
shall be deemed to hold an amount of such other securities equal to the amount
so distributed multiplied by the fraction specified in clause (e) of this
definition (determined as of a time immediately prior to the record date for
such dividend or other distribution), and to the extent interest or dividends
are paid or other distributions are made on such other securities so
distributed to holders of Series A Telephony Group Common Stock and Series B
Telephony Group Common Stock, the TCI Group shall include a corresponding
ratable amount of the kind of assets paid as such interest or dividends or
other distributions in respect of such securities so deemed to be held by the
TCI Group. The Corporation may also, to the extent any such other securities
constitute Convertible Securities which are at the time convertible,
exercisable or exchangeable, cause such Convertible Securities deemed to be
held by the TCI Group to be deemed to be converted, exercised or exchanged (and
to the extent the terms of such Convertible Securities require payment
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<PAGE> 126
or delivery of consideration in order to effect such conversion, exercise or
exchange, the TCI Group shall in such case no longer include an amount of the
kind of properties or assets required to be paid or delivered as such
consideration for the amount of the Convertible Securities deemed converted,
exercised or exchanged as if such Convertible Securities were outstanding), in
which case such Convertible Securities shall no longer be deemed to be held by
the TCI Group or attributed to the Liberty Media Group or the Telephony Group.
"TCI Group Available Dividend Amount", as of any date, shall mean
either: (a) the excess of (i) an amount equal to the total assets of the TCI
Group less the total liabilities (not including preferred stock) of the TCI
Group as of such date over (ii) the aggregate par value of, or any greater
amount determined to be capital in respect of, all outstanding shares of Series
A TCI Group Common Stock, Series B TCI Group Common Stock and each class or
series of Preferred Stock attributed to the TCI Group or (b) in case there is
no such excess, an amount equal to the Corporation Earnings (Loss) Attributable
to the TCI Group (if positive) for the fiscal year in which such date occurs
and/or the preceding fiscal year.
"Telephony Group" shall mean, as of any date that any shares of Series
A Telephony Group Common Stock or Series B Telephony Group Common Stock have
been issued and continue to be outstanding:
(a) the interest of the Corporation or of any of its
subsidiaries in TCI Telephony Services, Inc. ("TCI Telephony") or any
of its subsidiaries (including any successor thereto by merger,
consolidation or sale of all or substantially all of its assets,
whether or not in connection with a Related Business Transaction) and
their respective properties and assets,
(b) all assets and liabilities of the Corporation or any
of its subsidiaries to the extent attributed to any of the properties
or assets referred to in clause (a) of this sentence, whether or not
such assets or liabilities are assets and liabilities of TCI Telephony
or any of its subsidiaries (or a successor as described in clause (a)
of this sentence),
(c) all assets and properties contributed or otherwise
transferred to the Telephony Group from the TCI Group, and
(d) the interest of the Corporation or any of its
subsidiaries in the businesses, assets and liabilities acquired by the
Corporation or any of its subsidiaries for the Telephony Group, as
determined by the Board of Directors;
provided that (i) from and after any dividend or other distribution with
respect to any shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock (other than a dividend or other distribution
payable in shares of Series A Telephony Group Common Stock or Series B
Telephony Group Common Stock, with respect to which adjustment shall be made as
provided in clause (a) of the definition of "Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest", or in other securities of
the Corporation attributed to the Telephony Group for which provision shall be
made as set forth in the penultimate sentence of this definition), the
Telephony Group shall no longer include an amount of assets or properties equal
to the aggregate amount of such kind of assets or properties so paid in respect
of shares of Series A Telephony Group Common Stock or Series B Telephony Group
Common Stock multiplied by a fraction the numerator of which is equal to the
Telephony Group Inter-Group Interest Fraction in effect immediately prior to
the record date for such dividend or other distribution and the denominator of
which is equal to the Telephony Group Outstanding Interest Fraction in effect
immediately prior to the record date for such dividend or other distribution
and (ii) from and after any transfer of assets or properties from the Telephony
Group to the TCI Group, the Telephony Group shall no longer include the assets
or properties so transferred. If the Corporation shall pay a dividend or make
any other distribution with respect to shares of Series A Telephony Group
Common Stock or Series B Telephony Group Common Stock payable in securities of
the Corporation attributed to the Telephony Group other than Series A Telephony
Group Common Stock and Series B Telephony Group Common Stock, the TCI Group
shall be deemed to hold an amount of such other securities equal to the amount
so distributed multiplied by the fraction specified in clause (i) of this
definition (determined as of a time immediately prior to the record date for
such dividend or other distribution), and to the extent interest or dividends
are paid or other distributions are made on such other securities so
distributed to the holders of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock, the Telephony Group shall no longer include a
corresponding ratable amount of the kind of assets paid as such interest or
dividends or other distributions in respect of such securities so deemed to be
held by the TCI Group. The Corporation may also, to the extent any such other
securities constitute Convertible Securities which are at the time convertible,
exercisable or exchangeable, cause such Convertible Securities deemed to be
held by the TCI Group to be deemed to be converted, exercised or exchanged (and
to the extent the terms of such Convertible Securities require payment or
delivery of
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<PAGE> 127
consideration in order to effect such conversion, exercise or exchange, the
Telephony Group shall in such case include an amount of the kind of properties
or assets required to be paid or delivered as such consideration for the amount
of the Convertible Securities deemed converted, exercised or exchanged as if
such Convertible Securities were outstanding), in which case such Convertible
Securities shall no longer be deemed to be held by the TCI Group or attributed
to the Telephony Group.
"Telephony Group Available Dividend Amount", as of any date, shall
mean the product of the Telephony Group Outstanding Interest Fraction and
either: (a) the excess of (i) an amount equal to the total assets of the
Telephony Group less the total liabilities (not including preferred stock) of
the Telephony Group as of such date over (ii) the aggregate par value of, or
any greater amount determined to be capital in respect of, all outstanding
shares of Series A Telephony Group Common Stock, Series B Telephony Group
Common Stock and each class or series of Preferred Stock attributed to the
Telephony Group or (b) in case there is no such excess, an amount equal to the
Corporation Earnings (Loss) Attributable to the Telephony Group (if positive)
for the fiscal year in which such date occurs and/or the preceding fiscal year.
"Telephony Group Inter-Group Interest Fraction", as of any date, shall
mean a fraction the numerator of which is the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest as of such date and the
denominator of which is the sum of (a) such Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest as of such date and (b) the
aggregate number of shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock outstanding as of such date.
"Telephony Group Net Proceeds" shall mean, as of any date, with
respect to any Disposition of any of the properties and assets of the Telephony
Group, an amount, if any, equal to the gross proceeds of such Disposition after
any payment of, or reasonable provision for, (a) any taxes payable by the
Corporation in respect of such Disposition or in respect of any resulting
dividend or redemption pursuant to clause (i) or (ii), respectively, of
paragraph 6(b) of this Section E (or which would have been payable but for the
utilization of tax benefits attributable to the TCI Group or the Liberty Media
Group), (b) any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses and (c) any liabilities and
other obligations (contingent or otherwise) of, or attributed to, the Telephony
Group, including, without limitation, any indemnity or guarantee obligations
incurred in connection with the Disposition or any liabilities for future
purchase price adjustments and any preferential amounts plus any accumulated
and unpaid dividends and other obligations in respect of Preferred Stock
attributed to the Telephony Group. For purposes of this definition, any
properties and assets of the Telephony Group remaining after such Disposition
shall constitute "reasonable provision" for such amount of taxes, costs and
liabilities (contingent or otherwise) as can be supported by such properties
and assets. To the extent the proceeds of any Disposition include any
securities or other property other than cash, the Board of Directors shall
determine the value of such securities or property, including for the purpose
of determining the equivalent value thereof if the Board of Directors
determines to pay a dividend or redemption price in cash or securities or other
property as provided in clause (z) of paragraph 6(b) of this Section E.
"Telephony Group Outstanding Interest Fraction", as of any date, shall
mean a fraction the numerator of which is the aggregate number of shares of
Series A Telephony Group Common Stock and Series B Telephony Group Common Stock
outstanding on such date and the denominator of which is the sum of (a) such
aggregate number of shares of Series A Telephony Group Common Stock and Series
B Telephony Group Common Stock outstanding on such date and (b) the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest as of
such date.
"Telephony Group Private Market Value" shall mean an amount equal to
the private market value of the Telephony Group as of the Appraisal Date. Each
of the First Appraiser, the Second Appraiser and the Mutually Designated
Appraiser, if any, shall be instructed to determine the private market value of
the Telephony Group as of the Appraisal Date based upon the amount a willing
purchaser would pay to a willing seller, in an arm's length transaction, if it
were acquiring the Telephony Group, as if the Telephony Group were a publicly
traded non-controlled corporation and the purchaser was acquiring all of the
capital stock of such corporation, and without consideration of any potential
regulatory constraints limiting the potential purchasers of the Telephony Group
other than that which would have existed if the Telephony Group were a publicly
traded non-controlled entity.
"Trading Day" shall mean each weekday other than any day on which any
relevant class or series of capital stock of the Corporation is not traded on
the Nasdaq National Market System or in the over-the-counter market.
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<PAGE> 128
(IV) SECTION C OF ARTICLE V OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE
CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"SECTION C
REMOVAL OF DIRECTORS
Subject to the rights of the holders of any class or series of
Preferred Stock, directors may be removed from office only for cause (as
hereinafter defined) upon the affirmative vote of the holders of 66 2/3% of the
total voting power of the then outstanding shares of Series A TCI Group Common
Stock, Series B TCI Group Common Stock, Series A Liberty Media Group Common
Stock, Series B Liberty Media Group Common Stock, Series A Telephony Group
Common Stock, Series B Telephony Group Common Stock and any class or series of
Preferred Stock entitled to vote at an election of directors, voting together
as a single class. Except as may be provided by law, "cause" for removal, for
purposes of this Section C, shall exist only if: (i) the director whose removal
is proposed has been convicted of a felony, or has been granted immunity to
testify in an action where another has been convicted of a felony, by a court
of competent jurisdiction and such conviction is no longer subject to direct
appeal; (ii) such director has become mentally incompetent, whether or not so
adjudicated, which mental incompetence directly affects his ability as a
director of the Corporation, as determined by at least 66 2/3% of the members
of the Board of Directors then in office (other than such director); or (iii)
such director's actions or failure to act have been determined by at least 66
2/3% of the members of the Board of Directors then in office (other than such
director) to be in derogation of the director's duties."
(V) SECTION A OF ARTICLE VIII OF THE RESTATED CERTIFICATE OF INCORPORATION OF
THE CORPORATION IS HEREBY AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
"ARTICLE VIII
MEETINGS OF STOCKHOLDERS
SECTION A
ANNUAL AND SPECIAL MEETINGS
Subject to the rights of the holders of any class or series of
Preferred Stock, stockholder action may be taken only at an annual or special
meeting. Except as otherwise provided in the terms of any class or series of
Preferred Stock or unless otherwise prescribed by law or by another provision
of this Certificate, special meetings of the stockholders of the Corporation,
for any purpose or purposes, shall be called by the Secretary of the
Corporation (i) upon the written request of the holders of not less than 66
2/3% of the total voting power of the outstanding Voting Securities (as
hereinafter defined) or (ii) at the request of at least 75% of the members of
the Board of Directors then in office. The term "Voting Securities" shall
include the Series A TCI Group Common Stock, the Series B TCI Group Common
Stock, the Series A Liberty Media Group Common Stock, the Series B Liberty
Media Group Common Stock, the Series A Telephony Group Common Stock, the Series
B Telephony Group Common Stock and any class or series of Preferred Stock
entitled to vote with the holders of Common Stock generally upon all matters
which may be submitted to a vote of stockholders at any annual meeting or
special meeting thereof.
SECOND: That said amendments were duly adopted by the Board of
Directors of the Corporation, and pursuant to resolution of the Board of
Directors of the Corporation, the annual meeting of the stockholders of the
Corporation was duly called and held, upon notice in accordance with Section
222 of the General Corporation Law of the State of Delaware, at which meeting
the necessary number of shares as required by statute and the Restated
Certificate of Incorporation of the Corporation were voted in favor of said
amendments.
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<PAGE> 129
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware."
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<PAGE> 130
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment this ___ day of __________, 1996.
TELE-COMMUNICATIONS, INC.
By:
-------------------------------
Name:
Title:
ATTEST:
By:
----------------------------
Name:
Title:
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<PAGE> 131
ANNEX III
DESCRIPTION OF TELEPHONY GROUP
GENERAL
The Telephony Group would initially consist of the Company's interest
in TCI Telephony Services, Inc., a direct wholly owned subsidiary of the
Company, its subsidiaries, their respective assets, and all assets and
liabilities of the Company and its subsidiaries to the extent attributed to any
of the foregoing assets, whether or not such assets or liabilities are assets
and liabilities of TCI Telephony Services, Inc. (together with its consolidated
subsidiaries (unless the context indicates otherwise), "TCI Telephony"). The
principal assets of TCI Telephony are its investments in a series of
partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband personal
communications services ("PCS"), to residences and businesses nationwide under
the "Sprint" brand (the "PCS Ventures"), and its investment in Teleport
Communications Group, Inc., a Delaware corporation ("TCG" or "Teleport"). The
PCS Ventures include Sprint Spectrum Holding Company, L.P. ("Holdings") and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships" or "Sprint PCS"),
the partners of each of which are subsidiaries of Sprint Corporation
("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox")
and the Company, and PhillieCo, L.P. ("PhillieCo"), the partners of which are
subsidiaries of Sprint, Cox and the Company. The Company, through subsidiaries,
has a 30% interest as a partner in the Sprint PCS Partnerships and a 35.3%
interest as a partner in PhillieCo. TCG is a competitive local exchange carrier
that offers a wide range of local telecommunications services in major
metropolitan markets nationwide, primarily to businesses, long distance
carriers and resellers, and wireless communications companies. The Company has
a 31.1% equity interest (which represent a 36.5% voting interest) in TCG. The
Telephony Group also would hold partnership interests of 50% in Kansas City
Fiber Network, L.P. and 40% in NHT Partnership, which are competitive access
providers serving the Kansas City and Buffalo metropolitan areas, respectively.
SPRINT PCS
GENERAL
Sprint PCS intends to become a leading provider of wireless
communications products and services in the United States. Sprint PCS is the
largest broadband wireless personal communications services company in the
United States in terms of total licensed "Pops" (or population equivalents),
with licenses (including those owned by licensees that have affiliated or have
agreed to affiliate with Sprint PCS) to provide service in 33 major trading
areas ("MTAs") covering 190.9 million Pops (73% of the total United States
population), including eight of the nation's ten largest MTAs. Broadband PCS
systems differ from traditional analog cellular telephone service principally
in that PCS systems operate at a higher frequency band (1850- 1990 MHZ radio
spectrum), have more spectrum allotted and have different license areas.
Sprint PCS initiated the commercial launch of its service in December
1996 in Fresno, California, Milwaukee, Wisconsin, Portland, Oregon and Spokane,
Washington. Remaining markets, including New York, San Francisco, Dallas/Ft.
Worth, Boston, Miami, Minneapolis/ St. Paul, Denver, Seattle and Kansas City,
will be launched on a market-by-market basis in the first half of 1997. When
this first phase of launch is completed next year, Sprint PCS service will be
available in 65 cities throughout the United States, including 35 of the top 50
markets in the United States. The timing of launch in individual markets will
be determined by various factors, principally zoning and microwave relocation
factors, equipment delivery schedules, completion of network testing and
optimization and local market and competitive considerations.
The partners (the "Partners") in the Sprint PCS Partnerships are:
Sprint Enterprises, L.P., which has a 40% partnership interest in Sprint PCS,
TCI Telephony Services, Inc., which has a 30% partnership interest in the
Sprint PCS Partnerships, and Comcast Telephony Services and Cox Telephony
Partnership, each of which has a 15% partnership interest in the Sprint PCS
Partnerships. Each Partner is both a general partner holding 99% of its interest
as a general partner and a limited partner holding 1% of its interest as a
limited partner. The Partners are subsidiaries of, respectively, Sprint, TCI,
Comcast and Cox (together the "Parents").
Sprint PCS will require significant funds for development,
construction, testing and deployment of its PCS network. The Partners have
agreed to contribute up to an aggregate of $4.2 billion of equity to Sprint PCS
to the extent required by the annual budgets of Sprint PCS through fiscal 1999
as approved by the Partners. As of December 16, 1996, approximately $3.0
billion had been contributed to Sprint PCS, of which amount the Company had
contributed approximately $890 million. Sprint PCS' proposed business plan
currently contemplates that the remaining approximately $1.2 billion of
committed equity contributions by the Partners (of which amount the Company has
committed to provide approximately $370 million) will be made by the end of the
second quarter of 1998 (although there can be no assurance that any additional
capital will be obtained in the form of equity from the Partners or otherwise).
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Sprint PCS has also obtained approximately $3.1 billion in secured vendor
financing, entered into a $2.0 billion secured credit facility with a group of
banks and received net proceeds of approximately $520 million from a public
offering of senior notes. In connection with such financings, the Parents have
committed to make available or to cause to be made available to Sprint PCS up
to $1.0 billion of its additional equity requirements (in addition to any
amounts contributed to APC or Cox-California (each as defined below)), to the
extent required by Sprint PCS to fund any projected cash shortfall, under a
Capital Contribution Agreement among Sprint PCS and the Parents that provides
for $1.0 billion in aggregate equity commitments (less, subject to certain
exceptions, amounts of cash equity contributed to Sprint PCS after December 31,
1995). At December 16, 1996, approximately $450 million of such $1.0 billion
had been made available to Sprint PCS under the Capital Contribution Agreement,
of which amount the Company had contributed approximately $140 million. Based
on the currently expected timing of such additional contributions to Sprint PCS
(including the currently expected timing of Sprint PCS' expected capital
contributions to APC and Cox- California), the Company does not expect that
its obligations under the Capital Contribution Agreement will result in the
obligation to make any incremental capital contributions to Sprint PCS in
addition to its pro rata portion of the Partners' initial $4.2 capital
commitment to Sprint PCS.
Sprint PCS believes that rapid growth in consumer and business demands
for wireless services, technological advances, increased customer expectations
for quality), and convenience of use and deregulation are reshaping the
telecommunications market. In order to compete in this changing environment,
accelerate subscriber growth and increase customer retention, Sprint PCS
intends to offer customers integrated telecommunications packages and national
service offerings. The Parents and Sprint PCS expect to package Sprint PCS's
wireless services with other of the Parents' communications products and
services, including the local and long distance telecommunications services and
the cable- based entertainment services of Sprint and TCI, Cox and Comcast (the
"Cable Parents"). Sprint PCS and the Parents will market PCS wireless products
and services nationally under the Sprint brand name through diverse
distribution channels including those of the Parents.
PCS is expected to be the first all-digital wireless service and will
be able to provide enhanced integrated services not currently offered by
traditional analog cellular providers, including integrated voicemail and short
messaging. Sprint PCS believes that the enhanced features and services, in
conjunction with increased competition within the industry, will contribute to
the acceleration of growth in the wireless telecommunications market. The
number of cellular telephone subscribers nationwide has grown from
approximately 680,000 in 1986 to an estimated 34 million as of December 31,
1995. The Personal Communications Industry Association estimates that the
number of cellular and PCS wireless services subscribers will be over 104
million by the year 2005 and that PCS subscriptions will account for
approximately 40 million of such subscriptions.
POPULATION COVERAGE
Sprint PCS was the successful bidder for 29 PCS licenses in the FCC's
A Block and B Block PCS auction which concluded in March 1995. Sprint PCS's 29
wholly-owned markets cover 150.3 million Pops and include, among others, the
New York, San Francisco, Detroit, Dallas/Fort Worth and Boston/Providence MTAs.
Additionally, Cox has agreed to contribute to Sprint PCS, upon FCC approval
which is pending, a PCS license for the Omaha MTA that it separately purchased
in the broadband PCS auction in March 1995.
In order to increase its Pop coverage, Sprint PCS has affiliated and
expects to continue to affiliate with other PCS providers, including those in
which Sprint PCS or affiliates of its Partners have an interest. Pursuant to
affiliation agreements, each affiliated PCS service provider will be included
in Sprint PCS's national network and will use the Sprint brand name. Sprint PCS
owns a 49% limited partnership interest in American PCS, L.P. ("APC"), which
owns a PCS license for and operates a broadband PCS system in the Washington
D.C./Baltimore MTA, which MTA covers 8.3 million Pops. APC has affiliated with
Sprint PCS and is marketing its products and services under the Sprint brand
name. APC launched its PCS service in November 1995 and is the nation's first
commercially operational PCS system. As of May 15, 1996, APC had approximately
80,000 subscribers. Sprint PCS also expects to acquire in the fourth quarter of
1996 (or early in the first quarter of 1997) a 49% limited partnership interest
in Cox California PCS, L.P. ("Cox California"), a partnership that will be
formed to hold a PCS license for the Los Angeles/San Diego MTA covering 21.5
million Pops. Cox, which currently owns this license, will contribute the
license to Cox-California and will manage and control Cox-California. Sprint
PCS expects to sign an affiliation agreement with Cox-California in the fourth
quarter of 1996 (or early in the first quarter of 1997). Sprint PCS also
expects to affiliate with, and provide various services to PhillieCo, a limited
partnership organized by and among subsidiaries of Sprint, TCI and Cox that
owns a PCS license for the Philadelphia MTA covering 9.1 million Pops. The
Company owns a 35.3% partnership interest in PhillieCo, which interest would be
held in the Telephony Group. As of December 16, 1996, the Company had made a
total of approximately $30 million in capital
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<PAGE> 133
contributions to PhillieCo and expects to make approximately $60 million in
additional capital contributions to PhillieCo prior to December 31, 1998.
The table below presents the owned and affiliated Pops after giving
effect to such affiliation agreements:
<TABLE>
<CAPTION>
Average
License
Purchase
1995 Price per
# of Population 1990
Owned/Affiliated MTAs in MTA(s) Pop(1)
---------------- ---- ---------- ---------
(millions)
<S> <C> <C> <C>
Owned by Sprint PCS . . . . . . . . . . . . . . . . . . 29 150.3 $14.54
Omaha (to be contributed to Sprint PCS by Cox)(2) . . . 1 1.7 $ 3.06
Affiliated:
APC (Baltimore/Washington)(3) . . . . . . . . 1 8.3 $13.16
Cox-California (Los Angeles/San Diego)(4). . . 1 21.5 $13.16
PhillieCo (Philadelphia)(5) . . . . . . . . . 1 9.1 $ 9.52
- -----
Total . . . . . . . . . . . . . . . . 33 190.9
== =====
</TABLE>
- -----------------------------
(1) Cost to winning bidder in FCC auction(s) or in connection with the
award of Pioneer's Preference license.
(2) Contribution will be credited towards capital contributions required of
Cox under the Sprint PCS Partnership Agreement to the same extent as if
Cox had made a cash contribution in an amount equal to the sum of (i)
$995,564, together with interest at the annual rate of 13.4% computed
from November 17, 1994 through the date the Omaha license is
contributed, plus (ii) $4,062,400, together with interest at the annual
rate of 13.4% computed from June 30, 1995 through the date the Omaha
license is contributed.
(3) Sprint PCS owns a 49% limited partnership interest in APC, which has
signed an affiliation agreement with Sprint PCS.
(4) Sprint PCS intends to acquire a 49% limited partnership interest in,
and Sprint PCS expects to sign an affiliation agreement with,
Cox-California.
(5) Owned by subsidiaries of Sprint, TCI and Cox. Sprint PCS expects to
sign a services and affiliation agreement with PhillieCo.
The Company is also currently negotiating to acquire a minority equity
interest in a limited partnership that would operate a PCS system utilizing C
block PCS licenses for eight BTAs covering an aggregate of approximately 2.2
million Pops as an affiliate of the Sprint PCS network, although no assurance
can be given that the Company will acquire such interest or that such
partnership will enter into an affiliation agreement with Sprint PCS.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in
the capacity and quality of digital technology, shorter cycles for new products
and enhancements and changes in consumer preferences and expectations.
Accordingly, Sprint PCS expects competition in the wireless telecommunications
business to be dynamic and intense as a result of the entrance of new
competitors and the development of new technologies, products and services.
Sprint PCS anticipates that market prices for two-way wireless services
generally will decline in the future based upon increased competition.
Each of the markets in which Sprint PCS competes will be served by
other two-way wireless service providers, including cellular and PCS operators
and resellers. Many of these competitors have been operating for a number of
years, currently serve a substantial subscriber base and have significantly
greater financial and technical resources than those available to Sprint PCS.
Certain of Sprint PCS's competitors are operating, or planning to operate,
through joint ventures and affiliation arrangements, wireless
telecommunications systems that encompass most of the United States. In
addition, several entities have received and several others are seeking FCC
authorization to construct and operate global satellite networks to provide
domestic and international mobile communications services from geostationary
and low earth orbit satellites.
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Continuing technological advances in telecommunications and FCC
policies that encourage the development of new spectrum-based technologies make
it impossible to predict the extent of future competition. The FCC has adopted
rules that provide preferences, including discounted licenses, to companies
that develop new spectrum based communications technologies without bidding in
FCC-sanctioned auctions. Such a preference may encourage the development of new
technologies that compete with cellular and PCS service. In addition, the
Omnibus Budget Reconciliation Act of 1993 requires, among other things, the
allocation to commercial use of a portion of 200 MHZ of the spectrum currently
reserved for government use. It is possible that some portion of the spectrum
that is reallocated will be used to create new land-mobile services or to
expand existing land-mobile services.
Sprint PCS will directly compete with several other PCS providers in
each of its PCS markets, including AT&T Wireless Services, Inc., BellSouth
Telecommunications, Inc., Omnipoint Corporation, Pacific Bell Mobile Services,
Inc., PCS PrimeCo L.P. and Western Wireless Corporation. Sprint PCS also
expects that existing analog wireless service providers in the PCS markets,
some of which have been operational for a number of years and have
significantly greater financial and technical resources than those available to
Sprint PCS, will upgrade their systems to provide comparable services in
competition with its PCS system. These cellular competitors include AirTouch,
AT&T Wireless Services, Inc., BellSouth Mobility, Inc., Ameritech Mobile
Communications, Inc., Bell Atlantic NYNEX Mobile, Southwestern Bell Mobile
Systems. GTE Mobilnet, Inc. and U.S. Cellular Corp.
MANAGEMENT
Pursuant to the Agreement of Limited Partnership (the "Partnership
Agreement") of Holdings, the Partners of Sprint PCS conduct the business and
affairs of Sprint PCS through their representatives on the Partnership Board of
Holdings (the "Representatives"). The Partnership Board currently has six
voting Representatives, three of whom are currently designated by Sprint and
one of whom is currently designated by each of the Cable Partners. The
Representative or Representatives designated by each Partner have voting power
equal to the percentage interest of the Partner appointing him or them. Based
on the current percentage interest of the Company in the Sprint PCS
Partnerships, the Company's Representative on the Partnership Board has a 30%
voting percentage interest. If a Partner designates more than one
Representative such Representatives are required to vote the entire voting
power held by such General Partner as a single unit. The Chief Executive
Officer is a non-voting member of the Partnership Board.
Except as set forth below, all actions required or permitted to be
taken by the Partnership Board must be approved by the affirmative vote of
Representatives having voting power of 75% or more of the percentage interests
entitled to vote on such action (other than those required to abstain pursuant
to the terms of the Partnership Agreement) (a "Required Majority Vote"). As a
result, except as set forth below and based on the Company's current voting
percentage interest, no action may be taken by the Partnership Board without
the consent of the Company's Representative (other than any action with respect
to a matter with respect to which the Company's Representative is required to
abstain pursuant to the terms of the Partnership Agreement). The unanimous vote
of the Partnership Board is required for specified matters including, but not
limited to, admission of new Partners or equity holders, actions that would
result in voluntary bankruptcy or the dissolution of Sprint PCS or any
subsidiary, approval of transactions which would subject the Partnership to
certain restrictions relating to FCC regulatory oversight, actions relating to
the incurrence of indebtedness that is recourse to the Partners, certain
acquisitions and dispositions of assets and the approval of a request for
withdrawal by a general partner.
The unanimous consent of all of the Partners (other than those
required to abstain pursuant to the terms of the Partnership Agreement) is
required for the engagement by Sprint PCS in businesses outside those specified
in the Partnership Agreement or the conducting of business by the Partnership
or its subsidiaries in the Philadelphia MTA, the loan or advancement by Sprint
PCS or any subsidiary of funds to, or the guarantee of any obligations of, a
Partner or any affiliate thereof, the making of any non-pro rata cash or
in-kind distributions to a Partner other than in accordance with the terms of
the Partnership Agreement, the approval of, amendment, modification or
supplement to, procedures relating to the winding up of the affairs of Sprint
PCS and, subject to certain exceptions, the incurrence of any debt for loans
made by a Partner or affiliate thereof and any amendment, modification or
supplement to the Partnership Agreement. If any such action is not so approved
solely due to the failure of one or more Partners who is not entitled to
representation on the Partnership Board to contents the Partnership Agreement
provides means by which the consenting Partners may purchase all of such
non-consenting Partner's interest.
III-4
<PAGE> 135
COMPETITIVE ACTIVITIES
Subject to certain exceptions, the Partnership Agreement restricts any
Partner and its controlled affiliates from bidding on, acquiring or, directly
or indirectly, owning, managing, operating, joining, controlling or financing,
or participating in the management, operation, control or financing of, or
being connected as a principal, agent, representative, consultant, beneficial
owner of an interest in any person or entity, or otherwise with, or use or
permit its name to be used in connection with, any business that engages in the
bidding for or acquisition of any Wireless Business (as defined) license or
engages in any Wireless Business or provides, offers, promotes or brands
services that are within the Wireless Exclusive Services (as defined).
ADDITIONAL INFORMATION
A subsidiary of the Sprint PCS Partnerships, Sprint Spectrum, L.P.
(through which Sprint PCS conducts substantially all of its operations other
than the ownership of its 49% partnership interest in APC and its proposed 49%
partnership interest in Cox-California) is subject to the information
requirements of the Exchange Act and, in accordance therewith, files reports,
proxy and information statements and other information with the Commission, all
of which are available from the Commission in the manner described above under
"Available Information."
TELEPORT
Teleport Communications Group Inc., the largest in terms of route
miles competitive local exchange carrier ("CLEC") in the United States, offers
a wide range of local telecommunications services in major metropolitan markets
nationwide. Teleport competes with incumbent local exchange carriers ("ILECs")
as "The Other Local Phone Company"(SM) by providing high quality, integrated
local telecommunications services, primarily over fiber optic digital networks,
to meet the voice, data, and video transmission needs of its customers. TCG's
customers are principally telecommunications- intensive businesses, long
distance carriers and resellers, and wireless communications companies. TCG
offers these customers technologically advanced local telecommunications
services, as well as superior customer service, flexible pricing and vendor and
route diversity. While Teleport's carrier business has continued to grow, in
1995 end user customers accounted for approximately 62% of Teleport's revenues.
During 1995, Teleport's top 10 customers accounted for approximately 57% of
TCG's total pro forma revenues. AT&T Corp. ("AT&T") and Sprint each accounted
for more than 10% of such revenues, and no customer accounted for 15% or more
of such revenues.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. Teleport currently operates high capacity
state-of-the-art digital networks in 57 metropolitan markets, including 18 of
the 20 largest metropolitan areas. Teleport operates networks in metropolitan
New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston, Detroit,
Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale, Seattle, San
Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee, Indianapolis,
Hartford and Omaha, and is developing networks in Atlanta, Charlotte,
Cincinnati and Columbus, Ohio, Minneapolis/St. Paul, Minnesota, Orlando and
Tampa, Florida, and Sacramento. As of September 30, 1996, Teleport's networks
spanned over 6,250 route miles, contained over 316,000 fiber miles and served
approximately 6,800 buildings.
TCG has grown rapidly over the last several years, expanding its
existing networks, developing new networks and increasing its service
offerings. On a pro forma basis, after giving effect to the reorganization (the
"Reorganization") of TCG's business in connection with its recent initial
public offering, Teleport's revenues were approximately $184.9 million for
1995, substantially all of which were derived from the provision of local
telecommunications services.
Total revenues from the local telecommunications market in the United
States were estimated to have been approximately $96 billion in 1995. In the
past, competitive access providers, including Teleport, were limited to serving
only the dedicated services portion of this market, which was estimated to have
been approximately $5 billion in 1995, whereas the local switched services
portion of this market for business customers was estimated to have been
approximately $55 billion. Teleport has expanded into the switched services
market in a number of states over the last five years by constructing switched
networks and obtaining the necessary regulatory authorizations and
interconnection arrangements. With the passage of the 1996 Act, Teleport
believes that it is well positioned to address a significantly larger portion
of the local telecommunications market and to improve its operating margins in
the switched and dedicated services markets by expanding its networks,
installing additional high capacity digital switches and offering new products
and services.
III-5
<PAGE> 136
The Company, through a subsidiary, currently owns 48,779,388 shares of
Class B Common Stock of Teleport ("Teleport Class B Stock"), each of which is
generally entitled to ten votes per share on each matter to be voted on by the
holders of the common stock of Teleport and each of which is convertible into
one share of Class A Common Stock of Teleport ("Teleport Class A Stock"). The
Company also expects to acquire an additional 1,011,528 shares of Teleport
Class A Stock in the fourth quarter of 1996 in connection with the completion
of the Reorganization. Such shares of Teleport Class B Stock and Teleport Class
A Stock in the aggregate represent approximately 31.1% of the outstanding
common stock of Teleport and approximately 36.5% of the aggregate voting power
of such securities. In addition, subsidiaries of Cox, Comcast and Continental
Cablevision, Inc. ("Continental" and, collectively with TCI, Cox and Comcast,
the "Cable Stockholders") own shares of Teleport Class B Stock and Teleport
Class A Stock representing approximately 25.0%, 16.4% and 11.5%, respectively,
of the outstanding common stock of Teleport (representing approximately 29.2%,
19.1% and 13.4%, respectively of the aggregate voting power of such
securities). Such amounts do not reflect the possiple issuance of 2,757,083
shares of Teleport Class A Stock in connection with Teleport's proposed
acquisition of the remaining equity interest in Eastern Telelogic, a
competitive local exchange carrier operating in portions of Pennsylvania, New
Jersey and Delaware, principally in the Philadelphia metropolitan area.
Generally, the Cable Stockholders have not made any commitments to contribute
any additional capital to TCG (or to otherwise acquire any additional shares of
capital stock of TCG).
Teleport is subject to the information requirements of the Exchange
Act and, in accordance therewith, files reports, proxy and information
statements and other information with the Commission, all of which are
available from the Commission in the manner described above under "Available
Information."
TELEPORT'S SERVICES
Teleport provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, dedicated services, high-speed switched data
services and video channel transmission services. Switched voice services
offered by Teleport use primarily high-capacity digital switches to route voice
transmissions anywhere on the public switched telephone network. TCG's
dedicated services, which include private line and special access services, use
high-capacity digital circuits to carry voice, data and video transmissions
from point-to-point in multiple configurations. Teleport provides its media
industry customers with point-to-point, broadcast-quality video channels for
video transmissions between two or more locations, including video link
services to all the major television networks as well as to other programmers.
Teleport also provides private network management and systems integration
services for businesses that require combinations of various dedicated and
switched telecommunications services.
Teleport uses the latest technologies and network architectures to
develop a highly reliable infrastructure for delivering high speed, quality
digital transmissions of voice, data and video telecommunications. The basic
transmission platform consists primarily of optical fiber equipped with high
capacity synchronous optical network ("SONET") equipment deployed in
self-healing rings. These SONET rings give TCG the capability of routine
customer traffic simultaneously in both directions around the ring thereby
eliminating loss of service in the event of a cable cut. Teleport extends SONET
rings or point to point links from rings to each customer's premises over its
own fiber optic cable, unbundled facilities obtained from ILECS, microwave
(including 38 GHz milliwave) transmission facilities and other technologies.
TCG also installs diverse building entry points where a customer's security
needs require such redundancy. TCG then places necessary customer dedicated or
shared electronic equipment at a location near or in the customer's premises to
terminate the link.
COMPETITION
Teleport faces substantial competition in each of the metropolitan
areas it serves or plans to serve from entities that offer services similar to
those offered by TCG, including ILECs such as Ameritech, Bell Atlantic,
BellSouth, NYNEX, Pacific Telesis Group, SBC Communications, U S WEST, Inc. and
GTE. Teleport believes that ILECs generally benefit from their long-standing
relationships with customers, substantial technical and financial resources and
federal and state regulations that could provide them with increased pricing
flexibility as competition increases. In addition, in most of the metropolitan
areas in which Teleport currently operates, at least one, and sometimes
several, other competitive access providers ("CAPs") or CLECs offer
substantially similar services and substantially similar prices to those of
Teleport. Other CLECS, CAPs, cable television companies, electric utilities,
long distance carriers, microwave carriers, wireless telephone system operators
and private networks built by large end users may offer services similar to
those offered by Teleport.
III-6
<PAGE> 137
GOVERNANCE BY CABLE STOCKHOLDERS
Affiliates of the Cable Stockholders and Teleport are parties to a
stockholders agreement (the "Stockholders Agreement") which provides for, among
other things, the corporate governance of Teleport, certain registration rights
and certain stock transfer restrictions. Under the Stockholders Agreement, (i)
ten of the thirteen members of the Board of Directors are designated by the
holders of the Teleport Class B Stock and (ii) a holder of Teleport Class B
Stock generally is entitled to designate one director nominee for each 9% of
the outstanding shares of Teleport Class B Stock held by it and its affiliates;
provided, that Continental currently does not have the right to designate any
of such directors as a result of its proposed merger with US West, Inc. TCI,
Cox, Comcast and Continental currently own 37.1%, 29.7%, 19.5% and 13.5%,
respectively, of the outstanding Teleport Class B Stock. As a result, the
Company is currently entitled to designate four directors for election to the
Board of Directors of Teleport. In addition, the Stockholders Agreement
provides that the chief executive officer and two independent directors will
continue to be designated for election to Teleport's Board of Directors.
The Stockholders Agreement prohibits any transfer of Teleport Class B
Stock held by the parties thereto, unless expressly permitted under the terms
thereof. Parties to the Stockholders Agreement have certain rights of first
refusal thereunder with respect to proposed sales of the Teleport Class B
Stock. In addition, if any party desires to convert Teleport Class B Stock to
Class A Common Stock, it must first offer that stock to the other holders of
Teleport Class B Stock who are entitled to designate at least one director to
the Teleport Board of Directors. If such other holders do not elect to buy such
stock, then such stock can be converted to Class A Common Stock and sold by the
selling stockholder free of restrictions under the Stockholders Agreement.
GOVERNMENT REGULATION
REGULATION OF PCS AND OTHER WIRELESS ACTIVITIES
PCS licensees are subject to regulation at the federal and, in certain
respects, at the state and local level. The FCC regulates the licensing,
construction, operation, acquisition and interconnection arrangements of
wireless telecommunications systems in the United States under the
Communications Act of 1934, as amended by the Telecommunications Act of 1996
(the "1996 Act"). Pursuant to the Communications Act of 1934, the FCC has
promulgated a series of rules, regulations and policies to (i) grant or deny
licenses for PCS frequencies, (ii) grant or deny PCS license renewals, (iii)
rule on assignments and/or transfers of control of PCS licenses, (iv) govern
the interconnection of PCS networks with other wireless and wireline carriers,
(v) impose fines and forfeitures for violations of any of the FCC's rules and
(vi) regulate the technical standards of PCS networks.
The FCC has established service areas for PCS throughout the United
States and its possessions and territories based upon the Rand McNally market
definition of 51 MTAs and 493 smaller BTAs. At least two BTAs are contained
within each MTA. The FCC has allocated 120 MHz of radio spectrum in the 1850 to
1990 MHz band, divided into six separate spectrum blocks, for licensed
broadband PCS services. The A and B Blocks are 30 MHz each and are allocated to
the 51 MTAs. The FCC sponsored auctions for the A and B Blocks that ended in
March 1995, and the FCC granted the A and B Block licenses in June 1995. The
remaining blocks, C (30 MHz), D (10 MHz), E (10 MHz), and F (10 MHz), are
allocated to the 493 BTAs. The C Block auctions ended on May 6, 1996. Sprint
PCS did not participate in the C Block auctions or the ongoing F block
auctions, as these licenses were available only to small businesses and other
designated entities. Sprint is currently participating in the FCC's ongoing D
and E Block auctions and is actively bidding on licenses for markets where
Sprint PCS does not currently have license coverage. Pursuant to the
Partnership Agreement and a further agreement among the Partners, Sprint will
be required to offer to enter into affiliation agreement(s) with Sprint PCS
with respect to those license areas where Sprint successfully obtains PCS
licenses in such auctions.
In November 1996, the FCC proposed to create a new wireless
communications service in the 2.3 GHz band that would allow licensees to
provide a broad range of wireless services, potentially including PCS services.
The FCC proposes to award these licenses through competitive bidding. The FCC
is currently in the process of receiving and reviewing comments in response to
its proposal.
Pursuant to Section 332(c)(3) of the 1996 Act, state and local
governments generally are not permitted to regulate the entry of or rates
charged by any commercial mobile service, including PCS. States may petition
the FCC for authority to regulate commercial mobile service rates, which
authority is to be granted only in circumstances where the state demonstrates
that market conditions fail to protect subscribers adequately from unjust and
unreasonable rates or rates that are unjustly or
III-7
<PAGE> 138
unreasonably discriminatory. States are not prohibited from regulating other
terms and conditions for PCS and other commercial mobile services, so long as
such regulations are consistent with the provisions of the Communications Act,
as amended by the 1996 Act. In particular, state and local governments can
manage public rights of way and require compensation for the use of such rights
of way by telecommunications carriers, including PCS providers, so long as the
compensation is fair and reasonable, imposed on a competitively neutral and
non-discriminatory basis, and publicly- disclosed by the governmental entity.
States and localities cannot regulate the placement of wireless facilities so
as to "prohibit" the provision of wireless services or to "discriminate" among
providers of such services. In addition, so long as a wireless system complies
with the FCC's rules, the 1996 Act prohibits states and localities from using
environmental effects as a basis to regulate the placement, construction or
operation of wireless facilities.
WIRELINE TELEPHONY ACTIVITIES
The wireline telephony activities of Teleport (and those of the other
entities in which the Telephony Group has investments) are subject to
regulation at the federal, state, and local level. Nationally, the recent trend
has been for federal and state legislators and regulators to permit and promote
additional competition in the local telecommunications industry. The Company
believes that this trend, coupled with the recent enactment of the 1996 Act,
generally should contribute to an increase in the market opportunities for TCG.
However, because these developments require numerous implementation actions by
the Federal Communications Commission ("FCC") individual state regulatory
commissions, and federal and state courts, and are subject to particular legal,
political and economic conditions, it is not possible to predict the extent to
which or the pace at which such liberalization will occur.
The 1996 Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any person from providing any interstate or intrastate telecommunications
service. However, states retain jurisdiction under the 1996 Act to adopt
regulations necessary to preserve universal service, protect public safety and
welfare, ensure the continued quality of telecommunications services and
safeguard the rights of consumers. States also are responsible for mediating
and arbitrating interconnection arrangements between new entrants (CLECs) and
established telephone companies (ILECs) if voluntary arrangements are not
reached. The precise jurisdictional responsibilities of the FCC and the states
under the Communications Act, as amended by the 1996 Act, are currently being
litigated.
At the federal level, the FCC has established different levels of
regulation for "dominant carriers" and "nondominant carriers." For domestic
interstate telecommunications purposes, only the ILECs are classified as
dominant carriers, and all other carriers are classified as nondominant
carriers. Nondominant carriers, such as TCG, have been required to file federal
tariffs for interstate long distance and access services and periodic reports
with the FCC concerning their interstate circuits and deployment of network
facilities. As a result of an FCC ruling in November 1996, tariff obligations
for interstate, interexchange services offered by TCG have been removed. The
tariff obligation remains applicable to any TCG interstate access or
international long distance services. TCG must offer its interstate services on
a non-discriminatory basis, at just and reasonable rates and subject to the
complaint provisions of the Communications Act. TCG is not subject to rate of
return or price cap regulation by the FCC and may install and operate digital
facilities for the transmission of interstate communications without prior FCC
authorization. Under the 1996 Act, TCG has additional federal regulatory
obligations when it provides local exchange service in a market.
In addition, most state public utility commissions require TCG and
other carriers that wish to provide local and other jurisdictionally intrastate
common carrier services to be authorized to provide such services. TCG's
operating subsidiaries and affiliates are authorized as common carriers in a
number of states. The authority held by TCG's subsidiaries and affiliates
varies in the scope of the intrastate services permitted. TCG has filed or
expects to file applications for authority to provide local exchange service in
all of its markets in which it does not have such authority. TCG typically is
not subject to price regulation or to rate of return regulation for its
intrastate services. In most states, TCG is required to file tariffs setting
forth the terms, conditions and prices for its intrastate services. In some
jurisdictions, the tariff can list a rate range or set prices for intrastate
services. TCG may be subject to additional regulatory burdens in some states,
such as quality of service requirements and universal service contributions.
State public utility commissions also are actively involved in the mediation
and arbitration of disputes between ILECs and TCG and other CLECs concerning
local interconnection and access arrangements.
Under the 1996 Act, state and local governments may manage public
rights of way and require compensation for their use, so long as such fees are
fair and reasonable, applied on a competitively neutral and non-discriminatory
basis, and publicly disclosed by the relevant governmental entity. TCG also may
be required to obtain from municipal authorities street opening
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<PAGE> 139
and construction permits and other rights of way to install and expand its
digital networks in certain cities. In some cities, TCG's affiliates or
subcontractors may already possess the requisite authorizations to construct or
expand TCG's networks.
III-9
<PAGE> 140
ANNEX IV
ILLUSTRATION OF CERTAIN TERMS
The following illustrations demonstrate the method of calculation of
the Inter-Group Interest of the TCI Group in the Telephony Group and the
application of certain terms of the Telephony Group Stock Proposal based on the
assumptions set forth herein and using 825 million shares as the number of
authorized shares of Telephony Group Common Stock, 100 million shares as the
initial Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest and 10 million shares as the number of shares of Series A
Telephony Group Common Stock sold in an initial public offering (the
"Offering"), with the proceeds of such sale being credited entirely to the
Telephony Group, as diagramed below. Unless otherwise specified, each
illustration below should be read independently as if none of the other
transactions illustrated in this Annex IV had occurred. Actual calculations may
be slightly different due to rounding. The following illustrations are not
intended to be complete and are qualified in their entirety by the more
detailed information contained in the Proxy Statement and the other Annexes
thereto. Capitalized terms used herein have the respective meanings ascribed to
them in the Proxy Statement. See Annex I--Glossary of Certain Defined Terms.
<TABLE>
<CAPTION>
Before Proposed After Proposed
Initial Public Offering Initial Public Offering
----------------------- -----------------------
<S> <C>
100 million Number of Shares Issuable with 100 million Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Respect to the Telephony Group Inter-Group
Interest Interest
725 million Available Shares 715 million Available Shares
10 million Outstanding Shares
</TABLE>
At any given time, the Telephony Group Outstanding Interest Fraction,
which represents the percentage interest in the equity value of the Company
attributable to the Telephony Group that is represented by the outstanding
shares of Telephony Group Common Stock, would be equal to:
OUTSTANDING SHARES OF TELEPHONY GROUP COMMON STOCK
- --------------------------------------------------------------------------------
OUTSTANDING SHARES OF TELEPHONY GROUP COMMON STOCK + NUMBER OF SHARES
ISSUABLE WITH RESPECT TO THE TELEPHONY GROUP INTER-GROUP INTERESTS
The balance of the equity of the Telephony Group is represented by the
TCI Group's Inter-Group Interest in the Telephony Group and, at any given time,
the Telephony Group Inter-Group Interest Fraction, which represents the
percentage interest in the equity value of the Company attributable to the
Telephony Group that is attributed to the TCI Group, would be equal to:
NUMBER OF SHARES ISSUABLE WITH RESPECT TO THE TELEPHONY GROUP INTER-GROUP
INTERESTS
- --------------------------------------------------------------------------------
OUTSTANDING SHARES OF TELEPHONY GROUP COMMON STOCK + NUMBER OF SHARES ISSUABLE
WITH RESPECT TO THE TELEPHONY GROUP
The sum of the Telephony Group Outstanding Interest Fraction and the
Telephony Group Inter-Group Interest Fraction would always equal 100%.
INITIAL PUBLIC OFFERING
o The following illustration assumes the initial issuance of 10
million shares of Series A Telephony Group Common Stock in the
Offering. The Number of Shares Issuable with Respect to the
Telephony Group Inter-
IV-1
<PAGE> 141
Group Interest would be 100 million shares immediately
following the Offering. As a result, the Telephony Group
Inter-Group Interest Fraction would be 90.9%, calculated as
follows:
100 MILLION
-------------------------
10 MILLION + 100 MILLION
The Telephony Group Outstanding Interest Fraction would
accordingly represent an interest of 9.1% in the Telephony
Group.
o The shares sold in the Offering would be entitled to vote and
in the aggregate would represent an interest in the Telephony
Group equal to the Telephony Group Outstanding Interest
Fraction. The Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would not be issued,
outstanding or entitled to vote.
o Immediately after the Offering, the Company would have 815
million authorized and unissued shares of Telephony Group
Common Stock remaining (825 million minus 10 million issued
and outstanding) of which 715 million represent Available
Shares. Authorized and unissued shares may be issued without
further action by shareholders and if issued from Available
Shares would result in the reduction of the percentage equity
interest of existing holders and may be issued at prices which
could dilute the equity interest of existing holders. The
issuance and sale of any of the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest, however,
would not dilute earnings per share of the Telephony Group
because the number of shares that would be used in the
denominator for such calculation would remain the same after
any such issue.
o In addition, with a Telephony Group Outstanding Interest
Fraction of 9.1% (and a Telephony Group Inter- Group Interest
Fraction of 90.9%), the financial statements of the Telephony
Group would be charged in respect of the Inter-Group Interest
with an amount equal to 999% (representing the ratio of the
Telephony Group Inter-Group Interest Fraction (90.9%) to the
Telephony Group Outstanding Interest Fraction (9.1%)) of the
aggregate amount of any dividend or other distribution paid on
the outstanding shares of Telephony Group Common Stock (other
than a dividend or other distribution payable in shares of
Telephony Group Common Stock or in certain other securities.)
If, for example, a dividend of $1 per share were declared and
paid on the 10 million shares of Telephony Group Common Stock
outstanding (an aggregate of $10 million), the TCI Group would
be credited with $99.9 million, and the Telephony Group would
be charged with that amount in addition to the $10 million
dividend on the outstanding shares of Telephony Group Common
Stock (a total of $109.9 million). An example of the effects
of a distribution of Telephony Group Common Stock is set forth
under the caption "Telephony Group Common Stock Dividends".
IV-2
<PAGE> 142
FUTURE OFFERINGS OF TELEPHONY GROUP COMMON STOCK
The following illustrations reflect the sale by the Company of 15
million additional shares of Telephony Group Common Stock on a date on which
the Number of Shares Issuable with Respect to the Telephony Group Inter-Group
Interest is 100 million.
OFFERINGS FOR THE TELEPHONY GROUP
Assume all such shares are identified as issued for the account of the
Telephony Group, with the net proceeds credited to the Telephony Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . 10 million
Newly issued shares. . . . . . . . . . . . . . . . . . . . . . . 15 million
----------
Total shares issued and outstanding after offering . . . . . . . 25 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would not be changed by the
issuance of any shares of Telephony Group Common Stock for
the account of the Telephony Group.
o The Telephony Group Outstanding Interest Fraction would be
20%, calculated as follows:
25 MILLION
------------------------
25 MILLION + 100 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 80% in the Telephony
Group.
o The Company would have 800 million authorized and unissued
shares of Telephony Group Common Stock remaining (825 million
minus 25 million issued and outstanding).
OFFERING FOR THE TCI GROUP
Assume all of such shares are identified as issued for the account of
the TCI Group with respect to the Inter-Group Interest, with the net proceeds
credited to the TCI Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . 10 million
Newly issued shares . . . . . . . . . . . . . . . . . . . . . . . 15 million
----------
Total shares issued and outstanding after offering . . . . . . . 25 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Inter-Group Interest would decreased by the number of shares
of Telephony Group Common Stock issued for the account of the
TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to offering . . . . . . . . . . . . . 100 million
Shares issued in offering . . . . . . . . . . . . . . . . . . . . . 15 million
-----------
Number of Shares Issuable with Respect to the Telephony Group
Inter Group Interest after offering . . . . . . . . . . . . . . . 85 million
==========
</TABLE>
IV-3
<PAGE> 143
o The Telephony Group Outstanding Interest Fraction would be
22.7%, calculated as follows:
25 MILLION
-----------------------
25 MILLION + 85 MILLION
The Telephony Inter-Group Interest Fraction would accordingly
represent an interest of 77.3% in the Telephony Group.
o The Company would have 800 million authorized and unissued
shares of Telephony Group Common Stock remaining (825 million
minus 25 million issued and outstanding).
OFFERINGS OF CONVERTIBLE SECURITIES FOLLOWING THE DISTRIBUTION
If the Company were to issue any debt or preferred stock convertible
into shares of Telephony Group Common Stock, the Telephony Group Inter-Group
Interest Fraction and the Telephony Group Outstanding Interest Fraction would
be unchanged at the time of such issuance. If any shares of Telephony Group
Common Stock were issued upon conversion of such Convertible Security, however,
then the Telephony Inter-Group Interest Fraction and the Telephony Group
Outstanding Interest Fraction would be affected in a manner similar to that
shown above under "Offering for the Telephony Group", if such Convertible
Security were attributed to the Telephony Group, or under "Offering for the TCI
Group," if such Convertible Security were attributed to the TCI Group.
PURCHASES OF TELEPHONY GROUP COMMON STOCK
The following two illustrations reflect the purchase by the Company of
5 million shares of Telephony Group Common Stock, which are retired or
otherwise cease to be outstanding following their purchase. The illustrations
assume that there are 25 million shares outstanding prior to the purchase and
that the Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to such purchase is 85 million.
PURCHASE WITH TELEPHONY GROUP FUNDS
Assume all such shares are identified as having been purchased with
funds attributed to the Telephony Group, with the Telephony Group being charged
with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . 25 million
Shares purchased . . . . . . . . . . . . . . . . . . 5 million
----------
Total shares issued and outstanding after purchase . 20 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would not be changed by the
purchase of any shares of Telephony Group Common Stock which
are purchased with funds attributed to the Telephony Group.
o The Telephony Group Outstanding Interest Fraction would be
19%, calculated as follows:
20 MILLION
-----------------------
20 MILLION + 85 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 81% in the Telephony
Group.
o In this case, the TCI Group would be credited, and the
Telephony Group would be charged, with an amount equal to 426%
(representing the ratio of the Telephony Group Inter-Group
Interest Fraction (81%) to the
IV-4
<PAGE> 144
Telephony Group Outstanding Interest Fraction (19%)) of the
aggregate amount of any dividend or other distribution paid on
the outstanding shares of Telephony Group Common Stock (other
than a dividend or other distribution payable in shares of
Telephony Group Common Stock or certain other securities).
o The Company would have 805 million authorized and unissued
shares of Telephony Group Common Stock (825 million minus 20
million issued and outstanding).
PURCHASE WITH TCI GROUP FUNDS
Assume all such shares are identified as having been purchased with
funds attributed to the TCI Group, with the TCI Group being charged with the
consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . . . 25 million
Shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . 5 million
----------
Total shares issued and outstanding after purchase. . . . . . . . . . 20 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be increased by the number of
shares of Telephony Group Common Stock which are so purchased
with funds attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to purchase . . . . . . . . . . . . . 85 million
Shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . 5 million
----------
Number of Shares Issuable with Respect to the Telephony Group
Inter Group Interest after purchase . . . . . . . . . . . . . . . 90 million
==========
</TABLE>
o The Telephony Group Outstanding Interest Fraction would be
18.2% calculated as follows:
20 MILLION
-----------------------
20 MILLION + 90 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 81.8 % in the Telephony
Group.
o In this case, the TCI Group would be credited, and the
Telephony Group would be charged, with an amount equal to 449%
(representing the ratio of the Telephony Group Inter-Group
Interest Fraction (81.8%) to the Telephony Group Outstanding
Interest Fraction (18.2%)) of the aggregate amount of any
dividend or other distribution paid on the outstanding shares
of Telephony Group Common Stock (other than a dividend or
other distribution payable in shares of Telephony Group Common
Stock or in certain other securities).
o The Company would have 805 million authorized and unissued
shares of Telephony Group Common Stock (825 million minus 20
million issued and outstanding).
TRANSFERS OF ASSETS BETWEEN THE TCI GROUP AND THE TELEPHONY GROUP
CONTRIBUTION OF ASSETS FROM THE TCI GROUP TO THE TELEPHONY GROUP
The following illustration reflects the contribution by the TCI Group
to the Telephony Group with respect to the Inter-Group Interest of $100 million
of assets attributed to the TCI Group on a date on which the Market Value of
the Telephony Group Common Stock is $20 per share.
IV-5
<PAGE> 145
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . . 10 million
Newly issued shares . . . . . . . . . . . . . . . . . . . . . . . . 0
----------
Total shares issued and outstanding after contribution . . . . . . 10 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be increased to reflect the
contribution to the Telephony Group of assets theretofore
attributed to the TCI Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Inter-
Group Interest prior to contribution . . . . . . . . . . . . . . . . . 100 million
Adjustment to reflect contribution to the Telephony Group of
assets attributed to the TCI Group ($100 million divided by $20) . . . . 5 million
-----------
Number of Shares Issuable with Respect to the Telephony Inter-
Group Interest after contribution . . . . . . . . . . . . . . . . . . . 105 million
===========
</TABLE>
o The Telephony Group Outstanding Interest Fraction would be
8.7%, calculated as follows:
10 MILLION
-------------------
10 MILLION + 105 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 91.3% in the Telephony
Group.
o In this case, the TCI Group would be credited, and the
Telephony Group would be charged, with an amount equal to
1049% (representing the ratio of the Telephony Group
Inter-Group Interest Fraction (91.3%) to the Telephony Group
Outstanding Interest Fraction (8.7%)) of the aggregate amount
of any dividend or other distribution paid on the outstanding
shares of Telephony Group Common Stock (other than a dividend
or other distribution payable in shares of Telephony Group
Common Stock or in certain other securities).
o The Company would have 815 million authorized and unissued
shares of Telephony Group Common Stock (825 million minus 10
million issued and outstanding).
TRANSFER OF ASSETS FROM THE TELEPHONY GROUP TO THE TCI GROUP
The following illustration reflects the transfer by the Telephony
Group to the TCI Group in reduction of the Inter-Group Interest of $100 million
of assets attributed to the Telephony Group on a date on which the Market Value
of Telephony Group Common Stock is $20 per share and the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest is $100
million.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . . 10 million
Shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . 0
----------
Total shares issued and outstanding after transfer . . . . . . . . 10 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be decreased to reflect the
contribution to the TCI Group of assets theretofore attributed
to the Telephony Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to transfer . . . . . . . . . . . . . 100 million
Adjustment to reflect transfer to the TCI Group of assets
attributed to the Telephony Group . . . . . . . . . . . . . . . . 5 million
-----------
Number of Shares Issuable with Respect to the Telephony Group
Inter Group Interest after transfer . . . . . . . . . . . . . . . 95 million
===========
</TABLE>
IV-6
<PAGE> 146
The Telephony Group will not make transfers of assets to the TCI Group
in reduction of the Inter-Group Interest if the effect would be to
reduce the Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest to less than zero. The Telephony Group
cannot have an interest in the TCI Group corresponding to the
Inter-Group Interest.
o The Telephony Group Outstanding Interest Fraction would be
9.5%, calculated as follows:
10 MILLION
-----------------------
10 MILLION + 95 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 90.5% in the Telephony
Group.
o In this case, the TCI Group would be credited, and the
Telephony Group would be charged, with an amount equal to 952%
(representing the ratio of the Telephony Group Inter-Group
Interest Fraction (90.5%) to the Telephony Group Outstanding
Interest Fraction (9.5%)) of the aggregate amount of any
dividend or other distribution paid on the outstanding shares
of Telephony Group Common Stock (other than a dividend or
other distribution payable in shares of Telephony Group Common
Stock or in certain other securities).
o The Company would have 115 million authorized and unissued
shares of Telephony Group Common Stock (825 million minus 10
million issued and outstanding).
TELEPHONY GROUP COMMON STOCK DIVIDENDS
The following illustrations reflects dividends of Telephony Group
Common Stock on outstanding Telephony Group Common Stock and outstanding TCI
Group Common Stock, respectively, on a date on which the Number of Shares
Issuable with Respect to the Telephony Group Inter-Group Interest is 100
million.
TELEPHONY GROUP COMMON STOCK DIVIDEND ON TELEPHONY GROUP COMMON STOCK
Assume the Company declares a dividend of one-half of one share of
Telephony Group Common Stock on each outstanding share of Telephony Group
Common Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . . 10 million
Newly issued shares . . . . . . . . . . . . . . . . . . . . . . . . 5 million
----------
Total shares issued and outstanding after dividend . . . . . . . . 15 million
==========
</TABLE>
o The Number of Shares Issuable with Respect to the Telephony
Group Inter-Group Interest would be increased proportionately
to reflect the stock dividend payable in shares of Telephony
Group Common Stock to holders of Telephony Group Common Stock.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to dividend . . . . . . . . . . . . . 100 million
Adjustment to reflect dividend of shares on outstanding shares of
Telephony Group Common Stock . . . . . . . . . . . . . . . . . . 50 million
-----------
Number of Shares Issuable with Respect to the Telephony Group
Inter Group Interest after dividend . . . . . . . . . . . . . . . 150 million
===========
</TABLE>
o The Telephony Group Outstanding Interest Fraction would be
9.1%, calculated as follows:
15 MILLION
------------------------
15 MILLION + 150 MILLION
IV-7
<PAGE> 147
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 90.9% in the Telephony
Group. The Telephony Group Outstanding Interest Fraction and
the Telephony Group Inter- Group Interest Fraction would be
unchanged from the corresponding percentages prior to the
dividend.
o The Company would have 810 million authorized and unissued
shares of Telephony Group Common Stock remaining (825 million
minus 15 million issued and outstanding.)
TELEPHONY GROUP COMMON STOCK DIVIDEND ON TCI GROUP COMMON STOCK
Assume an aggregate of 800 million shares of TCI Group Common Stock
are outstanding and the Company declares a dividend of one-tenth of one share
of Telephony Group Common Stock on each outstanding share of TCI Group Common
Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding . . . . . . . . . . . . . . . . . 10 million
Newly issued shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 million
----------
Total shares issued and outstanding after dividend . . . . . . . . . . . . 11 million
==========
</TABLE>
o Any dividend of shares of Telephony Group Common Stock on the
outstanding shares of TCI Group Common Stock will be treated
as a dividend payable from the Number of Shares Issuable with
Respect to the Telephony Group Inter-Group Interest. As a
result, the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest would decrease by the
number of shares of Telephony Group Common Stock distributed
on the outstanding shares of TCI Group Common Stock as a
dividend.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Telephony Group
Inter-Group Interest prior to dividend . . . . . . . . . . . . . 100 million
Shares distributed on outstanding shares of TCI Group Common Stock 1 million
-----------
Number of Shares Issuable with Respect to the Telephony Group
Inter Group Interest after dividend . . . . . . . . . . . . . . . 99 million
===========
</TABLE>
The Company will not distribute to holders of TCI Group Common Stock
as a dividend a number of shares of Telephony Group Common Stock
exceeding the Number of Shares Issuable with Respect to the Telephony
Group Inter- Group Interest.
o The Telephony Group Outstanding Interest Fraction would be
10%, calculated as follows:
11 MILLION
-----------------------
11 MILLION + 99 MILLION
The Telephony Group Inter-Group Interest Fraction would
accordingly represent an interest of 90% in the Telephony
Group.
o The Company would have 814 million authorized and unissued
shares of Telephony Group Common Stock remaining (825 million
minus 11 million issued and outstanding).
CERTAIN CONVERSION, REDEMPTION AND SPECIAL DIVIDEND PROVISIONS
The following illustrations reflect (a) conversion of the Telephony
Group Common Stock at the option of the Company, (b) mandatory dividend,
redemption or conversion of the Telephony Group Common Stock following the
Disposition of all or substantially all of the properties and assets of the
Telephony Group and (c) redemption of all of the Telephony Group Common Stock
in exchange for stock of a subsidiary holding all the assets and liabilities of
the Telephony Group, in each case assuming that (i) the number of outstanding
shares of Telephony Group Common Stock is 10 million and (ii) the Number of
Shares Issuable with Respect to the Telephony Group Inter-Group Interest is 100
million.
IV-8
<PAGE> 148
CONVERSION AT THE OPTION OF THE COMPANY
Assume that the Company elects to convert the Telephony Group Common
Stock into TCI Group Common Stock at the Telephony Group Optional Conversion
Ratio, the Telephony Group Private Market Value is determined to be $2.2
billion and the number of shares of Telephony Group Common Stock deemed to be
issued upon the conversion, exercise or exchange of Convertible Securities that
are convertible into or exercisable or exchangeable for Telephony Group Common
Stock is 10 million.
o The Adjusted Outstanding Shares of Telephony Group Common
Stock would be 120 million (representing the sum of (i) the
number of outstanding shares of Telephony Group Common Stock,
(ii) the Number of Shares Issuable with Respect to the
Telephony Group Inter-Group Interest, and (iii) the number of
shares of Telephony Group Common Stock deemed to be issued
upon the conversion, exercise or exchange of Convertible
Securities convertible into or exercisable or exchangeable for
Telephony Group Common Stock), calculated as follows:
10 MILLION + 100 MILLION + 10 MILLION
o The Telephony Group Common Stock Per Share Value would be
$18.33 (representing the quotient of the Telephony Group
Private Market Value ($2.2 billion) and the Adjusted
Outstanding Shares of Telephony Group Common Stock (120
million)).
o In this case, assuming that the average Market Value of the
Series A TCI Group Common Stock for the 20- Trading Day period
ending on the Trading Day preceding the date as of which the
Telephony Group Private Market Value is determined is $15, the
Telephony Group Optional Conversion Ratio would be 1.222
(representing the quotient of the Telephony Group Common Stock
Per Share Value ($18.33) and such average Market Value of the
Series A TCI Group Common Stock ($15)), and each outstanding
share of Telephony Group Common would be converted into 1.222
shares of TCI Group Common Stock.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF TELEPHONY GROUP COMMON STOCK
Assume that a Disposition of all (not merely substantially all) of the
properties and assets of the Telephony Group occurs and the Net Proceeds from
such Disposition equal $2.2 billion.
o If the Company elected to redeem all outstanding shares of
Telephony Group Common Stock, the aggregate redemption price
would be $200 million (representing the product of the
Telephony Group Outstanding Interest Fraction and the Net
Proceeds of such Disposition), calculated as follows:
10 MILLION X $2.2 BILLION
------------------------
10 MILLION + 100 MILLION
In this case, each outstanding share of Telephony Group Common
Stock would be redeemed in exchange for $20 per share
(representing the quotient of the aggregate redemption price
($200 million) and the number of outstanding shares of
Telephony Group Common Stock (10 million)).
o If the Company elected to convert the Telephony Group Common
Stock into TCI Group Common Stock, assuming that the Market
Value of one share of Series A Telephony Group Common Stock on
each Trading Day during the ten-Trading Day period beginning
on the 16th Trading Day following the consummation of such
Disposition is $20 and the Market Value of one share of Series
A TCI Group Common Stock on each Trading Day during such
period is $15, the Telephony Group Common Stock would be
converted into TCI Group Common Stock at a ratio of 1.467
(representing 110% of the average daily ratio during such
period of
IV-9
<PAGE> 149
the Market Value of one share of Series A Telephony Group
Common Stock to the Market Value of one share of Series A TCI
Group Common Stock) shares of TCI Group Common Stock for each
share of Telephony Group Common Stock.
Assume that a Disposition of substantially all (but not all) of the
properties and assets of the Telephony Group occurs and the Net Proceeds from
such Disposition equal $2.2 billion.
o If the Company elected to pay a dividend to the holders of
Telephony Group Common Stock, the aggregate amount of such
dividend would be $200 million (representing the product of
the Telephony Group Outstanding Interest Fraction and the Net
Proceeds of such Disposition), calculated as follows:
10 MILLION X $2.2 BILLION
------------------------
10 MILLION + 100 MILLION
In this case, the TCI Group would be credited, and the
Telephony Group would be charged, with $2 billion, an amount
equal to 999% (representing the ratio of the Telephony Group
Inter-Group Interest Fraction (90.9%) and the Telephony Group
Outstanding Interest Fraction (9.1%)) of the aggregate amount
of such dividend.
o If the Company elected to redeem shares of Telephony Group
Common Stock, the aggregate redemption price would be $200
million (representing the product of the Telephony Group
Outstanding Interest Fraction and the Net Proceeds of such
Disposition), calculated as follows:
10 MILLION X $2.2 BILLION
------------------------
10 MILLION + 100 MILLION
In this case, assuming that the average Market Value of one
share of Series A Telephony Group Common Stock for the
ten-Trading Day period beginning on the 16th Trading Day
following the consummation of such Disposition is $25, an
aggregate of 8 million (equal to the quotient of the aggregate
redemption price and such average Market Value) shares of
Telephony Group Common Stock would be redeemed in exchange for
$25 per share.
o If the Company elected to convert the Telephony Group Common
Stock into TCI Group Common Stock, assuming that the Market
Value of one share of Series A Telephony Group Common Stock on
each Trading Day during the ten-Trading Day period referred to
in the preceding paragraph is $25 and the Market Value of one
share of Series A TCI Group Common Stock on each Trading Day
during such period is $15, the Telephony Group Common Stock
would be converted into TCI Group Common Stock at a ratio of
1.833 (representing 110% of the average daily ratio during
such period of the Market Value of one share of Series A
Telephony Group Common Stock to the Market Value of one share
of Series A TCI Group Common Stock) shares of TCI Group Common
Stock for each share of Telephony Group Common Stock.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
Assume that the Company elects to redeem all of the outstanding shares
of Telephony Group Common Stock in exchange for shares of common stock of the
Telephony Group Subsidiary and that the total number of outstanding shares of
common stock of the Telephony Group Subsidiary owned by the Company is 220
million.
o In this case, shares of Telephony Group Common Stock would be
redeemed in exchange for an aggregate number of shares of
common stock of the Telephony Group Subsidiary equal to 30
million (representing the product of the Telephony Group
Outstanding Interest Fraction and the number of shares of
common stock of the Telephony Group Subsidiary), calculated as
follows:
IV-10
<PAGE> 150
10 MILLION X $220 MILLION
------------------------
10 MILLION + 100 MILLION
In this case, each outstanding share of Telephony Group Common
Stock would be redeemed in exchange for 2 shares of common
stock of the Telephony Group Subsidiary, and the Company would
retain 200 million shares of common stock of the Telephony
Group Subsidiary.
IV-11
<PAGE> 151
APPENDIX V
FINANCIAL INFORMATION
Index to Appendix V
<TABLE>
<CAPTION>
Page
Numbers
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES:
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1995, 1994 and 1993 V-3
Independent Auditors' Report V-24
Consolidated Balance Sheets,
December 31, 1995 and 1994 V-25
Consolidated Statements of Operations,
Years ended December 31, 1995, 1994 and 1993 V-27
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1995, 1994, 1993 V-28
Consolidated Statements of Cash Flows,
Years ended December 31, 1995, 1994 and 1993 V-31
Notes to Consolidated Financial Statements,
December 31, 1995, 1994 and 1993 V-32
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Nine months ended September 30, 1996 and 1995 V-78
Consolidated Balance Sheets,
September 30, 1996 and December 31, 1995 (unaudited) V-87
Consolidated Statements of Operations,
Three month and nine month periods ended September 30, 1996 and 1995
(unaudited) V-89
Consolidated Statement of Stockholders' Equity,
Nine months ended September 30, 1996 (unaudited) V-90
Consolidated Statements of Cash Flows,
Nine months ended September 30, 1996 and 1995 (unaudited) V-91
Notes to Consolidated Financial Statements,
September 30, 1996 (unaudited) V-92
"TELEPHONY GROUP":
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1995, 1994 and 1993 V-107
Independent Auditors' Report V-116
Combined Balance Sheets,
December 31, 1995 and 1994 V-117
Combined Statements of Operations,
Years ended December 31, 1995, 1994 and 1993 V-118
Combined Statements of Combined Equity,
Years ended December 31, 1995, 1994, 1993 V-119
Combined Statements of Cash Flows,
Years ended December 31, 1995, 1994 and 1993 V-120
Notes to Combined Financial Statements,
December 31, 1995, 1994 and 1993 V-121
</TABLE>
(CONTINUED)
V-1
<PAGE> 152
APPENDIX V
FINANCIAL INFORMATION
Index to Appendix V
<TABLE>
<CAPTION>
Page
Numbers
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Nine months ended September 30, 1996 and 1995 V-138
Combined Balance Sheets,
September 30, 1996 and December 31, 1995 (unaudited) V-146
Combined Statements of Operations,
Three month and nine month periods ended September 30, 1996 and 1995
(unaudited) V-147
Combined Statement of Combined Equity,
Nine months ended September 30, 1996 (unaudited) V-148
Combined Statements of Cash Flows,
Nine months ended September 30, 1996 and 1995 (unaudited) V-149
Notes to Combined Financial Statements,
September 30, 1996 (unaudited) V-150
"TCI GROUP":
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Years ended December 31, 1995, 1994 and 1993 V-162
Independent Auditors' Report V-180
Combined Balance Sheets,
December 31, 1995 and 1994 V-181
Combined Statements of Operations,
Years ended December 31, 1995, 1994 and 1993 V-183
Combined Statements of Combined Equity,
Years ended December 31, 1995, 1994, 1993 V-184
Combined Statements of Cash Flows,
Years ended December 31, 1995, 1994 and 1993 V-187
Notes to Consolidated Financial Statements,
December 31, 1995, 1994 and 1993 V-188
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Nine months ended September 30, 1996 and 1995 V-227
Combined Balance Sheets,
September 30, 1996 and December 31, 1995 (unaudited) V-239
Combined Statements of Operations,
Three month and nine month periods ended September 30, 1996 and 1995
(unaudited) V-241
Combined Statement of Combined Equity,
Nine months ended September 30, 1996 (unaudited) V-242
Combined Statements of Cash Flows,
Nine months ended September 30, 1996 and 1995 (unaudited) V-243
Notes to Combined Financial Statements,
September 30, 1996 (unaudited) V-244
</TABLE>
V-2
<PAGE> 153
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Summary of Operations
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated on
August 4, 1994 and was structured as a tax free exchange of Class A and Class B
shares of both companies and preferred stock of Liberty for like shares of a
newly formed holding company, TCI/Liberty Holding Company. In connection with
the TCI/Liberty Combination, Old TCI changed its name to TCI Communications,
Inc. ("TCIC") and TCI/Liberty Holding Company changed its name to
Tele-Communications, Inc. ("TCI" or the "Company").
During the fourth quarter of 1994, the Company was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable and
Communications; Programming; International Cable and Programming ("TINTA"); and
Technology/Venture Capital. The Company reorganized its structure to provide
for financial and operational independence in the four operating units, each
under the direction of its own chief executive officer, while maintaining the
synergies and scale economies provided by a common corporate parent. While
neither the International Cable and Programming unit nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in
nature to warrant separate operational focus.
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty Group
Stock") which is intended to reflect the separate performance of TCI's business
which produces and distributes cable television programming services ("Liberty
Media Group"). While the Liberty Group Stock constitutes common stock of TCI,
the issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to Liberty
Media Group (the "Distribution") to its security holders of record on August 4,
1995. Additionally, the stockholders of TCI approved the redesignation of the
previously authorized TCI Class A and Class B common stock into Series A TCI
Group and Series B TCI Group common stock ("TCI Group Stock"). The TCI Group
Stock is intended to reflect the performance of those businesses of the Company
not attributed to Liberty Media Group. Such businesses are referred to herein
as "TCI Group". Liberty Media Group and TCI Group are sometimes herein after
referred to individually as a "Group".
Subsequent to consummation of the TCI/Liberty Combination, the Company
operates principally in two industry segments: cable and communications
services and programming services. Home shopping is a programming service
which includes a retail function. Separate amounts for the aforementioned home
shopping services have been provided to enhance the readers understanding of
the Company. The Technology/Venture Capital and the International Cable and
Programming portions of the Company's business have been included with cable
and communications services due to their relative insignificance. The amounts
provided for the Company's programming services segment represent the results
of Liberty Media Group since the date of the TCI/Liberty Combination. The
tables below set forth for the periods presented, the percentage relationship
that certain items bear to revenue. This summary provides trend data relating
to the normal recurring operations of the Company. Other items of significance
are discussed under separate captions below.
V-3
<PAGE> 154
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1995 1994 1993
----------------- ------------------ ---------------------
amounts in millions, except for percentages
<S> <C> <C> <C> <C> <C> <C>
Cable and Communications Services:
- ----------------------------------
Revenue 100% $ 5,384 100% $ 4,247 100% $ 4,153
Operating costs and expenses before
depreciation and amortization 64 3,457 58 2,474 56 2,326
Depreciation and amortization 24 1,274 23 992 22 911
---- ------- ---- ------- ----- -------
Operating income 12% $ 653 19% $ 781 22% $ 916
==== ======= ==== ======= ===== =======
Programming Services:
- --------------------
Electronic Retailing Services:
Net sales 100% $ 1,019 100% $ 482 -- $ --
Cost of sales 69 702 65 313 -- --
Operating costs and expenses before
depreciation and amortization 35 359 30 145 -- --
Depreciation and amortization 4 43 3 15 -- --
---- ------- ---- ------- ----- -------
Operating income (loss) (8)% $ (85) 2% $ 9 -- $ --
==== ======= ==== ======= ===== =======
Other Programming Services:
Revenue 100% $ 521 100% $ 240 -- $ --
Operating costs and expenses before
depreciation and amortization 94 492 96 231 -- --
Depreciation and amortization 11 55 5 11 -- --
---- ------- ---- ------- ----- -------
Operating loss (5)% $ (26) (1)% $ (2) -- $ --
==== ======= ==== ======= ===== =======
Eliminations
- ------------
Revenue 100% $ (73) 100% $ (33) -- $ --
Operating costs and expenses before
depreciation and amortization (100) (73) (100) (33) -- --
---- ------- ---- ------- ----- -------
Operating income --% $ -- --% $ -- --% $ --
==== ======= ==== ======= ===== =======
Tele-Communications, Inc. Consolidated:
- --------------------------------------
Revenue 100% $ 6,851 100% $ 4,936 100% $ 4,153
Cost of sales 10 702 6 313 -- --
Operating costs and expenses before
depreciation and amortization 62 4,235 57 2,817 56 2,326
Depreciation and amortization 20 1,372 21 1,018 22 911
---- ------- ---- ------- ----- -------
Operating income 8% $ 542 16% $ 788 22% $ 916
==== ======= ==== ======= ===== =======
</TABLE>
V-4
<PAGE> 155
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Cable and Communications Services
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the Federal Communications Commission ("FCC") adopted certain rate
regulations required by the 1992 Cable Act and imposed a moratorium on certain
rate increases. As a result of such actions, the Company'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. The regulations established benchmark rates in 1993 which were
further reduced in 1994, to which the rates charged by cable operators for
Regulated Services were required to conform.
The FCC also allowed cable operators to justify rates under "cost of
service" rules, which allow "high cost" systems to establish rates in excess of
the benchmark level. The FCC's interim cost of service rules allowed a cable
operator to recover through rates for regulated cable services its normal
operating expenses plus a rate of return equal to 11.25 percent on the rate
base. However, the FCC significantly limited the inclusion in the rate base of
acquisition costs in excess of the book value of tangible assets. As a result,
the Company pursued cost of service justifications in only a few cases. On
December 15, 1995, the FCC adopted slightly more favorable cost of service
rules.
The regulations also provide mechanisms for adjusting rates when
regulated tiers are affected by channel additions or deletions. Additional
programming costs resulting from channel additions can be accorded the same
external treatment as other program costs increases, and cable operators
presently are permitted to recover a mark-up on their programming expenses.
Under one option, operators are allowed a flat ($.20) fee increase per channel
added to an existing cable programming services tier ("CPST"), with an aggregate
cap on such increases ($1.20) plus a license fee reserve ($.30) through 1996.
In 1997, an additional flat ($.20) fee increase will be available, and the
license fees for additional channels and for increases in existing channels will
no longer be subject to the aggregate cap. This optional approach for adding
services is scheduled to expire on December 31, 1997.
The Company reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 in response to FCC regulations. The Company believes that it
has complied in all material respects with the provisions of the 1992 Cable
Act, including its rate setting provisions. However, the Company's rates for
Regulated Services are subject to review by the FCC, if a complaint has been
filed, or by the appropriate franchise authority, if such authority has been
certified. If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
On October 30, 1995, the FCC accepted for comment a proposed resolution
of all complaints against the CPST currently pending against cable systems owned
by the Company. If the proposed resolution is accepted by the FCC, the Company
will settle all pending complaints by a one-time credit to each subscriber in
CPST regulated franchises. The aggregate amount of such credits is
approximately $9 million and had previously been accrued by the Company. In
addition, the FCC will find that the CPST rates in CPST regulated franchises on
September 15, 1995 comply with federal regulations. The Company has committed
not to file any additional cost-of-service filings until May 15, 1996 in
franchises that were subject to CPST regulation prior to September 15, 1995.
However, the Company will be able to avail itself of the other mechanisms under
FCC rules to recover costs, including abbreviated cost-of-service filings
covering system rebuilds and upgrades. In the proposed resolution, the Company
does not admit any violation of, or any failure to conform to, the 1992 Cable
Act or the rules promulgated thereunder. The comment period has ended and the
Company is awaiting final action by the FCC.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Telecom Act") was signed into law. Because the 1996 Telecom Act does not
deregulate CPST rates until 1999 (and basic service tier rates will remain
regulated thereafter), the Company believes that the 1993 and 1994 rate
regulations have had and will continue to have a material adverse effect on its
results of operations.
Revenue from Cable and Communications increased 26% from 1994 to 1995.
Such increase is due to the effect of certain acquisitions (13%), growth in the
Company's satellite subscribers (4%), increases in the rates charged to the
Company's subscribers from inflation increases, the provision of new channels
and increases in equipment costs (4%), growth in subscriber levels within the
Company's cable television systems (4%) and an increase in the Company's long-
distance voice and data service revenue (1%).
Revenue increased 2% from 1993 to 1994. Such increase was the result
of the TCI/Liberty Combination in August of 1994 (1%), growth in subscriber
levels within the Company's cable television systems (5%), the effect of
certain other acquisitions (2%) and certain new services (1%), net of a
decrease in revenue (4%) due to rate reductions required by rate regulation
implemented pursuant to the 1992 Cable Act and a decrease in revenue (3%) due
to the transfer of Netlink USA ("Netlink") to the Programming unit in the
Reorganization. Netlink's operations were included in Cable and Communications
Services in 1993, but have been reflected in Programming Services for all of
1994 and 1995. In the second half of 1994, as a result of the FCC revision of
its rate regulations which reduced benchmark rates, the Company experienced an
additional decrease, in excess of that which was incurred in 1993, in the price
charged for its Regulated Services.
Included in the Company's revenue from cable operations of $5,105
million, $4,203 million and $4,098 million for the years ended December 31,
1995, 1994 and 1993, respectively, is $5,038 million, $4,177 million and $4,098
million attributable to TCIC and $67 million, $26 million and $0 attributable
to other cable operations.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Operating costs and expenses before depreciation and amortization
increased 40% for the year ended December 31, 1995. Exclusive of the affects
of acquisitions (13%) and Primestar (7%) (see discussion below), such expenses
increased 20%. Programming expenses accounted for the majority of such
increase. In this regard, programming expenses represented $1,251 million
(36%), $903 million (36%) and $740 million (32%) of operating costs and
expenses before depreciation and amortization during 1995, 1994 and 1993,
respectively. The Company cannot determine whether and to what extent
increases in the cost of programming will affect its future operating costs.
However, such programming costs have increased at a greater percentage than
increases in revenue of Regulated Services. The Company will experience an
increase in programming costs in the first five months of 1996 without
increasing its rates charged to its customers at that time. In June of 1996,
the Company will be entitled to an increase in its service rates for increased
programming costs and inflation. FCC regulations provide for the Company to
further increase its rates by an additional amount intended to recover
increased programming costs incurred during the first five months of 1996 and
not previously recovered, as well as interest on said amounts.
During 1995, the Company changed its approach to how it ordered and
stored excess cable distribution equipment. The Company created material
support centers and consolidated all of its excess inventory. In conjunction
with this change, the Company incurred $5 million of costs. Additionally,
during 1995, the Company incurred approximately $22 million in expenses related
to initiatives to improve its customer service, to begin the redesign of its
computer and accounting systems and to promote and market the Company's
products. During the fourth quarter of 1995, the Company incurred $25 million
in expenses related to payment of bonuses to the majority of its employees.
The Company has an investment in a direct broadcast satellite
partnership, Primestar Partners ("Primestar"). Primestar provides programming
and marketing support to each of its cable partners who then provide satellite
service to their customers. During 1995, the Company's revenue and expenses
related to such satellite service have increased significantly as the number of
the Company's Primestar subscribers increased from approximately 100,000
subscribers at January 1, 1995 to approximately 550,000 subscribers at December
31, 1995. During the year ended December 31, 1995, revenue increased from $30
million to $207 million and operating, selling, general and administrative
expenses increased from $18 million to $197 million, as compared to the year
ended December 31, 1994. The Company incurs significant sales commissions and
installation costs when customers initially subscribe. Therefore, as long
as the Company continues to launch this new service and increase its Primestar
subscriber base at such a rapid pace, management expects operating costs and
expenses will increase as well.
Operating costs and expenses before depreciation and amortization
increased 6% for the year ended December 31, 1994 compared to the corresponding
period of 1993. The consolidation of Liberty resulted in an increase of $18
million in operating, selling, general and administrative expenses from
Liberty's cable television systems. In 1993, the Company incurred certain
one-time direct charges relating to the implementation of the FCC rate
regulations.
The increase in the Company's depreciation expense in 1995 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems.
The systems, which facilitate digital transmission of voice, video and data
signals, will have optical fiber to neighborhood nodes with coaxial cable
distribution downstream from that point. The increase in amortization expense
in 1995 is due to acquisitions.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
The Company records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
Electronic Retailing Services
This information reflects the results of Home Shopping Network, Inc.
("HSN"), which became a consolidated subsidiary of the Company in the
TCI/Liberty Combination. HSN's primary business is the sale of merchandise to
viewers of the home shopping programming produced and distributed by Home
Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of HSN.
During the year ended December 31, 1995, HSN's net sales increased
from $482 million to $1,019 million. Such increase is due to the consolidation
of HSN in August of 1994 in connection with the TCI/Liberty Combination.
However, on an annualized basis, HSN's net sales decreased approximately 10%.
Such annualized decrease is the net affect of a 19% decease in the number of
packages shipped, partially offset by a 9% increase on the average price per
unit sold.
In September 1994, HSN appointed new management personnel to institute
procedures intended to improve purchasing and other merchandising practices.
Their strategies included offering a greater variety of products, developing
strong private label lines, selling higher margin items and offering name brand
and other high quality merchandise. These efforts were aimed at long-term
improvements in sales by attracting new customers and increasing the frequency
of repeat purchases. However, the impact of these strategies was to adversely
affect sales during 1995.
Since June 5, 1995, HSN has operated two full-time networks renamed
HSN, the primary network, and Spree!. On August 5, 1995, HSN relaunched the
HSN network with more scheduled programs and theme related shows, new sets,
graphics and music. During the third quarter of 1995, HSN relaunched the
Spree! network with a more spontaneous format, new graphics and music. These
changes were designed to eliminate programming redundancies, distinguish the
networks and reach a broader range of potential customers.
Management of HSN also instituted promotional programs to help
increase sales, including a national advertising campaign and a "no interest --
no payments" credit promotion through February 1996 for certain purchases made
during the third and fourth quarters of 1995 using HSN's private label credit
card. Although the credit promotion program was successful, its effect was not
enough to offset the decline in sales discussed above.
Additionally, $4 million of the restructuring charges for the year
ended December 31, 1995, represents HSN management's estimate of costs to be
incurred in connection with the closing of HSN's Reno, Nevada, distribution
center, which was accomplished in June 1995. The decision to close the Reno
distribution center was based on an evaluation of HSN's overall distribution
strategy. Management of HSN believes that consolidation of HSN's distribution
facilities will result in better operating efficiencies and improved service
to customers.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
HSN's cost of sales increased from $313 million to $702 million during
1995. As a percent of sales, cost of sales increased from 65% in 1994 to 69%
in 1995. The increase in the cost of sales percentages primarily relate to
warehouse sales and other promotional events. Such events included price
discounts to (i) facilitate the restructuring of HSN's distribution center,
(ii) make room for new holiday merchandise and (iii) adjust inventory levels
and product mix. In addition, cost of sales for the year ended December 31,
1995 includes a $12 million increase in HSC's inventory carrying value
adjustment related to products which are inconsistent with HSN's new sales and
merchandise philosophy.
HSN believes that future levels of net sales of HSC will be dependent,
in large part, on program carriage, market penetration and merchandising
management. Program carriage is defined as the number of cable systems and
broadcast television stations that carry HSC programming. Market penetration
represents the level of active purchasers within a market.
Cable television systems and affiliated broadcast television stations
broadcast HSC programming under affiliation agreements with varying original
terms. HSN seeks to increase the number of cable television systems and
broadcast television stations that televise HSC programming while evaluating
the expected profitability of each contract.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
On November 27, 1995, the Company announced that it had agreed to
exchange its controlling interest in HSN for shares of Silver King
Communications, Inc. ("Silver King"). The Company will receive approximately
11 million newly issued shares of Silver King in exchange for its 37.5 million
shares of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995 pursuant to
which an option owned by Liberty Media Group to purchase 2 million shares of
Silver King Class B common stock (the "Option") (which shares would constitute
voting control of Silver King) would be transferred to Silver Management
Company ("Silver Company"), an entity in which Liberty Media Group would own
all of the non-voting equity interests (which would constitute substantially
all of the equity of such entity) and Mr. Diller would own all of the voting
equity interests. Silver Company would thereafter exercise the Option and hold
the shares of Silver King Class B Common Stock purchased thereunder. In an
amendment to such agreement entered into in November 1995, Liberty Media Group
agreed to contribute all of its shares of HSN (which shares constitute
approximately 41% of the equity of HSN and approximately 90% of the voting
power of HSN) to Silver Company in return for additional non-voting equity
interests in Silver Company. Following such contribution, Silver Company would
exchange such HSN shares with Silver King for additional shares of Silver King
Common Stock and Class B Common Stock (thereby increasing Silver Company's
controlling interest in Silver King to in excess of 80% of the voting power of
Silver King). Each such transaction is subject to the satisfaction of certain
conditions, including the receipt of all necessary regulatory consents and
approvals. If consummated, HSN would cease to be a subsidiary of the Company
and therefore, the financial results of HSN would not be consolidated with the
financial results of Liberty Media Group. Although the Company would cease to
possess voting control over HSN, it would continue to have an indirect equity
interest in HSN through its ownership of the equity securities of Silver
Company. No assurance can be given that the transaction will be consummated.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Other Programming Services
Revenue from the Company's Other Programming Services increased $281
million or 117% from 1994 to 1995, and operating costs and expenses before
depreciation and amortization increased $261 million or 113%. Such increases
are primarily due to the TCI/Liberty Combination.
Revenue of TCI's consolidated entertainment and information
programming services represented $240 million of total consolidated revenue for
1994. This revenue was attributable to subscription and advertising revenue at
TCI's consolidated sports programming businesses ($91 million), revenue from
Netlink, a marketer and distributor of programming to the United States home
satellite dish subscriber market ($132 million) and subscription revenue
generated by Southern Satellite Systems, Inc. ("Southern") and Encore Media
Corporation ("Encore") ($17 million).
On October 31, 1995, Liberty Media Group announced that it had entered
into a binding agreement in principle with The News Corporation Limited ("News
Corp.") and TINTA. In the United States, Liberty Media Group and News Corp.
agreed to form a partnership (the "Fox-Liberty Venture") into which Liberty
Media Group will contribute interests in its national and regional sports
networks and into which News Corp. will contribute its fx cable network and
certain other assets. Upon consummation, Liberty Media Group will receive a 50%
interest in the Fox-Liberty Venture and $350 million in cash. The fx Network
will be transformed into a nationally distributed, general entertainment and
sports network. The regional sports networks currently operated under the Prime
Sports name will be relaunched under the Fox Sports banner.
Internationally, News Corp., and a 50/50 partnership formed by Liberty
Sports, a wholly owned subsidiary of Liberty Media Group, and TINTA (the
"Liberty-TINTA Partnership") have agreed to form a venture to operate currently
existing sports services in Asia, Latin American and Australia and a variety of
new sports services throughout the world except in the United Kingdom, Japan
and New Zealand where prior arrangements preclude an immediate collaboration.
The Liberty-TINTA Partnership will own 50% of the international venture with
News Corp. owning the other 50%. News Corp. is contributing various
international sports rights, including the Star Sports channel which is
broadcast throughout Asia as part of the Star package of services. The
Liberty-TINTA Partnership is contributing Prime Deportiva, a Spanish language
sports service distributed in Latin America and in Hispanic markets in the
United States, an interest in Torneos y Competencias S.A., an Argentinean
sports programming and production business, various international sports and
satellite transponder rights and cash. The Liberty-TINTA Partnership will also
contribute their 50% interest in Premiere Sports and All-Star Sports in
Australia. Both are 24-hour sports services available via MMDS or cable
television in Australia.
The closing of the formation of both the US Venture and the
International Venture is expected to occur during 1996.
Other Income and Expense
The Company's interest expense increased $225 million or 29% during
1995, as compared to 1994 and $54 million or 7% during 1994, as compared to
1993. Such increases are the result of higher interest rates and debt
balances. The Company's weighted average interest rate on borrowings was 8.1%,
7.5% and 7.2% during 1995, 1994 and 1993, respectively.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
The Company is a shareholder of TeleWest plc ("TeleWest"), a company
that is currently operating and constructing cable television and telephone
systems in the United Kingdom ("UK"). TeleWest, which is accounted for under
the equity method, had a carrying value at December 31, 1995 of $550 million
and comprised $70 million, $43 million and $28 million of the Company's share
of its affiliates' losses in 1995, 1994, and 1993, respectively. In addition,
the Company has other less significant equity method investments in video
distribution and programming businesses located in the UK, other parts of
Europe, Asia, Latin America and certain other foreign countries. In the
aggregate, such other equity method investments had a carrying value of $354
million at December 31, 1995 and accounted for $62 million and $50 million of
the Company's share of its affiliates' losses in 1995 and 1994, respectively.
TeleWest was formed during the fourth quarter of 1995 upon the merger
(the "TeleWest Merger") of TeleWest Communications plc (formerly TCI/US WEST
Cable Communications Group or "TeleWest UK") ("TeleWest Communications") with
SBC (CableComms)(UK). Prior to the TeleWest Merger, the Company had an
effective ownership interest of approximately 36% in TeleWest Communications,
and subsequent to the TeleWest Merger the Company has an effective ownership
interest of approximately 27% in TeleWest. As a result of the TeleWest Merger,
the Company recognized a gain of $165 million (before deducting the related tax
expense of $58 million). Such gain represents the difference between the
Company's recorded cost for TeleWest Communications and the Company's effective
proportionate share of TeleWest's net assets. There is no assurance that the
Company will realize similar gains in future periods.
As a result of the TeleWest Communications November 1994 initial
public offering (the "TeleWest IPO") and the associated dilution of the
Company's ownership interest of TeleWest Communications, the Company recognized
a gain amounting to $161 million (before deducting the related tax expense of
$57 million) in 1994.
TeleWest, which is currently constructing broadband cable television
and telephony networks in the UK, has incurred net losses since its inception.
Although there is no assurance, the Company believes (i) that the continued
expansion of TeleWest's networks ultimately will provide TeleWest with a
revenue base that will exceed its expenses and (ii) that TeleWest's present and
future sources of liquidity (including the net proceeds from the TeleWest IPO
and certain bank credit facilities) will be sufficient to meet TeleWest's
liquidity requirements for the foreseeable future. The Company has no present
intention to make significant loans to or investments in TeleWest.
During the year ended December 31, 1995, the Company recognized a gain
amounting to $123 million in connection with the sale to the public of 20
million shares of common stock (the "IPO") and the issuance of shares of common
stock for an investment in an Argentine programming entity (the "TYC
Acquisition") by TINTA. There is no assurance that the Company will realize
similar gains in future periods.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Effective February 9, 1995, QVC Programming Holdings, Inc. (the
"Purchaser"), a corporation jointly owned by Comcast Corporation and the
Company, was merged (the "QVC Merger") with and into QVC, Inc. ("QVC") with QVC
continuing as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC. Upon consummation of the QVC Merger, the
Company was deemed to exercise significant influence over QVC and, accordingly,
adopted the equity method of accounting for its investment in QVC. The
accompanying 1994 financial statements have been restated to reflect such
change in accounting. Such restatement resulted in an increase in the
Company's net earnings of $5 million for the year ended December 31, 1994.
During 1995, BET Holdings, Inc. ("BET") repurchased a portion of its
own common stock. As a result of the repurchase, the Company's ownership of
BET was increased from 19% to 22%. Therefore, the Company is deemed to
exercise significant influence over BET and, has accordingly adopted the equity
method of accounting for its investment in BET. The accompanying 1994 and 1993
financial statements have been restated to reflect such change in accounting.
Such restatement resulted in an increase in the Company's net earnings of $2
million for each of 1994 and 1993.
On July 11, 1994, Rainbow Program Enterprise ("Rainbow") purchased
49.9% of Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with the
disposition of AMC was $183 million and is included in the Company's share of
Liberty's earnings prior to the TCI/Liberty Combination.
Net Earnings (Loss)
The Company's net loss (before preferred stock dividend requirements)
of $171 million for the year ended December 31, 1995 represented a decrease of
$233 million as compared to the Company's net earnings (before preferred stock
dividend requirements) of $62 million for 1994. Such decrease is due primarily
to a decrease in operating income, a decrease in share of earnings of
affiliates (a significant portion of which results from the gain recognized in
1994 by Liberty upon the sale of its investment in AMC), and an increase in
interest expense partially offset by the recognition of a gain resulting from
the TINTA IPO.
The Company's net earnings (before preferred stock dividend
requirements) of $62 million for the year ended December 31, 1994 represented
an increase of $67 million as compared to the Company's net loss (before
preferred stock dividend requirements) of $5 million for the corresponding
period of 1993. Such increase is principally the result of the effect of
improved share of earnings from Liberty prior to the TCI/Liberty Combination
(principally resulting from the gain recognized by Liberty upon the sale of its
investment in AMC), the recognition of a gain resulting from the TeleWest IPO,
and the reduction in income tax expense (principally resulting from the
required recognition in the third quarter of 1993 of the cumulative effect of
the change in the Federal income tax rate from 34% to 35%), net of the effect
of the aforementioned reduction in rates charged for Regulated Services and the
decrease in gain on disposition of assets.
Inflation has not had a significant impact on the Company's results of
operations during the three-year period ended December 31, 1995.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Recent Accounting Pronouncements
In March of 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning after
December 15, 1995. Statement No. 121 requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement No. 121 effective January 1, 1996. The
effect of such adoption is not expected to be significant.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in
October 1995. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans as well as transactions
in which an entity issues its equity instruments to acquire goods or services
from non-employees. The Company will include the disclosures required by
Statement No. 123 in the notes to future financial statements.
Liquidity and Capital Resources
During 1994, subsidiaries of the Company, Comcast Corporation
("Comcast"), Cox Communications, Inc. ("Cox" and together with the Company and
Comcast, the "Cable Partners") and Sprint Corporation ("Sprint") formed a
partnership ("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, in which
the Company owns an indirect 30% interest, the partners participated in
auctions ("PCS Auctions") of broadband personal communications services ("PCS")
licenses conducted by the FCC. In the first round auction, which concluded
during the first quarter of 1995, WirelessCo was the winning bidder for PCS
licenses for 29 markets, including New York, San Francisco-Oakland-San Jose,
Detroit, Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-
Fort Lauderdale. The aggregate license cost for these licenses was
approximately $2.1 billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and agreed to make capital contributions to APC
equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox, which holds a pioneer
preference PCS license for the Los Angeles-San Diego market, and WirelessCo
have also agreed on the general terms and conditions upon which Cox (with a 51%
interest) and WirelessCo (with a 49% interest) would form a partnership to hold
and develop a PCS system using the Los Angeles-San Diego license. APC and the
Cox partnership would affiliate their PCS systems with WirelessCo and be part
of WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand.
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3% interest.
PhillieCo was the winning bidder in the first round auction for a PCS license
for the Philadelphia market at a license cost of $85 million. To the extent
permitted by law, the PCS system to be constructed by PhillieCo would also be
affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial.
In March of 1995, the Cable Partners and Sprint ( collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
MajorCo, L.P. ("MajorCo"), to which they contributed their respective interests
in WirelessCo and through which they formed another partnership, NewTelco, L.P.
("New Telco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis.
The Cable Partners agreed to contribute their interests in Teleport
Communications Group, Inc. and TCG Partners (collectively, "TCG") to NewTelco.
TCG is one of the largest competitive access providers in the United States in
terms of route miles.
Effective January 31, 1996, the Partners amended the MajorCo
partnership agreement (the "Partnership Agreement") and certain other
agreements related thereto. Under the Partnership Agreement, the business of
MajorCo and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The Partners intend for
WirelessCo and its subsidiary partnerships to be the exclusive vehicles through
which they engage in the wireless telephony service businesses, subject to
certain exceptions. MajorCo will no longer be authorized to engage in the
business of providing local wireline communications services to residences and
businesses. In connection with the amendment of the Partnership Agreement, the
Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint
have agreed to negotiate in good faith on a market-by-market basis for the
provision of local wireline telephony services over the cable television
facilities of the respective Cable Partner under the Sprint brand. Accordingly,
local wireline telephony offerings in each market would be the subject of
individual agreements to be negotiated with Sprint, rather than being provided
by MajorCo, as originally contemplated. The Cable Partners and Sprint also
reaffirmed their intention to continue to attempt to integrate the business of
TCG with that of MajorCo. In addition, each Cable Partner agreed to certain
restrictions on its ability to offer, promote, or package certain of its
products or services with certain products and services of other persons and
agreed to make its facilities available to Sprint for specified purposes to the
extent and on the terms that it has made such facilities available to others
for such purposes. Such agreements have a term of five years, but under
certain circumstances may terminate after three years.
V-14
<PAGE> 165
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Execution of the foregoing agreements was a condition to the
effectiveness of a previously approved business plan for the build out of
WirelessCo's nationwide network for wireless personal communications services.
Pursuant to the business plan, the Partners are obligated to make additional
cash capital contributions to MajorCo in the aggregate amount of approximately
$1.9 billion during the two-year period that commenced January 1, 1996. The
business plan contemplates that MajorCo will require additional equity
thereafter.
As of January 26, 1995, TCI, TCIC, and TeleCable Corporation
("TeleCable") consummated a transaction whereby TeleCable was merged into TCIC
(the "TeleCable Merger"). The aggregate $1.6 billion purchase price was
satisfied by TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of approximately 42
million shares of TCI Class A common stock and 1 million shares of TCI
Convertible Preferred stock, Series D (the "Series D Preferred Stock") with an
aggregate initial liquidation value of $300 million. The Series D Preferred
Stock, which accrues dividends at a rate of 5.5% per annum, is convertible into
10 million shares of Series A TCI Group Stock and 2.5 million shares of Series
A Liberty Group Stock. The Series D Preferred Stock is redeemable for cash at
the option of TCI after five years and at the option of either TCI or the
holder after ten years.
On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision S.A. and certain affiliated companies (collectively, "Cablevision")
for a purchase price of $282 million, before liabilities assumed. The purchase
price was paid with cash consideration of $195 million and TINTA's issuance of
$87 million principal amount of secured negotiable promissory notes payable to
the selling shareholders. TINTA has an option during the two-year period ended
April 25, 1997 to increase its ownership interest in Cablevision up to 80% at a
cost per subscriber similar to the initial purchase price, adjusted however for
certain fluctuations in applicable foreign currency exchange rates.
In July 1995, TCIC and TCI, entered into certain agreements with
Viacom Inc. ("Viacom") and certain subsidiaries of Viacom regarding the
purchase by TCIC of all of the common stock of a subsidiary of Viacom ("Cable
Sub") which, at the time of purchase, will own Viacom's cable systems and
related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). Cable Sub will also transfer to New Viacom Sub the
proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan
Facility") to be arranged by TCIC, TCI and Cable Sub. Following these
transfers, Cable Sub will retain cable assets with an estimated value at
closing of approximately $2.2 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds
will be non-recourse to Viacom and New Viacom Sub.
V-15
<PAGE> 166
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Viacom will offer to the holders of shares of Viacom Class A Common
Stock and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the
opportunity to exchange (the "Exchange Offer") a portion of their shares of
Viacom Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). The Exchange Offer will be
subject to a number of conditions, including a condition (the "Minimum
Condition") that sufficient tenders are made of Viacom Common Stock that permit
the number of shares of Cable Sub Class A Stock issued pursuant to the Exchange
Offer to equal the total number of shares of Cable Sub Class A Stock issuable
in the Exchange Offer.
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B common stock for $350
million (which will be used to reduce Cable Sub's obligations under the Loan
Facility). At the time of such acquisition, the Cable Sub Class A Stock
received by Viacom stockholders pursuant to the Exchange Offer will
automatically convert into a series of senior cumulative exchangeable preferred
stock (the "Exchangeable Preferred Stock") of Cable Sub with a stated value of
$100 per share (the "Stated Value"). The terms of the Exchangeable Preferred
Stock, including its dividend, redemption and exchange features, will be
designed to cause the Exchangeable Preferred Stock, in the opinion of two
investment banks, to initially trade at the Stated Value. The Exchangeable
Preferred Stock will be exchangeable, at the option of the holder commencing
after the fifth anniversary of the date of issuance, for shares of Series A TCI
Group Stock. The Exchangeable Preferred Stock will also be redeemable, at the
option of Cable Sub, after the fifth anniversary of the date of issuance, and
will be subject to mandatory redemption on the tenth anniversary of the date of
issuance at a price equal to the Stated Value per share plus accrued and unpaid
dividends, payable in cash or, at the election of Cable Sub, in shares of
Series A TCI Group Stock or in any combination of the foregoing. If
insufficient tenders are made by Viacom stockholders in the Exchange Offer to
permit the Minimum Condition to be satisfied, Viacom will extend the Exchange
Offer for up to 15 business days and, during such extension, TCI and Viacom are
to negotiate in good faith to determine mutually acceptable changes in the
terms and conditions for the Exchangeable Preferred Stock and the Exchange
Offer that each believes in good faith will cause the Minimum Condition to be
fulfilled and that would cause the Exchangeable Preferred Stock to trade at a
price equal to the Stated Value immediately following the expiration of the
Exchange Offer. In the event the Minimum Condition is not thereafter met, TCI
and Viacom will each have the right to terminate the transaction. In addition,
either party may terminate the transaction if the Exchange offer has not
commenced by June 24, 1996 or been consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue
Service that the transaction qualifies as a tax-free transaction and the
satisfaction or waiver of all of the conditions of the Exchange Offer. A
request for a letter ruling from the Internal Revenue Service has been filed by
Viacom. The Company believes that, based upon the unique and complex structure
of the transaction, there exists significant uncertainty as to whether a
favorable ruling will be obtained. In light of the foregoing, management of
the Company has concluded that consummation of the transaction is not yet
probable. Accordingly, no assurance can be given that the transaction will be
consummated.
V-16
<PAGE> 167
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenue of $442 million and net earnings
of $34 million. It is expected that if the transaction is consummated, the
Company would account for such acquisition under the purchase method of
accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and
the estimated aggregate Stated Value of the Exchangeable Preferred Stock of
$500 million) would be allocated to the assets and liabilities acquired
according to their respective fair values, with any excess being treated as
intangible assets. As such, the Company will, if such transaction is
consummated, reflect additional interest expense, depreciation, amortization
and minority share of losses of consolidated subsidiaries. On a pro forma
basis, if the transaction had been consummated under its current terms on or
before January 1, 1995, Cable Sub would have reflected loss before taxes of
approximately $51 million for the year ended December 31, 1995. On a pro forma
basis, Cable Sub would reflect an approximate $21 million of preferred stock
dividend requirements on an annual basis assuming, solely for the purpose of
this presentation, a dividend rate of 4.25% per annum on the Exchangeable
Preferred Stock. On a pro forma basis, the Company would reflect the foregoing
financial impacts of Cable Sub in its consolidated results of operations except
that the preferred stock dividend requirement of Cable Sub would be reflected
as minority interest in the Company's statement of operations and the Company
would incur an additional approximately $28 million of interest expense per
year arising from the assumed borrowing by the Company for its $350 million
capital contribution to Cable Sub.
The Company owns shares of common stock and preferred stock of Turner
Broadcasting System, Inc. ("TBS"). On September 22, 1995, the boards of
directors of Time Warner and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of the agreement,
TBS shareholders will receive 0.75 of a Time Warner common share for each TBS
Class A and Class B common share. Each holder of TBS Class C preferred stock
will receive 0.80 of a Time Warner common share for each of the 6 shares of TBS
Class B common stock into which each of the shares of Class C preferred stock
may be converted.
Subject to certain conditions, the Company has agreed to vote its TBS
shares for the TBS/Time Warner Merger. The Time Warner shares of common stock
received by the Company will be exchanged immediately for a series of voting
common stock ("Time Warner Series Common Stock") economically equivalent to the
common stock and placed in a voting trust with Time Warner Chairman, Gerald M.
Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth Network, L.P. ("SportSouth"), a regional sports
cable network, to the Company for approximately $60 million; and Time Warner
has agreed to issue shares of Time Warner Series Common Stock economically
equivalent to 5 million shares of Time Warner common stock to the Company in
exchange for a 6-year option to purchase Southern. Time Warner has also agreed
to issue additional shares of Time Warner Series Common Stock to the Company
having a market value of $160 million in the event Time Warner exercised such
option. Any shares of Time Warner common stock issuable in connection with the
Southern option will be exchanged for Time Warner Series Common Stock.
Additionally, Time Warner will grant the Company an option to purchase Time
Warner's interest in Sunshine Network, a Florida based sports cable network,
for $14 million.
V-17
<PAGE> 168
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
The TBS/Time Warner Merger is subject to, among other things, approval
by the FCC and regulatory review by federal antitrust authorities, and approval
by the shareholders of TBS and Time Warner. It is expected to be completed in
1996.
Pursuant to an underwritten public offering, the Company sold
19,550,000 shares of TCI Class A common stock in February of 1995. The Company
received net proceeds of approximately $401 million. Such proceeds were
immediately used to reduce outstanding indebtedness under credit facilities.
On July 18, 1995, TINTA completed the IPO in which it sold 20 million
shares of TINTA Series A common stock to the public for aggregate consideration
of $320 million, before deducting related expenses (approximately $19 million).
TINTA used the IPO proceeds to repay debt of the Company ($177 million) and
fund acquisitions, operations and capital contributions.
During the year ended December 31, 1995, TCIC sold approximately $1.5
billion of publicly-placed fixed rate senior and medium term notes with interest
rates ranging from 6.8% to 8.8% and maturity dates ranging through 2015. The
proceeds from the sale of these notes were used primarily to repay variable-rate
bank debt.
Subsequent to December 31, 1995, TINTA issued $345 million (before
deducting offering costs of $9 million) of 4.5% convertible subordinated
debentures. TINTA anticipates that it will use the net proceeds to fund
capital contributions to certain of its equity investees.
Also, subsequent to December 31, 1995, the Company, through certain
subsidiaries, issued (i) 4.6 million shares of Cumulative Exchangeable
Preferred Stock for net cash proceeds of $223 million, (ii) 20 million
preferred securities of 8.72% Trust Originated Preferred Securities for net
cash proceeds of $486 million (through a special purpose entity formed as a
Delaware business trust) and (iii) $1 billion of publicly-placed fixed rate
senior and medium term notes with interest rates ranging from 6.9% to 7.9% and
maturity dates ranging through 2026. The Company used the proceeds from the
aforementioned debt and equity securities to retire overnight commercial paper
and to repay variable rate indebtedness.
The Company has a credit facility which matures in September of 1996.
The outstanding balance of such facility was $602 million at December 31, 1995.
The Company currently anticipates that it will refinance such borrowings but
there can be no assurance that it can do so on terms acceptable to the Company.
V-18
<PAGE> 169
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
The Company is a holding company and its assets consist almost
entirely of investments in its subsidiaries. As a holding company, the
Company's ability to pay dividends on any classes or series of preferred stock
is dependent on the earnings of, or other funds available to, the Company's
subsidiaries and the distribution or other payment of such earnings or other
funds to the Company in the form of dividends, loans or other advances, payment
or reimbursement of management fees and expenses and repayment of loans and
advances from the Company. The Company's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
the dividends on any class or series of preferred stock of TCI or to make any
funds available therefor, whether by dividends, loans or other payments. The
payment of dividends or the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or regulatory restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations. Further, certain of the Company's subsidiaries are
subject to loan agreements that prohibit or limit the transfer of funds by such
subsidiaries to the Company in the form of dividends, loans, or advances, and
require that such subsidiaries' indebtedness to the Company be subordinate to
the indebtedness under such loan agreements. The amount of net assets of
subsidiaries subject to such restrictions exceeds the Company's consolidated
net assets. The Company's subsidiaries currently have the ability to transfer
funds to the Company in amounts exceeding the Company's dividend requirement on
any class or series of preferred stock. Net cash provided by operating
activities of subsidiaries which are not restricted from making transfers to
the parent company have been and are expected to continue to be sufficient to
enable the parent company to meet its cash obligations.
Moreover, almost all of the consolidated liabilities of the Company
have been incurred by its subsidiaries. Therefore, the Company's rights, and
the extent to which the holders of the Company's preferred stocks will be able
to participate in the distribution of assets of any subsidiary upon the
latter's liquidation or reorganization, will be subject to prior claims of the
subsidiary's creditors, including trade creditors, except to the extent that
the Company may itself be a creditor with recognized claims against such
subsidiary (in which case the claims of the Company would still be subject to
the prior claims of any secured creditor of such subsidiary and of any holder
of indebtedness of such subsidiary that is senior to that held by the Company).
Subsidiaries of the Company had approximately $2.5 billion in unused
lines of credit at December 31, 1995 excluding amounts related to lines of
credit which provide availability to support commercial paper. Although
subsidiaries of the Company were in compliance with the restrictive covenants
contained in their credit facilities at said date, additional borrowings under
the credit facilities are subject to the subsidiaries' continuing compliance
with such restrictive covenants (which relate primarily to the maintenance of
certain ratios of cash flow to total debt and cash flow to debt service, as
defined in the credit facilities) after giving effect to such additional
borrowings. See note 9 to the accompanying consolidated financial statements
for additional information regarding the material terms of the subsidiaries'
lines of credit.
V-19
<PAGE> 170
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges)($1,975 million, $1,798 million and $1,858 million
in 1995, 1994 and 1993, respectively) to interest expense ($1,010 million, $785
million and $731 million in 1995, 1994 and 1993, respectively), is determined
by reference to the consolidated statements of operations. The Company's
interest coverage ratio was 196%, 229% and 254% for 1995, 1994 and 1993,
respectively. The decrease in the Company's interest coverage in 1995 is
caused by increased interest expense due to higher interest rates and debt
levels in 1995. Management of the Company believes that the foregoing interest
coverage ratio is adequate in light of the consistency and nonseasonal nature
of its cable television operations and the relative predictability of the
Company's interest expense, almost half of which results from fixed rate
indebtedness. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense,
and should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($957 million, $908
million and $1,247 million in 1995, 1994 and 1993, respectively) reflects net
cash from the operations of the Company available for the Company's liquidity
needs after taking into consideration the aforementioned additional substantial
costs of doing business not reflected in Operating Cash Flow. Amounts expended
by the Company for its investing activities exceed net cash provided by
operating activities. However, management believes that net cash provided by
operating activities, the ability of the Company and its subsidiaries to obtain
additional financing (including the subsidiaries' available lines of credit and
access to public debt markets), issuances and sales of the Company's equity or
equity of its subsidiaries, and proceeds from disposition of assets will
provide adequate sources of short-term and long-term liquidity in the future.
See the Company's consolidated statements of cash flows included in the
accompanying consolidated financial statements.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. At December 31, 1995, after considering the net effect of various
interest rate exchange agreements (see note 9 to the consolidated financial
statements) with notional amounts aggregating $1,918 million, the Company had
$6,002 million (or 45%) of fixed-rate debt with a weighted average interest
rate of 8.8% and $7,209 million (or 55%) of variable-rate debt with a weighted
average interest rate of 6.3%.
V-20
<PAGE> 171
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
Pursuant to the interest rate exchange agreements, the Company pays
(i) fixed interest rates ranging from 6.1% to 9.9% on notional amounts of $602
million at December 31, 1995 and (ii) variable interest rates on notional
amounts of $2,520 million at December 31, 1995. During the years ended
December 31, 1995, 1994 and 1993, the Company's net payments pursuant to its
fixed rate exchange agreements were $13 million, $26 million and $38 million,
respectively. During the years ended December 31, 1995, 1994 and 1993, the
Company's net receipts (payments) pursuant to its variable rate exchange
agreements were (less than $1 million), $36 million and $31 million,
respectively. The Company is exposed to credit losses for the periodic
settlements of amounts due under the interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements. However, the
Company does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
In connection with its investments in certain foreign entities, the
Company is exposed to unfavorable and potentially volatile fluctuations of the
U.S. dollar against the UK pound sterling ("L."), the Japanese yen ("Yen"), and
various other foreign currencies that are the functional currencies of the
Company's foreign subsidiaries and affiliates. Any increase (decrease) in the
value of the U.S. dollar against any foreign currency that is the functional
currency of an operating subsidiary or affiliate of TINTA will cause the
Company to experience unrealized foreign currency translation losses (gains)
with respect to amounts already invested in such foreign currencies. The
Company is also exposed to foreign currency risk to the extent that the Company
or its foreign subsidiaries and affiliates enter into transactions denominated
in currencies other than their respective functional currencies. Because the
Company generally views its foreign operating subsidiaries and affiliates as
long-term investments, the Company generally does not attempt to hedge existing
investments in its foreign affiliates and subsidiaries. With respect to
funding commitments that are denominated in currencies other than the U.S.
dollar, the Company historically has sought to reduce its exposure to
short-term (generally no more than 90 days) movements in the applicable
exchange rates once the timing and amount of such funding commitments becomes
fixed. Although the Company monitors foreign currency exchange rates with the
objective of mitigating its exposure to unfavorable fluctuations in such rates,
the Company believes that it is not possible or practical to completely
eliminate the Company's exposure to unfavorable fluctuations in foreign
currency exchange rates.
Approximately twenty-five percent of the franchises held by the
Company, involving approximately 4.4 million basic subscribers, expire within
five years. There can be no assurance that the franchises for the Company's
systems will be renewed as they expire, although the Company believes that its
cable television systems generally have been operated in a manner which
satisfies the standards established by the Cable Communications Policy Act of
1984 (the "1984 Cable Act"), as supplemented by the renewal provisions of the
1992 Cable Act, for franchise renewal. However, in the event they are renewed,
the Company cannot predict the impact of any new or different conditions that
might be imposed by the franchising authorities in connection with the
renewals. To date they have not varied significantly from the original terms.
V-21
<PAGE> 172
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
A significant competitive impact is expected from medium power and
higher power direct broadcast satellites ("DBS") that use high frequencies to
transmit signals that can be received by dish antennas much smaller in size
than traditional home satellite dishes ("HSDs"). Primestar distributes a
multi-channel programming service via a medium power communications satellite
to HSDs of approximately 3 feet in diameter. At December 31, 1995, Primestar,
through its partners, served an estimated 940,000 HSDs in the United States.
Two other DBS operators, DirecTV, a subsidiary of GM Hughes Electronics, and
United States Satellite Broadcasting, a subsidiary of Hubbard Broadcasting,
Inc., offer video services that can be received by HSDs that measure
approximately eighteen inches in diameter. Such DBS operators have the right
to distribute substantially all of the significant cable television programming
services currently carried by cable television systems. The competition from
DBS will likely continue to grow. One DBS operator is preparing to launch a
new DBS satellite. AT&T Corp. recently made a large investment in DirecTV, and
several other major companies are preparing to develop and operate high-power
DBS systems, including MCI Communications Corp. ("MCI") and News Corp. MCI
recently acquired rights to satellite frequencies for DBS in an FCC auction.
The 1996 Telecom Act eliminated the statutory and regulatory
restrictions that prevented telephone companies from competing with cable
operators for the provision of video services by any means. The 1996 Telecom
Act allows local telephone companies, including the regional bell operating
companies, to compete with cable television operators both inside and outside
their telephone service areas. The Company expects that it will face
substantial competition from telephone companies for the provision of video
services. The Company assumes that all major telephone companies have already
entered or soon will enter the business of providing video services. Most
major telephone companies have greater financial resources than the Company,
and the 1992 Cable Act ensures that telephone company providers of video
services will have access to all of the significant cable television
programming services. Additionally, the 1996 Telecom Act eliminates certain
federal restrictions on utility holding companies and thus frees all utility
companies to provide cable television services. The Company expects this
could result in another source of significant competition in the delivery of
video services.
The Company is upgrading and installing optical fiber technology in its
cable systems at a rate such that in approximately two years TCI anticipates
that it will be serving the majority of its customers with this technology. The
systems, which facilitate digital transmission of voice, video and data signals,
will have optical fiber to neighborhood nodes with coaxial cable distribution
downstream from that point. The Company made capital expenditures of $1,782
million in 1995 and the Company expects to expend similar amounts in 1996 to
provide for the continued rebuilding of its cable systems. However, such
proposed expenditures are subject to reevaluation based upon changes in the
Company's liquidity, including those resulting from rate regulation.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $222
million at December 31, 1995. Although there can be no assurance, management
of the Company believes that it will not be required to meet its obligations
under such guarantees, or if it is required to meet any of such guarantees,
that they will not be material to the Company.
V-22
<PAGE> 173
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
The Company is obligated to pay fees for the license to exhibit certain
qualifying films that are released theatrically by various motion picture
studios through February 28, 2009 (the "Film Licensing Obligations"). The
aggregate minimum liability under certain of the license agreements is
approximately $414 million. The aggregate amount of the Film Licensing
Obligations under other license agreements is not currently estimable because
such amount is dependent upon certain variable factors. Nevertheless, the
Company's aggregate payments under the Film Licensing Obligations could prove
to be significant. Additionally, the Company has guaranteed up to $67 million
of similar license fee obligations of an affiliate.
The Company has committed to provide additional debt or equity funding
to certain of its affiliates. At December 31, 1995, such commitments
aggregated $95 million.
The Company intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. The Company's obligation for
certain sports program rights contracts as of December 31, 1995 was $448
million. Upon the formation of the Fox-Liberty Venture, of which there is no
assurance, the Company anticipates that such commitments will be transferred to
the Fox-Liberty Venture. In the event the Fox-Liberty Venture is not formed,
the Company expects that sufficient cash will be generated by the programming
services to satisfy these commitments. However, the continued development of
such services may require additional financing and it cannot be predicted
whether the Company will obtain such financing on terms acceptable to the
Company.
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
V-23
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
Tele-Communications, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
Tele-Communications, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1996
V-24
<PAGE> 175
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994 *
-------- --------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 118 74
Trade and other receivables, net 407 301
Inventories, net 104 121
Prepaid expenses 65 36
Prepaid program rights 47 24
Committed film inventory 122 58
Investments in affiliates, accounted for
under the equity method, and related
receivables (notes 5 and 6) 2,372 1,299
Investment in Turner Broadcasting System, Inc.
("TBS") (note 7) 955 660
Property and equipment, at cost:
Land 88 91
Distribution systems 9,545 7,705
Support equipment and buildings 1,429 1,146
-------- --------
11,062 8,942
Less accumulated depreciation 3,653 3,066
-------- --------
7,409 5,876
-------- --------
Franchise costs 14,322 11,152
Less accumulated amortization 2,092 1,708
-------- --------
12,230 9,444
-------- --------
Other assets, net of amortization 1,748 1,383
-------- --------
$ 25,577 19,276
======== ========
</TABLE>
*Restated - see notes 5 and 6.
(continued)
V-25
<PAGE> 176
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994 *
-------- --------
Liabilities and Stockholders' Equity amounts in millions
- ------------------------------------
<S> <C> <C>
Accounts payable $ 243 201
Accrued interest 233 183
Accrued programming expense 318 248
Other accrued expenses 1,114 561
Debt (note 9) 13,211 11,162
Deferred income taxes (note 14) 4,584 3,509
Other liabilities 195 160
-------- --------
Total liabilities 19,898 16,024
-------- --------
Minority interests in equity
of consolidated subsidiaries 651 429
Redeemable preferred stocks (note 10) 478 168
Stockholders' equity (note 11):
Series Preferred Stock, $.01 par value -- --
Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock,
$.01 par value -- --
Tele-Communications, Inc. Series A TCI
Group common stock, $1 par value
Authorized 1,750,000,000 shares;
issued 672,211,009 in 1995 672 --
Tele-Communications, Inc. Series B TCI
Group common stock, $1 par value
Authorized 150,000,000 shares;
issued 84,691,554 in 1995 85 --
Tele-Communications, Inc. Series A Liberty
Media Group common stock, $1 par value
Authorized 750,000,000 shares;
issued 142,896,264 in 1995 143 --
Tele-Communications, Inc. Series B Liberty
Media Group common stock, $1 par value
Authorized 75,000,000 shares;
issued 21,196,868 in 1995 21 --
Class A common stock, $1 par value
Issued 576,979,498 shares in 1994 -- 577
Class B common stock, $1 par value
Issued 89,287,429 shares in 1994 -- 89
Additional paid-in capital 4,068 2,791
Cumulative foreign currency
translation adjustment, net of taxes (9) (4)
Unrealized holding gains for
available-for-sale securities, net of taxes 338 94
Accumulated deficit (454) (282)
-------- --------
4,864 3,265
Treasury stock, at cost (100,524,364 shares of
Series A TCI Group common stock in 1995; and
86,030,992 shares of Class A common
stock and 4,172,629 shares of Class B
common stock in 1994) (314) (610)
-------- --------
Total stockholders' equity 4,550 2,655
-------- --------
Commitments and contingencies (note 15)
$ 25,577 19,276
======== ========
</TABLE>
*Restated - see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-26
<PAGE> 177
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 * 1993 *
-------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue (note 16):
From cable and programming services
(notes 4 and 8) $ 5,832 4,454 4,153
Net sales from electronic retailing services 1,019 482 --
-------- -------- --------
6,851 4,936 4,153
-------- -------- --------
Operating costs and expenses:
Operating (note 4) 2,097 1,445 1,190
Cost of sales from electronic retailing services 702 313 --
Selling, general and administrative 2,066 1,380 1,105
Compensation relating to stock
appreciation rights 55 -- 31
Adjustment to compensation relating to stock
appreciation rights -- (8) --
Restructuring charges 17 -- --
Depreciation 899 700 622
Amortization 473 318 289
-------- -------- --------
6,309 4,148 3,237
-------- -------- --------
Operating income (note 16) 542 788 916
Other income (expense):
Interest expense (1,010) (785) (731)
Interest and dividend income 52 36 34
Share of earnings of Liberty Media Corporation
("Liberty") (note 4) -- 128 7
Share of losses of other affiliates, net
(notes 5 and 6) (193) (112) (76)
Gain on sale of subsidiary stock (note 13) 123 -- --
Gain on sale of stock by equity investee (note 5) 165 161 --
Gain (loss) on disposition of assets 49 (10) 42
Other, net (19) (24) (28)
-------- -------- --------
(833) (606) (752)
-------- -------- --------
Earnings (loss) before income taxes (291) 182 164
Income tax benefit (expense) (note 14) 120 (120) (169)
-------- -------- --------
Net earnings (loss) (note 8) (171) 62 (5)
Dividend requirements on preferred stocks (34) (8) (2)
-------- -------- --------
Net earnings (loss) attributable
to common stockholders (note 8) $ (205) 54 (7)
======== ======== ========
Net earnings (loss) attributable to common
stockholders (note 2):
TCI Class A and Class B common stock $ (71) 54 (7)
TCI Group Series A and Series B common stock (107) -- --
Liberty Media Group Series A and Series B
common stock (27) -- --
-------- -------- --------
$ (205) 54 (7)
======== ======== ========
Primary and fully diluted net earnings (loss)
attributable to common stockholders per common
and common equivalent share (notes 2 and 8):
TCI Class A and Class B common stock $ (.11) .10 (.02)
TCI Group Series A and Series B common stock $ (.16) -- --
Liberty Media Group Series A and Series B
common stock $ (.16) -- --
</TABLE>
* Restated - see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-27
<PAGE> 178
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------------------------
Class B TCI TCI Group Liberty Media Group
Preferred -------------------- -------------------- --------------------
Stock Class A Class B Series A Series B Series A Series B
----------- -------- --------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993* $ -- 462 48 -- -- -- --
Net loss -- -- -- -- -- -- --
Issuance of common stock
upon conversion of notes
(note 9) -- 20 -- -- -- -- --
Issuance of common stock upon
exercise of options -- -- -- -- -- -- --
Dividends on redeemable
preferred stocks -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- --
Acquisition and retirement
of common stock -- -- (1) -- -- -- --
------- ------- ------ ------- ------- ------- -------
Balance at December 31, 1993 $ -- 482 47 -- -- -- --
------- ------- ------ ------- ------- ------ -------
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
Additional currency available- from
paid-in translation for-sale related Accumulated Treasury
capital adjustment securities * party deficit * stock
----------- ---------- ------------ ------------ --------------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993* 1,909 (19) -- -- (339) (333)
Net loss -- -- -- -- (5) --
Issuance of common stock
upon conversion of notes
(note 9) 383 -- -- -- -- --
Issuance of common stock upon
exercise of options 7 -- -- -- -- --
Dividends on redeemable
preferred stocks (2) -- -- -- -- --
Foreign currency translation
adjustment -- (10) -- -- -- --
Acquisition and retirement
of common stock (4) -- -- -- -- --
------- ----- --------- ------ ------ -------
Balance at December 31, 1993 2,293 (29) -- -- (344) (333)
------- ----- --------- ------ ------ -------
<CAPTION>
Total
stockholders'
equity *
--------------
amounts in millions
<S> <C>
Balance at January 1, 1993* 1,728
Net loss (5)
Issuance of common stock
upon conversion of notes
(note 9) 403
Issuance of common stock upon
exercise of options 7
Dividends on redeemable
preferred stocks (2)
Foreign currency translation
adjustment (10)
Acquisition and retirement
of common stock (5)
-------
Balance at December 31, 1993 2,116
-------
</TABLE>
* Restated-see notes 5 and 6
(continued)
V-28
<PAGE> 179
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity, continued
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------
Class B TCI TCI Group Liberty Media Group
Preferred -------------------- -------------------- --------------------
Stock Class A Class B Series A Series B Series A Series B
----------- -------- --------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993* $ -- 482 47 -- -- -- --
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 -- -- -- -- -- -- --
Net earnings -- -- -- -- -- -- --
Conversion of redeemable preferred
stock (note 10) -- 1 -- -- -- -- --
Issuance of common stock upon
conversion of notes (note 9) -- 3 -- -- -- -- --
Issuance of common stock upon
exercise of stock option -- -- -- -- -- -- --
Acquisition and retirement of
common stock -- -- -- -- -- -- --
Consummation of the TCI/Liberty
Combination (note 4) -- 85 42 -- -- -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject
to mandatory redemption
requirements -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- --
Issuance of TCI Class A common
stock to subsidiaries of TCI in
Reorganization -- -- -- -- -- -- --
Issuance of Class A common stock
for investment -- 6 -- -- -- -- --
Repayment of note receivable from
related party -- -- -- -- -- -- --
Change in unrealized holding gains
for available-for-sale securities -- -- -- -- -- -- --
----- ------- ----- ---- ---- ---- ----
Balance at December 31, 1994 $ -- 577 89 -- -- -- --
---- ------- ------ ------ ------- ------ ------
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
Additional currency available- from Total
paid-in translation for-sale related Accumulated Treasury stockholders'
capital adjustment securities * party deficit * stock equity *
---------- ---------- ------------ ----------- ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993* 2,293 (29) -- -- (344) (333) 2,116
Unrealized holding gains for
available-for-sale securities
as of January 1, 1994 -- -- 297 -- -- -- 297
Net earnings -- -- -- -- 62 -- 62
Conversion of redeemable preferred
stock (note 10) 17 -- -- -- -- -- 18
Issuance of common stock upon
conversion of notes (note 9) -- -- -- -- -- -- 3
Issuance of common stock upon
exercise of stock option 3 -- -- -- -- -- 3
Acquisition and retirement of
common stock (2) -- -- -- -- -- (2)
Consummation of the TCI/Liberty
Combination (note 4) 383 -- 4 (15) -- (285) 214
Accreted dividends on all classes of
preferred stock (8) -- -- -- -- -- (8)
Accreted dividends on all classes of
preferred stock not subject
to mandatory redemption
requirements 4 -- -- -- -- -- 4
Foreign currency translation
adjustment -- 25 -- -- -- -- 25
Issuance of TCI Class A common
stock to subsidiaries of TCI in
Reorganization (23) -- -- -- -- 23 --
Issuance of Class A common stock
for investment 124 -- -- -- -- -- 130
Repayment of note receivable from
related party -- -- -- 15 -- (15) --
Change in unrealized holding gain
for available-for-sale securities -- -- (207) -- -- -- (207)
----- ----- ---- ----- ----- ----- -----
Balance at December 31, 1994 2,791 (4) 94 -- (282) (610) 2,655
----- ----- ---- ----- ----- ----- -----
</TABLE>
(continued)
*Restated - see notes 5 and 6
V-29
<PAGE> 180
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------
Class B TCI TCI Group Liberty Media Group
Preferred -------------------- -------------------- --------------------
Stock Class A Class B Series A Series B Series A Series B
----------- -------- --------- -------- -------- -------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 * $ -- 577 89 -- -- -- --
Net loss -- -- -- -- -- -- --
Issuance of common stock in
public offering -- 20 -- -- -- -- --
Issuance of common stock in
private offering -- 1 -- -- -- -- --
Issuance of common stock for
acquisitions and investments
(note 8) -- 59 -- -- -- -- --
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization -- -- -- -- -- -- --
Issuance of Class A common stock to
subsidiary in exchange for
investment -- -- -- -- -- -- --
Retirement of Class A common
stock previously held by subsidiary -- -- -- -- -- -- --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F
Preferred Stock") (note 1) -- (86) (4) -- -- -- --
Conversion of Series F Preferred
Stock held by subsidiary for Series
A TCI Group common stock -- -- -- 101 -- -- --
Distribution of Series A and
Series B Liberty Media Group
common stock to TCI common
stockholders (note 1) -- -- -- -- -- 143 21
Costs associated with Distribution
to stockholders -- -- -- -- -- -- --
Redesignation of TCI common stock
into Series A and Series B TCI
Group common stock (note 1) -- (571) (85) 571 85 -- --
Accreted dividends on all classes of
preferred stock -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption
requirements -- -- -- -- -- -- --
Payment of preferred stock dividends -- -- -- -- -- -- --
Issuance of common stock
by subsidiary (note 13) -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- -- --
Change in unrealized holding gains
for available-for-sale securities -- -- -- -- -- -- --
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries (note 2) -- -- -- -- -- -- --
-------- --------- -------- ------ -------- --------- ---------
Balance at December 31, 1995 $ -- -- -- 672 85 143 21
======== ========= ======== ====== ======== ========= =========
<CAPTION>
Unrealized
Cumulative holding Note
foreign gains for receivable
Additional currency available- from Total
paid-in translation for-sale related Accumulated Treasury stockholders'
capital adjustment securities * party deficit * stock equity *
---------- ---------- ------------ ----------- ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 * 2,791 (4) 94 -- (282) (610) 2,655
Net loss -- -- -- -- (171) -- (171)
Issuance of common stock in
public offering 381 -- -- -- -- -- 401
Issuance of common stock in
private offering 29 -- -- -- -- -- 30
Issuance of common stock for
acquisitions and investments
(note 8) 1,329 -- -- -- -- -- 1,388
Issuance of Class A common
stock to subsidiary of TCI in
Reorganization (6) -- -- -- -- 6 --
Issuance of Class A common stock to
subsidiary in exchange for
investment (1) -- -- -- -- 1 --
Retirement of Class A common
stock previously held by subsidiary 29 -- -- -- -- (29) --
Exchange of common stock held by
subsidiaries of TCI for Convertible
Redeemable Participating Preferred
Stock, Series F ("Series F
Preferred Stock") (note 1) (542) -- -- -- -- 632 --
Conversion of Series F Preferred
Stock held by subsidiary for Series
A TCI Group common stock 213 -- -- -- -- (314) --
Distribution of Series A and
Series B Liberty Media Group
common stock to TCI common
stockholders (note 1) (164) -- -- -- -- -- --
Costs associated with Distribution
to stockholders (8) -- -- -- -- -- (8)
Redesignation of TCI common stock
into Series A and Series B TCI
Group common stock (note 1) -- -- -- -- -- -- --
Accreted dividends on all classes of
preferred stock (34) -- -- -- -- -- (34)
Accreted dividends on all classes of
preferred stock not subject to
mandatory redemption
requirements 10 -- -- -- -- -- 10
Payment of preferred stock dividends (10) -- -- -- -- -- (10)
Issuance of common stock
by subsidiary (note 13) 51 -- -- -- -- -- 51
Foreign currency translation
adjustment -- (5) -- -- -- -- (5)
Change in unrealized holding gains
for available-for-sale securities -- -- 244 -- -- -- 244
Adjustment to reflect elimination of
reporting delay with respect to
certain foreign subsidiaries (note 2) -- -- -- -- (1) -- (1)
-------- -------- -------- -------- -------- ------- -----
Balance at December 31, 1995 4,068 (9) 338 -- (454) (314) 4,550
======== ======== ======== ======== ======== ======= =====
</TABLE>
*Restated - see notes 5 and 6
See accompanying notes to consolidated financial statements.
V-30
<PAGE> 181
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 * 1993 *
-------- -------- --------
amounts in millions
(see note 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (171) 62 (5)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,372 1,018 911
Compensation relating to stock appreciation
rights 55 -- 31
Adjustment to compensation relating to stock
appreciation rights -- (8) --
Share of earnings of Liberty -- (128) (7)
Share of losses of other affiliates 193 112 76
Gain on sale of subsidiary stock (123) -- --
Gain on sale of stock by equity investee (165) (161) --
Deferred income tax expense (benefit) (153) 37 140
Loss (gain) on disposition of assets (49) 10 (42)
Other non cash charges (credits) (37) 5 48
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables (70) 15 (32)
Change in inventories 16 (26) --
Change in prepaids (86) (97) (4)
Change in accrued interest 45 13 63
Change in other accruals and payables 132 56 68
Net cash used in Flextech plc's operating
activities during the month ended
September 30, 1995 (note 2) (2) -- --
-------- -------- --------
Net cash provided by operating activities 957 908 1,247
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisitions (477) (358) (158)
Capital expended for property and equipment (1,782) (1,264) (947)
Cash proceeds from disposition of assets 166 39 149
Additional investments in and
loans to affiliates and others (1,134) (445) (361)
Repayment of loans by affiliates and others 18 148 62
Other investing activities (84) (15) 89
Net cash used in Flextech plc's investing activities
during the month ended September 30, 1995 (note 2) (51) -- --
-------- -------- --------
Net cash used in investing activities (3,344) (1,895) (1,166)
-------- -------- --------
Cash flows from financing activities:
Borrowings of debt 8,152 4,676 6,305
Repayments of debt (6,567) (3,607) (6,321)
Proceeds from sale of subsidiary stock 445 -- --
Issuances of common stock 431 1 6
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends (24) (4) (2)
Costs associated with Distributor to Stockholders (8) -- --
Repurchases of preferred stock -- -- (92)
Repurchases of common stock -- -- (4)
Net cash used in Flextech plc's financing activities
during the month ended September 30, 1995 (note 2) 8 -- --
-------- -------- --------
Net cash provided (used) by financing
activities 2,431 1,060 (114)
-------- -------- --------
Net increase (decrease) in cash 44 73 (33)
Cash at beginning of year 74 1 34
-------- -------- --------
Cash at end of year $ 118 74 1
======== ======== ========
</TABLE>
* Restated - see notes 5 and 6.
See accompanying notes to consolidated financial statements.
V-31
<PAGE> 182
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) Organization
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reorganization
During the fourth quarter of 1994, the Company was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable
and Communications (the "Cable Unit"); Programming (the "Programming
Unit"); International Cable and Programming ("TINTA"); and
Technology/Venture Capital. Upon Reorganization, certain of the
assets of the Cable and Programming Units were transferred to the
other operating units. As consideration for such transfer of assets,
TCI issued 317,112 shares of TCI Class A common stock and 246,402
shares of Redeemable Convertible Preferred Stock, Series E ("Series E
Preferred Stock") (see note 10). Preferred stock of TCI which is
owned by subsidiaries of TCI eliminates in consolidation. Common
stock of the Company held by subsidiaries is treated as treasury stock
in consolidation.
Liberty Group Stock
On August 3, 1995, the stockholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock ("Liberty
Group Stock") which is intended to reflect the separate performance of
TCI's business which produces and distributes cable television
programming services ("Liberty Media Group"). While the Liberty Group
Stock constitutes common stock of TCI, the issuance of the Liberty
Group Stock did not result in any transfer of assets or liabilities of
TCI or any of its subsidiaries or affect the rights of holders of
TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to
the Liberty Media Group (the "Distribution") to its security holders
of record on August 4, 1995. Additionally, the stockholders of TCI
approved the redesignation of the previously authorized TCI Class A
and Class B common stock into Series A TCI Group and Series B TCI
Group common stock ("TCI Group Stock").
Upon the Distribution of the Liberty Group Stock and subsequent to the
redesignation of TCI Class A and Class B common stock into Series A
and Series B TCI Group Stock, the TCI Group Stock is intended to
reflect the separate performance of the subsidiaries and assets not
attributed to Liberty Media Group, including (i) TCI's Cable and
Communication unit, (ii) TINTA and (iii) TCI's Technology/Venture
Capital unit. Such subsidiaries and assets are referred to as "TCI
Group".
(continued)
V-32
<PAGE> 183
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group or to Liberty Media Group for
purposes of preparing their combined financial statements, the change
in the capital structure of TCI does not affect the ownership or the
respective legal title to assets or responsibility for liabilities of
TCI or any of its subsidiaries. TCI and its subsidiaries will each
continue to be responsible for their respective liabilities. Holders
of TCI Group Stock or Liberty Group Stock are holders of common stock
of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
The issuance of Liberty Group Stock did not affect the rights of
creditors of TCI.
Dividends on TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for
dividends and the available dividend amount with respect to TCI Group,
as defined. Determinations to pay dividends on TCI Group Stock will
be based primarily upon the financial condition, results of operations
and business requirements of TCI Group and TCI as a whole.
Dividends on Liberty Group Stock are payable at the sole discretion of
the Board out of the lesser of all assets of TCI legally available for
dividends and the available dividend amount with respect to Liberty
Media Group, as defined. Determinations to pay dividends on Liberty
Group Stock will be based primarily upon the financial condition,
results of operations and business requirements of Liberty Media Group
and TCI as a whole.
After the Distribution, existing preferred stock and debt securities
of TCI that were convertible into or exchangeable for shares of TCI
Class A common stock were, as a result of the operation of
antidilution provisions, adjusted so that there will be delivered upon
their conversion or exchange (in addition to the same number of shares
of redesignated Series A TCI Group Stock as were theretofore issuable
thereunder) the number of shares of Series A Liberty Group Stock that
would have been issuable in the Distribution with respect to the TCI
Class A common stock issuable upon conversion or exchange had such
conversion or exchange occurred prior to the record date for the
Distribution. Options to purchase TCI Class A common stock
outstanding at the time of the Distribution were adjusted by issuing
to the holders of such options separate options to purchase that
number of shares of Series A Liberty Group Stock which the holder
would have been entitled to receive had the holder exercised such
option to purchase TCI Class A common stock prior to the record date
for the Distribution and reallocating a portion of the aggregate
exercise price of the previously outstanding options to the newly
issued options to purchase Series A Liberty Group Stock.
(continued)
V-33
<PAGE> 184
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A number of wholly-owned subsidiaries of the Company which are part of
the TCI Group owned shares of Class A common stock and preferred stock
of the Company ("Subsidiary Shares"). Because the Distribution of the
Liberty Group Stock was made as a dividend to all holders of the
Company's Class A common stock and Class B common stock and, pursuant
to the anti-dilution provisions set forth therein, to the holders of
securities convertible into Class A common stock and Class B common
stock upon the conversion thereof, shares of Liberty Group Stock would
have otherwise been issued and become issuable in respect of the
Subsidiary Shares held by these subsidiaries and would have been
attributed to TCI Group. The Liberty Group Stock issued in connection
with the Distribution was intended to constitute 100% of the equity
value thereof to the holders of the TCI Class A common stock and TCI
Class B common stock and TCI Group did not initially have any interest
in Liberty Media Group represented by any outstanding shares of
Liberty Group Stock (an "Inter-Group Interest"). Therefore, the
Company determined to exchange all of the outstanding Subsidiary
Shares for shares of a new series of Series Preferred Stock designated
Convertible Redeemable Participating Preferred Stock, Series F (the
"Series F Preferred Stock"). See note 10. The rights, privileges and
preferences of the Series F Preferred Stock did not entitle its
holders to receive Liberty Group Stock in the Distribution or upon
conversion of the Series F Preferred Stock.
(2) Summary of Significant Accounting Policies
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 1995 and 1994 was not material.
Inventories, Net
Merchandise inventories are valued at the lower of cost or market,
cost being determined using the first-in, first-out method. Cost
includes freight, certain warehousing costs and other allocable
overhead. Market is determined on the basis of net realizable value,
giving consideration to obsolescence and other factors. Inventories
are presented net of an inventory carrying adjustment of $33 million
and $19 million at December 31, 1995 and 1994, respectively.
Program Rights
Prepaid program rights are amortized on a film-by-film basis (or
event-by-event basis for sports events) over the specific number of
exhibitions. Committed film inventory and program rights payable are
recorded at the estimated costs of the programs when the film is
available for airing. These amounts are amortized on a film-by-film
basis over the specific number of exhibitions.
(continued)
V-34
<PAGE> 185
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investments
All marketable equity securities held by the Company are classified as
available-for-sale and are carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are
carried net of taxes as a separate component of stockholders' equity.
Other investments in which the ownership interest is less than 20% and
are not considered marketable securities are generally carried at
cost. For those investments in affiliates in which the Company's
voting interest is 20% to 50%, the equity method of accounting is
generally used. Under this method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of the
net earnings or losses of the affiliates as they occur rather than as
dividends or other distributions are received, limited to the extent
of the Company's investment in, advances to and commitments for the
investee. The Company's share of net earnings or losses of affiliates
includes the amortization of the difference between the Company's
investment and its share of the net assets of the investee.
Recognition of gains on sales of properties to affiliates accounted
for under the equity method is deferred in proportion to the Company's
ownership interest in such affiliates.
Changes in the Company's proportionate share of the underlying equity
of a subsidiary or equity method investee, which result from the
issuance of additional equity securities by such subsidiary or equity
investee, generally are recognized as gains or losses in the Company's
consolidated statements of operations.
Long-Lived Assets
(a) Property and Equipment
Property and equipment is stated at cost, including
acquisition costs allocated to tangible assets acquired.
Construction costs, including interest during construction and
applicable overhead, are capitalized. During 1995, 1994 and
1993, interest capitalized was not material.
Depreciation is computed on a straight-line basis using
estimated useful lives of 3 to 15 years for distribution
systems, 3 to 40 years for support equipment and buildings.
Repairs and maintenance are charged to operations, and
renewals and additions are capitalized. At the time of
ordinary retirements, sales or other dispositions of property,
the original cost and cost of removal of such property are
charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in
connection with the sales of properties in their entirety.
(continued)
V-35
<PAGE> 186
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Franchise Costs
Franchise costs include the difference between the cost of
acquiring cable television systems and amounts allocated to
their tangible assets. Such amounts are generally amortized
on a straight-line basis over 40 years. Costs incurred by the
Company in obtaining franchises are being amortized on a
straight-line basis over the life of the franchise, generally
10 to 20 years.
In March of 1995, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal
years beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and either the
undiscounted future cash flows estimated to be generated by those
assets or the fair market value are less than the assets' carrying
amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company
will adopt Statement No. 121 effective January 1, 1996. The effect of
such adoption is not expected to be significant.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments
used to manage interest rate risks arising from the Company's
financial liabilities are recognized as interest expense. Gains and
losses on early terminations of derivatives are included in the
carrying amount of the related debt and amortized as yield adjustments
over the remaining terms of the debt. The Company does not use such
instruments for trading purposes.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of consolidated
subsidiaries have the right to cause the Company to repurchase such
holders' common equity.
Included in minority interests in equity of consolidated subsidiaries
is $49 million and $50 million in 1995 and 1994, respectively, of
preferred stocks (and accumulated dividends thereon) of certain
subsidiaries. The current dividend requirements on these preferred
stocks aggregate $6 million per annum and such dividend requirements
are reflected as minority interests in the accompanying consolidated
statements of operations.
Subsequent to December 31, 1995, TCI Communications, Inc. ("TCIC"), a
wholly-owned subsidiary of TCI, issued to the public 4.6 million
shares of Cumulative Exchangeable Preferred Stock with an initial
liquidation value of $230 million. Such issuance will be reflected as
an increase in the Company's minority interest in equity of
consolidated subsidiaries.
(continued)
V-36
<PAGE> 187
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Trust Originated Preferred Securities(SM)
Subsequent to December 31, 1995, TCI Communications Financing I (the
"Trust"), an indirect wholly-owned subsidiary of the Company, issued
$16 million in common securities and issued $500 million of 8.72%
Trust Originated Preferred Securities(SM) (the "Preferred
Securities" and together with the common securities, the "Trust
Securities"). The Trust exists for the exclusive purposes of issuing
Trust Securities and investing the proceeds thereof into an
aggregate principal amount of $516 million of 8.72% Subordinated
Deferrable Interest Notes due January 31, 2045 (the "Subordinated
Debt Securities") of the Company. The Subordinated Debt Securities
are unsecured obligations of the Company and are subordinate and
junior in right of payment to certain other indebtedness of the
Company. Upon redemption of such Subordinated Debt Securities, the
Preferred Securities will be mandatorily redeemable. The Company
effectively provides a full and unconditional guarantee of the
Trust's obligations under the Preferred Securities. The Company will
present the Preferred Securities as a separate line item in its
balance sheet captioned "Company-obligated mandatorily redeemable
preferred securities of subsidiary trust."
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at
the current exchange rate as of the end of the accounting period.
Statement of operations items are translated at average currency
exchange rates. The resulting translation adjustment is recorded as a
separate component of stockholders' equity.
Net Sales from Electronic Retailing Services
Revenue includes merchandise sales and shipping and handling revenue,
and is reduced by incentive discounts and sales returns to arrive at
net sales from home shopping services. Revenue is recorded for
credit card sales upon transaction authorization, and for check sales
upon receipt of customer payment, which does not vary significantly
from the time goods are shipped. The Company's sales policy allows
merchandise to be returned at the customer's discretion, generally up
to 30 days. An allowance for returned merchandise is provided based
upon past experience.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB
in October 1995. Statement No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as
well as transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. The Company will
include the disclosures required by Statement No. 123 in the notes to
future financial statements.
(continued)
V-37
<PAGE> 188
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Earnings (Loss) Per Common and Common Equivalent Share
(a) TCI Class A and B Common Stock
Loss per common share attributable to common stockholders was
computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares
outstanding (648.2 million for the period from January 1, 1995
through the Distribution and 432.6 million for the year ended
December 31, 1993). Common stock equivalents were not
included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
Primary earnings per common and common equivalent share
attributable to common stockholders was computed by dividing
net earnings attributable to common stockholders by the
weighted average number of common and common equivalent shares
outstanding (540.8 million for the year ended December 31,
1994).
Fully diluted earnings per common and common equivalent share
attributable to common stockholders was computed by dividing
earnings attributable to common stockholders by the weighted
average number of common and common equivalent shares
outstanding (540.8 million for the year ended December 31,
1994). Shares issuable upon conversion of the Convertible
Preferred Stock, Series C ("Series C Preferred Stock") (see
note 10) have not been included in the computation of weighted
average shares because their effect would be anti-dilutive.
(b) TCI Group Stock
The loss attributable to common stockholders per common share
for the period from the Distribution to December 31, 1995 was
computed by dividing net loss attributable to TCI Group Series
A and Series B common stockholders by the weighted average
number of common shares outstanding of TCI Group Stock during
the period (656.4 million). Common stock equivalents were not
included in the computation of weighted average shares
outstanding because their inclusion would be anti-dilutive.
(c) Liberty Group Stock
The loss per common share for the period from the Distribution
to December 31, 1995 was computed by dividing net loss
attributable to Liberty Media Group Series A and Series B
common stockholders by the weighted average number of common
shares outstanding of Liberty Group Stock during the period
(164.1 million). Common stock equivalents were not included
in the computation of weighted average shares outstanding
because their inclusion would be anti-dilutive.
(continued)
V-38
<PAGE> 189
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Accounting for Foreign Subsidiaries
Through the third quarter of 1995, the Company included certain of its
foreign subsidiaries (Flextech plc ("Flextech") and Cablevision S.A.
("Cablevision")) in its financial statements on a one-month time
delay. The Company eliminated such time delay from its December 31,
1995 financial statements. As a result, the Company's consolidated
statements of operations for the year ended December 31, 1995 include
(i) Cablevision's result of operations for the period from April 25,
1995 (the date Cablevision was acquired - see note 8) through December
31, 1995 and (ii) Flextech's results of operations for the period from
December 1, 1994 through December 31, 1995 (exclusive of the one-month
period ended September 30, 1995). The Company's consolidated
statement of cash flows for the year ended December 31, 1995 includes
the cash flows of Cablevision and Flextech for the same periods except
that Flextech's cash flows for the one-month period ended September
30, 1995 are included therein on a summarized basis. In connection
with the elimination of the above-described reporting delays, the
Company (i) restated certain of its quarterly financial information in
order to present Cablevision's 1995 results of operations on a current
basis (see note 17) and (ii) charged Flextech's net loss for the
one-month ended September 30, 1995 ($1 million) directly to the
Company's accumulated deficit so that the Company's consolidated
statement of operations for the year ended December 31, 1995 would not
include more than 12 months of Flextech's operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassification
Certain amounts have been reclassified for comparability with the 1995
presentation.
(continued)
V-39
<PAGE> 190
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $965 million, $758 million and $641
million for the years ended December 31, 1995, 1994 and 1993,
respectively. Cash paid for income taxes was $65 million in
1995 and was not material in 1994 or 1993.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------
1995 1994 1993
------ ------ ------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 3,571 1,921 172
Liabilities assumed, net of current assets (445) (648) (7)
Deferred tax liability recorded
in acquisitions (1,083) (190) (7)
Minority interests in equity of
acquired entities 49 (35) --
Note receivable from related party
assumed (1,615) 15 --
Common stock and preferred stock
issued in acquisitions (808) --
Common stock issued to TCIC and
Liberty in the TCI/Liberty Combination
reflected as treasury stock (note 3) -- 285 --
Unrealized gains on available-for-sale
securities of acquired entities -- (182) --
-------- -------- -------
Cash paid for acquisitions $ 477 358 158
======== ======== =======
Conversion of debt into additional minority
interest in consolidated subsidiary $ 14 -- --
======== ======== =======
Assets contributed for interest in limited
liability company $ 3 -- --
======== ======== =======
Issuance of subsidiary stock for equity
investment $ 11 -- --
======== ======== =======
Receipt of notes receivable upon
disposition of Liberty common
stock and preferred stock $ -- -- 182
======= ======== =======
Noncash exchange of equity investment
for consolidated subsidiary and
equity investment $ -- -- 22
======= ======== =======
Noncash capital contribution to
equity investee $ -- -- 22
======= ======== =======
</TABLE>
(continued)
V-40
<PAGE> 191
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Investment in Liberty Media Corporation
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "Old TCI") and Liberty entered into a
definitive merger agreement to combine the two companies (the
"TCI/Liberty Combination"). The transaction was consummated on August
4, 1994 and was structured as a tax free exchange of Class A and Class
B shares of both companies and preferred stock of Liberty for like
shares of a newly formed holding company, TCI/Liberty Holding Company.
In connection with the TCI/Liberty Combination, Old TCI changed its
name to TCI Communications, Inc. and TCI/Liberty Holding Company
changed its name to Tele-Communications, Inc.
Due to the significant economic interest held by TCIC through its
ownership of Liberty preferred stock and Liberty common stock and
other related party considerations, TCIC accounted for its investment
in Liberty under the equity method. Accordingly, TCIC had not
recognized any income relating to dividends, including preferred stock
dividends, and TCIC recorded the earnings or losses generated by
Liberty (by recognizing 100% of Liberty's earnings or losses before
deducting preferred stock dividends) through the date the TCI/Liberty
Combination was consummated.
Summarized unaudited financial information of Liberty for the period
from January 1, 1994 through August 4, 1994 and for the year ended
December 31, 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
Consolidated Operations amounts in millions
-----------------------
<S> <C> <C>
Revenue $ 790 1,153
Operating expenses (726) (1,105)
Depreciation and amortization (32) (49)
------ ------
Operating income (loss) 32 (1)
Interest expense (22) (31)
Other, net 118 39
------ ------
Net earnings $ 128 7
====== ======
</TABLE>
Prior to the TCI/Liberty Combination, TCIC purchased sports and other
programming from certain subsidiaries of Liberty. Charges to TCIC
(which were based upon customary rates charged to others) for such
programming were $27 million and $44 million for the period from
January 1, 1994 through August 4, 1994 and for the year ended December
31, 1993, respectively. Such amounts are included in operating
expenses in the accompanying consolidated statements of operations.
Certain subsidiaries of Liberty purchased from TCIC, at TCIC's cost
plus an administrative fee, certain pay television and other
programming. In addition, a consolidated subsidiary of Liberty paid a
commission to TCIC for merchandise sales to customers who were
subscribers of TCIC's cable systems. Aggregate commissions and
charges for such programming were $9 million and $11 million for the
period from January 1, 1994 through August 4, 1994 and for the year
ended December 31, 1993, respectively. Such amounts are recorded in
revenue in the accompanying consolidated statements of operations.
(continued)
V-41
<PAGE> 192
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 11, 1994, Rainbow Program Enterprise purchased 49.9% of
Liberty's 50% general partnership interest in American Movie Classics
Company ("AMC"). The gain recognized by Liberty in connection with
the disposition of AMC was $183 million and is included in the
Company's share of Liberty's earnings prior to the TCI/Liberty
Combination.
(5) Investments in Affiliates
The Company has various investments accounted for under the equity
method. Certain of the more significant investments held by the
Company at December 31, 1995 were MajorCo, L.P. ("MajorCo"), a
partnership formed by the Company, Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox") and Sprint Corporation ("Sprint")
(carrying value of $689 million) (see note 15), Teleport
Communications Group, Inc. and TCG Partners (collectively, "TCG")
(carrying value of $244 million), TeleWest plc ("New TeleWest")
(carrying value of $550 million) and Discovery Communications, Inc.
(carrying value of $117 million).
Summarized unaudited financial information for affiliates other than
Liberty is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
Combined Financial Position amounts in millions
---------------------------
<S> <C> <C>
Property and equipment, net $ 3,863 2,450
Franchise costs, net 1,204 579
Other assets, net 5,347 3,050
------- -----
Total assets $10,414 6,079
======= =====
Debt $ 5,336 2,333
Due to (from) TCI 45 (2)
Other liabilities 1,713 1,195
Owners' equity 3,320 2,553
------- -----
Total liabilities and equity $10,414 6,079
======= =====
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Combined Operations amounts in millions
-------------------
<S> <C> <C> <C>
Revenue $ 4,461 2,703 713
Operating expenses (3,807) (2,405) (648)
Depreciation and
amortization (532) (297) (127)
-------- -------- ------
Operating income (loss) 122 1 (62)
Interest expense (337) (100) (37)
Other, net (123) 24 98
-------- -------- ------
Net loss $ (338) (75) (1)
======== ======== ======
</TABLE>
(continued)
V-42
<PAGE> 193
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In August 1995, the Company made an additional $29 million investment
in Courtroom Television Network ("Court") which represented the
Company's pro rata share of capital calls made in prior years by
the other partners of Court that the Company had no obligation to
fund. Due to the additional investment in Court, which restored its
33% ownership interest, the Company's share of losses of Court for the
year ended December 31, 1995 includes $18 million of previously
unrecognized losses of Court. These losses were not recognized in
prior periods due to the fact that the Company's investment in Court
had been reduced to zero.
During 1995, BET Holdings, Inc. ("BET") repurchased a portion of its
common stock. As a result of the repurchase, the Company's ownership
of BET was increased from 19% to 22%. Therefore, the Company is
deemed to exercise significant influence over BET and, accordingly,
has adopted the equity method of accounting for its investment in BET.
As a result, the Company restated its financial statements, which
resulted in a decrease to its investment in BET, its unrealized
holding gains on available-for-sale securities, its deferred taxes and
accumulated deficit of $44 million, $32 million, $18 million and $6
million, respectively, at December 31, 1994. In addition, the Company
increased its net earnings by $2 million for each of 1994 and 1993.
At December 31, 1995, the Company had an effective ownership interest
of approximately 27% in New TeleWest, a company that is currently
operating and constructing cable television and telephone systems in
the United Kingdom ("UK"). New TeleWest was formed on October 3, 1995
upon the merger (the "TeleWest Merger") of TeleWest Communications plc
("TeleWest Communications") with SBC (CableComms) (UK). Prior to the
TeleWest Merger, the Company had an effective ownership interest of
approximately 36% in TeleWest Communications. As a result of the
TeleWest Merger, the Company recognized a gain of approximately $165
million (before deducting deferred income taxes of $58 million), which
gain represents the difference between the Company's recorded cost for
TeleWest Communications and the Company's 27% effective proportionate
share of New TeleWest's net assets.
New TeleWest contributed $70 million, $43 million and $28 million of
the Company's share of its affiliates' losses during the years ended
December 31, 1995, 1994 and 1993, respectively. In addition, the
Company has other less significant equity method investments in video
distribution and programming businesses located in the UK, other parts
of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying
value of $354 million at December 31, 1995 and accounted for $62
million of the Company's share of its affiliates' losses in 1995.
As a result of TeleWest Communications' November 1994 initial public
offering and the associated dilution of the Company's ownership
interest of TeleWest Communications, the Company recognized a gain
amounting to $161 million (before deducting the related tax expense of
$57 million).
(continued)
V-43
<PAGE> 194
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts (other than non-recourse debts) of that partnership in the event
liabilities of that partnership were to exceed its assets.
(6) Investment in QVC, Inc.
Effective February 9, 1995 and pursuant to an Agreement and Plan of
Merger, QVC Programming Holdings, Inc. (the "Purchaser"), a
corporation which is jointly owned by Comcast and the Company, merged
(the "QVC Merger") with and into QVC, Inc. ("QVC") with QVC continuing
as the surviving corporation. The Company owns an approximate 43%
interest of the post-merger QVC.
Liberty began accounting for its investment in QVC under the cost
method in May 1994, upon its determination to remain outside of the
previous QVC stockholders agreement. Prior to such determination,
Liberty had accounted for its investment in QVC under the equity
method.
Upon consummation of the QVC Merger, the Company was deemed to
exercise significant influence over QVC and, as such, adopted the
equity method of accounting for its investment in QVC. As a result,
TCI restated its financial statements, which resulted in a decrease to
its investment in QVC, its unrealized gain from available-for-sale
securities, its deferred tax liability and accumulated deficit by $211
million, $127 million, $89 million and $5 million, respectively, at
December 31, 1994. In addition, the restatement resulted in an
increase in the Company's share of earnings of Liberty and share of
losses of other affiliates by $1 million and $7 million, respectively,
for the year ended December 31, 1994.
A credit facility entered into by the Purchaser is secured by the
common stock of certain subsidiaries of QVC and by certain of QVC's
carriage and distribution agreements. In addition, Comcast and the
Company have pledged their shares of QVC pursuant to such credit
facility.
(7) Investment in Turner Broadcasting System, Inc.
The Company owns shares of TBS common stock and shares of a class of
preferred stock of TBS which have voting rights and are convertible
into shares of TBS common stock. The holders of those preferred
shares, as a group, are entitled to elect seven of fifteen members of
the board of directors of TBS, and the Company appoints three such
representatives. However, voting control over TBS continues to be
held by its chairman of the board and chief executive officer. The
Company's total holdings of TBS common and preferred stocks represent
an approximate 7.5% voting interest for those matters for which
preferred and common stock vote as a single class.
At December 31, 1995 and 1994, the Company's investment in TBS common
stock had an aggregate market value of $777 million and $487 million,
respectively (including unrealized holding gains of $451 million and
$169 million, respectively).
(continued)
V-44
<PAGE> 195
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1995 and 1994, the Company's investment in TBS
preferred stock, carried at cost, had an aggregate market value of
$927 million and $579 million, respectively, based upon the market
value of the common stock into which it is convertible. Such market
value exceeded cost by $749 million and $406 million, respectively,
for such periods.
On September 22, 1995, the boards of directors of Time Warner Inc.
("Time Warner") and TBS approved plans to merge their respective
companies (the "TBS/Time Warner Merger"). Under the terms of the
agreement, TBS shareholders will receive 0.75 of a Time Warner common
share for each TBS Class A and Class B common share. Each holder of
TBS Class C preferred stock will receive 0.80 of a Time Warner common
share for each of the 6 shares of TBS Class B common stock into which
each of the shares of Class C preferred stock may be converted.
Subject to certain conditions, the Company has agreed to vote its TBS
shares for the TBS/Time Warner Merger. The Time Warner shares of
common stock received by the Company will be exchanged immediately for
a series of voting common stock ("Time Warner Series Common Stock")
economically equivalent to the common stock and placed in a voting
trust with Time Warner Chairman, Gerald M. Levin, as the trustee.
In connection with the TBS/Time Warner Merger, TBS has agreed to sell
its interest in SportSouth Network, L.P., a regional sports cable
network, to the Company for approximately $60 million; and Time Warner
has agreed to issue 5 million shares of Time Warner common stock to
the Company in exchange for a 6-year option to purchase Southern
Satellite Systems, Inc. ("Southern"). Time Warner has also agreed to
issue additional shares of Time Warner Series Common Stock to the
Company having a market value of $160 million in the event Time Warner
exercises such option. Any shares of Time Warner common stock
issuable in connection with the Southern option will be exchanged for
Time Warner Preferred Stock. Additionally, Time Warner will grant the
Company an option to purchase Time Warner's interest in Sunshine
Network, a Florida based sports cable network, for $14 million.
The transaction is subject to, among other things, approval by the
Federal Communications Commission ("FCC") and regulatory review by
federal antitrust authorities, and approval by the shareholders of TBS
and Time Warner. It is expected to be completed in 1996.
(8) Acquisitions
As of January 26, 1995, TCI, TCIC and TeleCable Corporation
("TeleCable") consummated a transaction, whereby TeleCable was merged
into TCIC. The aggregate $1.6 billion purchase price was satisfied by
TCIC's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of
approximately 42 million shares of TCI Class A common stock and 1
million shares of TCI Convertible Preferred Stock, Series D (the
"Series D Preferred Stock") with an aggregate initial liquidation
value of $300 million (see note 10).
(continued)
V-45
<PAGE> 196
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision for a purchase price of $282 million, before liabilities
liabilities assumed. The purchase price was paid with cash
consideration of $195 million and TINTA's issuance of $87 million
principal amount of secured negotiable promissory notes payable (the
"Cablevision Notes") to the selling shareholders. TINTA has an option
during the two-year period ended April 25, 1997 to increase its
ownership interest in Cablevision up to 80% at a cost per subscriber
similar to the initial purchase price, adjusted however for certain
fluctuations in applicable foreign currency exchange rates.
The acquisitions of TeleCable and Cablevision were accounted for by
the purchase method. Accordingly, the results of operations of such
acquired entities have been consolidated with those of the Company
since the respective dates of acquisition. On a pro forma basis, the
Company's revenue would have been increased by $77 million, and the
Company's net loss, net loss attributable to common stockholders and
net loss per share would have been decreased by $13 million, $12
million and $.02, respectively, for the year ended December 31, 1995;
and revenue, net earnings, net earnings attributable to common
stockholders and net earnings per share would have increased by $441
million, $17 million, less than $1 million and less than $0.01,
respectively, for 1994 had such acquired entities been consolidated
with the Company on January 1, 1994. The foregoing unaudited pro forma
financial information was based upon historical results of operations
adjusted for acquisition costs and, in the opinion of management, is
not necessarily indicative of the results had the Company operated the
acquired entities since January 1, 1994.
Effective January 26, 1995, TCI purchased from Comcast the 19.9%
minority interest in Heritage Communications, Inc. owned by Comcast
for aggregate consideration of approximately $290 million, the
majority of which was paid in shares of TCI Class A common stock.
(9) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at ------------
December 31, 1995 1995 1994
----------------- ---- ----
amounts in millions
<S> <C> <C> <C>
Debt of subsidiaries:
Senior notes 8.5% $ 6,713 5,412
Bank credit facilities 6.9% 3,712 4,045
Commercial paper 6.4% 1,469 445
Notes payable 10.2% 934 1,024
Convertible notes (a) 9.5% 45 45
Cablevision Notes (b) 10.0% 65 --
Other debt 273 191
------- ------
$13,211 11,162
======= ======
</TABLE>
(continued)
V-46
<PAGE> 197
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) These convertible notes, which are stated net of unamortized
discount of $186 million at December 31, 1995 and 1994, mature
on December 18, 2021. The notes require (so long as
conversion of the notes has not occurred) an annual interest
payment through 2003 equal to 1.85% of the face amount of the
notes. During the years ended December 31, 1995, 1994 and
1993, certain of these notes were converted into 3,416 shares,
2,350,000 shares and 819,000 shares of TCI Class A common
stock, respectively. At December 31, 1995, the notes were
convertible, at the option of the holders, into an aggregate
of 38,707,574 shares of Series A TCI Group Stock and 9,676,893
shares of Series A Liberty Group Stock.
(b) The Cablevision Notes are secured by TINTA's pledge of stock
representing its 51% interest in Cablevision.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of its bank credit facilities,
the Company has pledged 100,524,364 shares of Series A TCI Group Stock
held by a subsidiary of the Company. As security for borrowings under
another of its credit facilities, TCI has pledged a portion of its TBS
common stock (with a quoted market value of $760 million at December
31, 1995).
In order to achieve the desired balance between variable and fixed
rate indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 6.1% to 9.9% on notional
amounts of $602 million at December 31, 1995 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,520 million at December 31, 1995. During the years ended December
31, 1995, 1994 and 1993, the Company's net payments pursuant to the
Fixed Rate Agreements were $13 million, $26 million and $38 million,
respectively; and the Company's net receipts (payments) pursuant to
the Variable Rate Agreements were (less than $1 million), $36 million
and $31 million, respectively. After giving effect to the Company's
interest rate exchange agreements, approximately 45% of the Company's
indebtedness bears interest at fixed rates.
(continued)
V-47
<PAGE> 198
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's Fixed Rate Agreements and Variable Rate Agreements
expire as follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
-------------- ------------- ------ -------------- -------------- ------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.2% 300
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
----
February 2000 5.8%-6.6% 650
$602 March 2000 5.8%-6.0% 675
====
September 2000 5.1% 75
-------
$ 2,520
=======
</TABLE>
The Company is exposed to credit losses for the periodic settlements
of amounts due under these interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements.
However, the Company does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance
by the counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that the Company would pay or receive to terminate
the agreements at December 31, 1995, taking into consideration current
interest rates and assuming the current creditworthiness of the
counterparties. The Company would be required to pay an estimated $25
million at December 31, 1995 to terminate the agreements.
The fair value of the debt of the Company's subsidiaries is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same
remaining maturities. The fair value of debt, which has a carrying
value of $13,211 million, was $13,804 million at December 31, 1995.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, certain of TCI's subsidiaries pay fees
ranging from 1/4% to 1/2% per annum on the average unborrowed portion
of the total amount available for borrowings under bank credit
facilities.
(continued)
V-48
<PAGE> 199
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Annual maturities of debt for each of the next five years are as
follows (amounts in millions):
<TABLE>
<S> <C>
1996 $3,494*
1997 745
1998 846
1999 804
2000 920
</TABLE>
* Includes $1,469 million of commercial paper.
(10) Redeemable Preferred Stocks
4-1/2% Convertible Preferred Stock. The 4-1/2% Convertible Preferred
Stock was stated at its redemption value of $3,000 per share, and each
share was convertible into 204 shares of TCI Class A common stock. In
February of 1994, all of the shares of such convertible preferred
stock were tendered to the Company for conversion and, on March 3,
1994, 1,265,004 shares of TCI Class A common stock were issued to the
holders of such preferred stock.
Convertible Preferred Stock, Series C. TCI has issued 70,575 shares
of a series of TCI Series Preferred Stock designated "Convertible
Preferred Stock, Series C," par value $.01 per share, as partial
consideration for an acquisition by TCI .
Each share of Series C Preferred Stock is convertible, at the option
of the holders, into 100 shares of Series A TCI Group Stock and 25
shares of Series A Liberty Group stock, subject to anti-dilution
adjustments. The dividend, liquidation and redemption features of the
Series C Preferred Stock will be determined by reference to the
liquidation value of the Series C Preferred Stock, which as of any
date of determination is equal, on a per share basis, to the sum of
(i) $2,375, plus (ii) all dividends accrued on such share through the
dividend payment date on or immediately preceding such date of
determination to the extent not paid on or before such date, plus
(iii), for purposes of determining liquidation and redemption
payments, all unpaid dividends accrued on the sum of clauses (i) and
(ii) above, to such date of determination.
(continued)
V-49
<PAGE> 200
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Subject to the prior preferences and other rights of any class or
series of TCI preferred stock ranking pari passu with the Series C
Preferred Stock, the holders of Series C Preferred Stock are entitled
to receive and, subject to any prohibition or restriction contained in
any instrument evidencing indebtedness of TCI, TCI is obligated to pay
preferential cumulative cash dividends out of funds legally available
therefor. Dividends accrue cumulatively at an annual rate of 5-1/2%
of the liquidation value per share, whether or not such dividends are
declared or funds are legally or contractually available for payment
of dividends, except that if TCI fails to redeem shares of Series C
Preferred Stock required to be redeemed on a redemption date,
dividends will thereafter accrue cumulatively at an annual rate of 15%
of the liquidation value per share. Accrued dividends are payable
quarterly on January 1, April 1, July 1 and October 1 of each year,
commencing on the first dividend payment date after the issuance of
the Series C Preferred Stock. Dividends not paid on any dividend
payment date will be added to the liquidation value on such date and
remain a part thereof until such dividends and all dividends accrued
thereon are paid in full. Dividends accrue on unpaid dividends at the
rate of 5-1/2% per annum, unless such dividends remain unpaid for two
consecutive quarters in which event such rate will increase to 15% per
annum. The Series C Preferred Stock ranks prior to the Series A TCI
Group Stock, Series A Liberty Group Stock and Class B Preferred Stock
and pari passu with the Series F Preferred Stock with respect to the
declaration and payment of dividends.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets
of TCI available for distribution to stockholders an amount in cash,
per share, equal to the liquidation value. The Series C Preferred
Stock will rank prior to the TCI common stock and Class B Preferred
Stock and pari passu with the Series F Preferred Stock as to any such
distributions.
The Series C Preferred Stock is subject to optional redemption at any
time after the seventh anniversary of its issuance, in whole or in
part, by TCI at a redemption price, per share, equal to the then
liquidation value of the Series C Preferred Stock. Subject to the
rights of any other class or series of the Company's preferred stock
ranking pari passu with the Series C Preferred Stock, the Series C
Preferred Stock is required to be redeemed by the Company at any time
after such seventh anniversary at the option of the holder, in whole
or in part (provided that the aggregate liquidation value of the
shares to be redeemed is in excess of $1 million), in each case at a
redemption price, per share, equal to the liquidation value.
(continued)
V-50
<PAGE> 201
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For so long as any dividends are in arrears on the Series C Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Series C Preferred Stock and until all dividends accrued up
to the immediately preceding dividend payment date on the Series C
Preferred Stock and such parity stock shall have been paid or declared
and set apart so as to be available for payment in full thereof and
for no other purpose, TCI may not redeem or otherwise acquire any
shares of Series C Preferred Stock, any such parity stock or any class
or series of its preferred stock ranking junior (including the TCI
common stock and the Series C Preferred Stock) unless all then
outstanding shares of Series C Preferred Stock and such parity stock
are redeemed. If TCI fails to redeem shares of Series C Preferred
Stock required to be redeemed on a redemption date, and until all such
shares are redeemed in full, TCI may not redeem any such parity stock
or junior stock, or otherwise acquire any shares of such stock or
Series C Preferred Stock. Nothing contained in the two immediately
preceding sentences shall prevent TCI from acquiring (i) shares of
Series C Preferred Stock and any such parity stock pursuant to a
purchase or exchange offer made to holders of all outstanding shares
of Series C Preferred Stock and such parity stock, if (a) as to
holders of all outstanding shares of Series C Preferred Stock, the
terms of the purchase or exchange offer for all such shares are
identical, (b) as to holders for all outstanding shares of a
particular series or class of parity stock, the terms of the purchase
or exchange offer for all such shares are identical and (c) as among
holders of all outstanding shares of Series C Preferred Stock and
parity stock, the terms of each purchase or exchange offer are
substantially identical relative to the respective liquidation prices
of the shares of Series C Preferred Stock and each series or class of
such parity stock, or (ii) shares of Series C Preferred Stock, parity
stock or junior stock in exchange for, or through the application of
the proceeds of the sale of, shares of junior stock.
The Series C Preferred Stock is subject to restrictions on transfer
although it has certain customary registration rights with respect to
the underlying shares of TCI Group and Liberty Group Stock. The
Series C Preferred Stock may vote on all matters submitted to a vote
of the holders of the TCI common stock, has one vote for each share of
TCI Group and Liberty Group Stock into which the shares of Series C
Preferred Stock are converted for such purpose, and may vote as a
single class with the TCI common stock. The Series C Preferred Stock
has no other voting rights except as required by the Delaware General
Corporation Law ("DGCL") and except that the consent of the holders of
record of shares representing at least two-thirds of the liquidation
value of the outstanding shares of the Series C Preferred Stock is
necessary to (i) amend the designation, rights, preferences and
limitations of the Series C Preferred Stock as set forth in the TCI
Charter and (ii) to create or designate any class or series of TCI
preferred stock that would rank prior to the Series C Preferred Stock.
Convertible Preferred Stock, Series D. The Company issued 1,000,000
shares of a series of TCI Series Preferred Stock designated
"Convertible Preferred Stock, Series D, par value $.01 per share, as
partial consideration for the merger between TCIC and TeleCable (see
note 8).
(continued)
V-51
<PAGE> 202
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The holders of the Series D Preferred Stock shall be entitled to
receive, when and as declared by the Board out of unrestricted funds
legally available therefor, cumulative dividends, in preference to
dividends on any stock that ranks junior to the Series D Preferred
Stock (currently the TCI Group Stock, the Liberty Group Stock and the
Class B Preferred Stock), that shall accrue on each share of Series D
Preferred stock at the rate of 5-1/2% per annum of the liquidation
value ($300 per share). Dividends are cumulative, and in the event
that dividends are not paid in full on two consecutive dividend
payment dates or in the event that TCI fails to effect any required
redemption of Series D Preferred Stock, accrue at the rate of 10% per
annum of the liquidation value. The Series D Preferred Stock ranks on
parity with the Series C Preferred Stock and the Series F Preferred
Stock.
Prior to the Distribution, 431 shares of Series D Preferred Stock were
converted into 4,310 shares of TCI Class A common stock. Subsequent
to the Distribution, each share of Series D Preferred Stock is
convertible into 10 shares of Series A TCI Group Stock and 2.5 shares
of Series A Liberty Group Stock, subject to adjustment upon certain
events specified in the certificate of designation establishing Series
D Preferred Stock. To the extent any cash dividends are not paid on
any dividend payment date, the amount of such dividends will be deemed
converted into shares of TCI common stock at a conversion rate equal
to 95% of the then current market price of common stock, and upon
issuance of common stock to holders of Series D Preferred Stock in
respect of such deemed conversion, such dividend will be deemed paid
for all purposes. See note 1.
Shares of Series D Preferred Stock are redeemable for cash at the
option of the holder at any time after the tenth anniversary of the
issue date at a price equal to the liquidation value in effect as of
the date of the redemption. Shares of Series D Preferred Stock may
also be redeemed for cash at the option of TCI after the fifth
anniversary of the issue date at such redemption price or after the
third anniversary of the issue date if the market value per share
exceeds certain defined levels for periods specified in the
certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred
Stock, the holders thereof will have the option to convert their
shares of Series D Preferred Stock into common stock at a conversion
rate of 95% of the then current market value of common stock, provided
that such option may not be exercised unless the failure to redeem
continues for more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the
stockholders of TCI.
(continued)
V-52
<PAGE> 203
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Convertible Redeemable Participating Preferred Stock, Series F.
Immediately prior to the record date for the Distribution, the Company
caused each of its subsidiaries holding Subsidiary Shares to exchange
such shares for shares of Series F Preferred Stock having an aggregate
value of not less than that of the Subsidiary Shares so exchanged.
The Company is authorized to issue 500,000 shares of Series F
Preferred Stock, par value $.01 per share. Subsidiaries of TCI hold
all the issued and outstanding shares. Subsidiaries of TCI exchanged
all of the Subsidiary Shares for 355,141 shares of Series F Preferred
Stock. Subsequent to such exchange, a holder of 78,077 shares of
Series F Preferred Stock converted its holdings into 100,524,364
shares of Series A TCI Group Stock. Such shares of Series A TCI Group
Stock are reflected as treasury stock in the accompanying consolidated
financial statements. Such preferred stock of TCI eliminates in
consolidation.
Each share of Series F Preferred Stock was convertible into 1,000
shares of Series A TCI Group Stock, subject to anti-dilution
adjustments, at the option of the holder at any time. The
anti-dilution provisions of the Series F Preferred Stock provide that
the conversion rate of the Series F Preferred Stock will be adjusted
by increasing the number of shares of Series A TCI Group Stock
issuable upon conversion in the event of any non-cash dividend or
distribution of the Series A TCI Group Stock to give effect to the
value of the securities, assets or other property so distributed;
however, no such adjustment shall entitle the holder to receive the
actual security, asset or other property so distributed upon the
conversion of shares of Series F Preferred Stock. Therefore, the
Distribution resulted in an adjustment to the conversion rate of the
Series F Preferred Stock such that each holder has the right to
receive upon conversion 1,287.51 shares of Series A TCI Group Stock.
The holders of the Series F Preferred Stock are entitled to
participate, on an as-converted basis, with the holders of the Series
A TCI Group Stock, with respect to any cash dividends or distribution
declared and paid on the Series A TCI Group Stock. Dividends or
distribution on the Series A TCI Group Stock which are not paid in
cash would result in the adjustment of the applicable conversion rate
as described above.
Upon the dissolution, liquidation or winding up of the Company,
holders of the Series F Preferred Stock will be entitled to receive
from the assets of the Company available for distribution to
stockholders an amount, in cash or property or a combination thereof,
per share of Series F Preferred Stock, equal to the sum of (x) $.01
and (y) the amount to be distributed per share of Series A TCI Group
Stock in such liquidation, dissolution or winding up multiplied by the
applicable conversion rate of a share of Series F Preferred Stock.
(continued)
V-53
<PAGE> 204
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series F Preferred Stock is subject to optional redemption by the
Company at any time after its issuance, in whole or in party, at a
redemption price, per share, equal to the issue price of a share of
Series F Preferred Stock (as adjusted in respect of stock splits,
reverse splits and other events affecting the shares of Series F
Preferred Stock), plus any dividends which have been declared but are
unpaid as of the date fixed for such redemption. The Company may
elect to pay the redemption price (or designated portion thereof) of
the shares of Series F Preferred Stock called for redemption by
issuing to the holder thereof, in respect of its shares to be
redeemed, a number of shares of Series A TCI Group Stock equal to the
aggregate redemption price (or designated portion thereof) of such
shares divided by the average of the last sales prices of the Series A
TCI Group Stock for a period specified, and subject to the adjustments
described, in the certificate of designation establishing the Series F
Preferred Stock.
Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
Preferred Stock") and Redeemable Convertible Liberty Media Group
Preferred Stock, Series H ("Series H Preferred Stock"). Subsequent to
December 31, 1995, TCI issued 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible TCI Group
Preferred Stock, Series G" and 7,259,380 shares of a series of TCI
Series Preferred Stock designated "Redeemable Convertible Liberty
Media Group Preferred Stock, Series H" as consideration for an
acquisition.
The initial liquidation value for the Series G Preferred Stock and
Series H Preferred Stock is $21.60 per share and $5.40 per share,
respectively, subject in both cases, to increase in an amount equal to
aggregate accrued but unpaid dividends, if any. No dividends will
accrue on the Series G or Series H Preferred Stock if the sum of the
last reported sale price of TCI Group Stock plus one-fourth of the
last reported sale price of the Liberty Group Stock equals or exceeds
$27 for any ten consecutive trading days during the 65 trading days
immediately prior to the first anniversary of issuance of the Series G
and Series H Preferred Stock. If the sum of the amounts specified in
the preceding sentence does not equal or exceed $27 for the specified
period, dividends will begin to accrue on the Series G and Series H
Preferred Stock on the first anniversary of issuance of the Series G
and Series H Preferred Stock, and will thereafter be payable
semi-annually commencing August 1, 1997, at the rate of 4% per annum
on the liquidation value. Any dividends paid on the Series G and
Series H Preferred Stock may be paid, at TCI's election, in cash or
shares of TCI Group Stock. Additional dividends will accrue on unpaid
dividends initially at a rate of 4% per annum. The dividend rate on
dividends that remain unpaid for six months will increase to 8.625%
per annum.
(continued)
V-54
<PAGE> 205
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Each share of Series G Preferred Stock is convertible at the option of
the holder at any time prior to the close of business on the last
business day prior to redemption into 1.05 shares of Series A TCI
Group Stock and each share of Series H Preferred Stock is convertible
at any time prior to the close of business on the last business day
prior to redemption into .2625 shares of Series A Liberty Group Stock.
The conversion rights of Series G and Series H Preferred Stock are
subject to adjustment in certain circumstances.
Among other such adjustments, if the Liberty Group Stock, or any other
redeemable capital stock of TCI into which either series of Preferred
Stock may be convertible ("Redeemable Capital Stock"), is redeemed in
full by TCI (the "Redemption Event"), then, except as otherwise
described below, the shares of such Series G and Series H Preferred
Stock will thereafter be convertible into the kind and amount of
consideration that would have been received in such Redemption Event
by a holder of the number of shares of Redeemable Capital Stock that
would have been issuable upon conversion of such shares of Series G
and Series H Preferred Stock, if they had been converted in full
immediately prior to such Redemption Event.
However, if any series of Redeemable Capital Stock into which a series
of Series G or Series H Preferred Stock is then convertible is
redeemed in full by TCI in exchange for securities of another issuer
("Redemption Securities"), TCI may elect to provide the holders of
such Series G or Series H Preferred Stock with the right to exchange
such Series G or Series H Preferred Stock, concurrently with the
Redemption Event, for preferred stock of such other issuer ("Mirror
Preferred Stock"). Such Mirror Preferred Stock shall be convertible
into Redemption Securities and shall otherwise have terms and
conditions comparable to the Series G or Series H Preferred Stock
exchanged. If TCI provides such an exchange right, any holder that
does not then choose to participate in such exchange will continue to
hold such Series G or Series H Preferred Stock but such holder will
lose the conversion right with respect to the Redeemable Capital Stock
redeemed in the Redemption Event and will not have any right to
receive Redemption Securities in lieu thereof. A holder that
participates in such exchange will receive Mirror Preferred Stock
convertible into Redemption Securities, but will no longer hold the
Series G or Series H Preferred Stock so exchanged.
An alternative provision will apply if, at the time of exercise of any
such exchange right provided by TCI, the holder of the applicable
series of Series G or Series H Preferred Stock would be entitled to
receive on conversion any property in addition to the Redeemable
Capital Stock being redeemed. In that case, holders that choose to
participate in the exchange will receive both Mirror Preferred Stock
issued by the issuer of the Redemption Securities of the other issuer
and a new preferred stock of TCI convertible into such additional
property. In such event, the Mirror Preferred Stock and such new TCI
preferred stock will have a combined liquidation value equal to the
liquidation value of the Series G or Series H Preferred Stock
exchanged and will otherwise have terms and conditions comparable to
such Series G or Series H Preferred Stock.
(continued)
V-55
<PAGE> 206
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Series G and Series H Preferred Stock are redeemable at TCI's
option, in whole or in part, any time on or after February 1, 2001.
The Series G and Series H Preferred Stock will be redeemable in full
on February 1, 2016, to the extent then outstanding. In all cases,
the redemption price per share will be the liquidation value thereof,
including the amount of any accrued but unpaid dividends thereon, to
and including the redemption date.
The Series G and Series H Preferred Stock will rank prior to TCI
common stock and the TCI Class B Preferred Stock and pari passu with
all other currently outstanding classes and series of TCI preferred
stock with respect to the declaration and payment of dividends and in
liquidation.
The Series G and Series H Preferred Stock will vote in any general
election of directors of TCI and will have one vote per share for such
purposes and will vote as a single class with the TCI common stock,
the TCI Class B Preferred Stock and any other class or series of TCI
Preferred Stock entitled to vote in any general election of directors.
The Series G and Series H Preferred Stock will have no other voting
rights except as required by the DGCL.
(11) Stockholders' Equity
Common Stock
The Series A TCI Group Stock and Series A Liberty Group Stock each
have one vote per share, and the Series B TCI Group Stock and Series B
Liberty Group Stock each have ten votes per share. Each share of
Series B TCI Group Stock is convertible, at the option of the holder,
into one share of Series A TCI Group Stock, and each share of Series B
Liberty Group Stock is convertible, at the option of the holder, into
one share of Series A Liberty Group Stock. See note 1.
The rights of holders of the TCI Group Stock upon liquidation of TCI
are based upon the ratio of the aggregate market capitalization, as
defined, of the TCI Group Stock to the aggregate market
capitalization, as defined, of the TCI Group Stock and the Liberty
Group Stock.
Similarly, the rights of holders of the Liberty Group Stock upon
liquidation of TCI are based upon the ratio of the aggregate market
capitalization, as defined, of the Liberty Group Stock to the
aggregate market capitalization, as defined, of the Liberty Group
Stock and the TCI Group Stock.
Employee Benefit Plans
The Company has several employee stock purchase plans (the "Plans") to
provide employees an opportunity for ownership in the Company and to
create a retirement fund. Terms of the Plans generally provide for
employees to contribute up to 10% of their compensation to a trust for
investment in TCI Group Stock and Liberty Media Group Stock. The
Company, by annual resolution of the Board, generally contributes up
to 100% of the amount contributed by employees. Certain of the
Company's subsidiaries have their own employee benefit plans.
Contributions to all plans aggregated $28 million, $21 million and $16
million for 1995, 1994 and 1993, respectively.
(continued)
V-56
<PAGE> 207
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Preferred Stock
Class A Preferred Stock. The Company is authorized to issue 700,000
shares of Class A Preferred Stock, par value $.01 per share.
Subsidiaries of TCI held all of the issued and outstanding shares of
such stock, amounting to 592,797 shares. Such preferred stock
eliminated in consolidation. The holders of the Class A Preferred
Stock exchanged such Subsidiary Shares for shares of Series F
Preferred Stock immediately prior to the record date of the
Distribution. See note 1.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
The Company is authorized to issue 1,675,096 shares of Class B
Preferred Stock and 1,620,026 of such shares are issued and
outstanding.
Dividends accrue cumulatively (but without compounding) at an annual
rate of 6% of the stated liquidation value of $100 per share (the
"Stated Liquidation Value"), whether or not such dividends are
declared or funds are legally available for payment of dividends.
Accrued dividends will be payable annually on March 1 of each year (or
the next succeeding business day if March 1 does not fall on a
business day), and, in the sole discretion of the Board, may be
declared and paid in cash, in shares of Series A TCI Group Stock or in
any combination of the foregoing. Accrued dividends not paid as
provided above on any dividend payment date will accumulate and such
accumulated unpaid dividends may be declared and paid in cash, shares
of Series A TCI Group Stock or any combination thereof at any time
(subject to the rights of any senior stock and, if applicable, to the
concurrent satisfaction of any dividend arrearages on any class or
series of TCI preferred stock ranking on a parity with the Class B
Preferred Stock with respect to dividend rights) with reference to any
regular dividend payment date, to holders of record of Class B
Preferred Stock as of a special record date fixed by the Board (which
date may not be more than 45 days nor less than 10 days prior to the
date fixed for the payment of such accumulated unpaid dividends). The
Class B Preferred Stock ranks junior to the Series F Preferred Stock
with respect to the declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of Series A TCI Group Stock, the
number of such shares to be issued and delivered will be determined by
dividing the amount of the dividend to be paid in shares of Series A
TCI Group Stock by the Average Market Price of the Series A TCI Group
Stock. For this purpose, "Average Market Price" means the average of
the daily last reported sale prices (or, if no sale price is reported
on any day, the average of the high and low bid prices on such day) of
a share of Series A TCI Group Stock for the period of 20 consecutive
trading days ending on the tenth trading day prior to the regular
record date or special record date, as the case may be, for the
applicable dividend payment.
(continued)
V-57
<PAGE> 208
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to
the Class B Preferred Stock with respect to liquidating distributions,
to receive from the assets of TCI available for distribution to
stockholders an amount in cash or property or a combination thereof,
per share, equal to the Stated Liquidation Value thereof, plus all
accumulated and accrued but unpaid dividends thereon to and including
the redemption date. TCI does not have any mandatory obligation to
redeem the Class B Preferred Stock as of any fixed date, at the option
of the holders or otherwise.
Subject to the prior preferences and other rights of any class or
series of TCI preferred stock, the Class B Preferred Stock will be
exchangeable at the option of TCI in whole but not in part at any time
for junior subordinated debt securities of TCI ("Junior Exchange
Notes"). The Junior Exchange Notes will be issued pursuant to an
indenture (the "Indenture"), to be executed by TCI and a qualified
trustee to be chosen by TCI.
If TCI exercises its optional exchange right, each holder of
outstanding shares of Class B Preferred Stock will be entitled to
receive in exchange therefor newly issued Junior Exchange Notes of a
series authorized and established for the purpose of such exchange,
the aggregate principal amount of which will be equal to the aggregate
Stated Liquidation Value of the shares of Class B Preferred Stock so
exchanged by such holder, plus all accumulated and accrued but unpaid
dividends thereon to and including the exchange date. The Junior
Exchange Notes will be issuable only in principal amounts of $100 or
any integral multiple thereof and a cash adjustment will be paid to
the holder for any excess principal that would otherwise be issuable.
The Junior Exchange Notes will mature on the fifteenth anniversary of
the date of issuance and will be subject to earlier redemption at the
option of TCI, in whole or in part, for a redemption price equal to
the principal amount thereof plus accrued but unpaid interest.
Interest will accrue, and be payable annually, on the principal amount
of the Junior Exchange Notes at a rate per annum to be determined
prior to issuance by adding a spread of 215 basis points to the
"Fifteen Year Treasury Rate" (as defined in the Indenture). Interest
will accrue on overdue principal at the same rate, but will not accrue
on overdue interest.
The Junior Exchange Notes will represent unsecured general obligations
of TCI and will be subordinated in right of payment to all Senior Debt
(as defined in the Indenture).
(continued)
V-58
<PAGE> 209
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For so long as any dividends are in arrears on the Class B Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Class B Preferred Stock which is entitled to payment of
cumulative dividends prior to the redemption, exchange, purchase or
other acquisition of the Class B Preferred Stock, and until all
dividends accrued up to the immediately preceding dividend payment
date on the Class B Preferred Stock and such parity stock shall have
been paid or declared and set apart so as to be available for payment
in full thereof and for no other purpose, neither TCI nor any
subsidiary thereof may redeem, exchange, purchase or otherwise acquire
any shares of Class B Preferred Stock, any such parity stock or any
class or series of its capital stock ranking junior to the Class B
Preferred Stock (including the TCI common stock), or set aside any
money or assets for such purpose, unless all of the outstanding shares
of Class B Preferred Stock and such parity stock are redeemed. If TCI
fails to redeem or exchange shares of Class B Preferred Stock on a
date fixed for redemption or exchange, and until such shares are
redeemed or exchanged in full, TCI may not redeem or exchange any
parity stock or junior stock, declare or pay any dividend on or make
any distribution with respect to any junior stock or set aside money
or assets for such purpose and neither TCI nor any subsidiary thereof
may purchase or otherwise acquire any Class B Preferred Stock, parity
stock or junior stock or set aside money or assets for any such
purpose. The failure of TCI to pay any dividends on any class or
series of parity stock or to redeem or exchange on any date fixed for
redemption or exchange any shares of Class B Preferred Stock shall not
prevent TCI from (i) paying any dividends on junior stock solely in
shares of junior stock or the redemption purchase or other acquisition
of junior stock solely in exchange for (together with cash adjustment
for fractional shares, if any) or (but only in the case of a failure
to pay dividends on any parity stock) through the application of the
proceeds from the sale of, shares of junior stock; or (ii) the payment
of dividends on any parity stock solely in shares of parity stock
and/or junior stock or the redemption, exchange, purchase or other
acquisition of Class B Preferred Stock or parity stock solely in
exchange for (together with a cash adjustment for fractional shares,
if any), or (but only in the case of failure to pay dividends on any
parity stock) through the application of the proceeds from the sale
of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of
directors, will have one vote per share for such purpose and will vote
as a single class with the TCI common stock and any class or series of
TCI preferred stock entitled to vote in any general election of
directors. The Class B Preferred Stock will have no other voting
rights except as required by the DGCL.
Series Preferred Stock. The TCI Series Preferred Stock is issuable,
from time to time, in one or more series, with such designations,
preferences and relative participating, option or other special
rights, qualifications, limitations or restrictions thereof, as shall
be stated and expressed in a resolution or resolutions providing for
the issue of such series adopted by the Board.
(continued)
V-59
<PAGE> 210
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Redeemable Convertible Preferred Stock, Series E. In connection with
the Reorganization, the Board created and authorized the issuance of
the Redeemable Convertible Preferred Stock, Series E, par value $.01
per share. The Company is authorized to issue 400,000 shares of such
preferred stock. Subsidiaries of TCI held all of the issued and
outstanding shares of such stock, amounting to 246,402 shares. All
such preferred stock eliminated in consolidation. The holders of the
Series E Preferred Stock exchanged such Subsidiary Shares for shares
of Series F Preferred Stock immediately prior to the record date of
the Distribution.
Stock Options
In 1994, the Company adopted the Tele-Communications, Inc. 1994 Stock
Incentive Plan (the "1994 Plan"). The Plan provided for awards to be
made in respect of a maximum of 16 million shares of TCI Class A
common stock. Awards may be made as grants of stock options, stock
appreciation rights, restricted shares, stock units or any combination
thereof. Pursuant to the TCI/Liberty Merger Agreement and certain
assumption agreements, stock options and/or stock appreciation rights
granted (or assumed) by Old TCI and stock options and/or stock
appreciation rights granted by Liberty were assumed by the Company and
new options and/or stock appreciation rights were substituted under
the 1994 Plan. The following descriptions represent the terms of the
assumed options and/or stock appreciation rights and additional awards
under the 1994 Plan.
The 1994 Plan was adjusted to provide that the number and type of
shares subject to future awards consists of a number of shares of
Series A TCI Group Stock equal to the number of shares of Class A
common stock subject to future awards immediately prior to the
Distribution and a number of shares of Series A Liberty Group Stock
equal to one-fourth of the number of shares of Class A common stock
subject to future awards immediately prior to Distribution. Following
the Distribution, the Compensation Committee of TCI may in its
discretion grant awards, including awards of options on, or stock
appreciation rights respecting, shares of Series A TCI Group Stock,
Series A Liberty Group Stock, or combinations thereof, in such amounts
and types as it determines in accordance with the terms of the 1994
Plan, as adjusted.
In 1995, the Company adopted the Tele-Communications, Inc. 1995
Employee Stock Incentive Plan (the "1995 Plan"). In addition, the
Company has established the Tele-Communications, Inc. 1996 Stock
Incentive Plan (the "1996 Plan") which is subject to stockholder
approval.
(continued)
V-60
<PAGE> 211
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the Distribution, each holder of an outstanding
option or stock appreciation right received an additional option or
stock appreciation right, as applicable, covering a number of shares
of Series A Liberty Group Stock equal to one-fourth of the number of
shares of Class A common stock theretofore subject to the outstanding
option or stock appreciation right, and the outstanding option or
stock appreciation right would continue in effect as an option or
stock appreciation right covering the same number of shares of Series
A TCI Group Stock (as redesignated) that were theretofore subject to
the option or stock appreciation right. The aggregate pre-adjustment
strike price of the outstanding options or stock appreciation rights
was allocated between the outstanding options or stock appreciation
rights and the newly issued options or stock appreciation rights in a
ratio determined by the Compensation Committee. The following
descriptions of stock options and/or stock appreciation rights have
been adjusted to reflect such change.
The following table presents information regarding certain options in
tandem with stock appreciation rights ("SARs") to purchase Class A,
Series A TCI Group Stock and Series A Liberty Group Stock pursuant to
the 1994 Plan, the 1995 Plan and the 1996 Plan:
<TABLE>
<CAPTION>
Series A Liberty
Class A Series A TCI Media Group
common stock Group Stock Stock
--------------- --------------- --------------
<S> <C> <C> <C>
Outstanding at January 1, 1993 4,525,578 -- --
Granted 3,955,000 -- --
Exercised (96,242) -- --
Canceled (75,000) -- --
-------------- --------------- --------------
Outstanding at December 31, 1993 8,309,336 -- --
Granted 3,191,000 -- --
Assumed 54,600 -- --
Exercised (217,483) -- --
Canceled (16,625) -- --
-------------- --------------- --------------
Outstanding at December 31, 1994 11,320,828 -- --
Converted from Class A options (11,218,866) 11,218,866 --
Adjustment for Distribution -- -- 2,804,715
Granted -- 7,407,500 2,211,000
Exercised (91,962) (933,516) (227,003)
Canceled (10,000) (90,500) (22,625)
-------------- --------------- --------------
Outstanding at December 31, 1995 -- 17,602,350 4,766,087
============== =============== ==============
Exercise Price $8.83-19.56 $6.60-17.00 $8.83-24.00
============== =============== ==============
Vesting period 4-5 years 4-5 years
============== =============== ==============
</TABLE>
On December 13, 1995, pursuant to the 1994 Plan, the Company awarded
330,000 restricted shares of Series A TCI Group common stock and
30,000 restricted shares of Series A Liberty Group Stock to certain
officers and other key employees of the Company. Such restricted
shares vest as to 50% on December 13, 2000 and as to the remaining 50%
on December 13, 2001.
(continued)
V-61
<PAGE> 212
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SARs with respect to 1,423,500 shares of Series A TCI Group Stock and
355,875 shares of Series A Liberty Group Stock were outstanding at
December 31, 1995. These rights have an adjusted strike price of
$0.60 and $0.82 per share, respectively, and become exercisable and
vest evenly over seven years, beginning March 28, 1992. The SARs
expire on March 28, 2001. The Company has the option of paying the
holder in stock or cash.
On August 3, 1995, stockholders of the Company approved the Director
Stock Option Plan including the grant, effective as of November 16,
1994, to each person that as of that date was a member of the Board
and was not an employee of the Company or any of its subsidiaries, of
options to purchase 50,000 shares of TCI Class A common stock.
Pursuant to the Director Stock Option Plan, options to purchase
300,000 shares of Series A TCI Group common stock were granted at an
exercise price of $16.50 per share and options to purchase 75,000
shares of Series A Liberty Group Stock were granted at an exercise
price of $22.00 per share and will vest and become exercisable over a
five-year period, commencing on November 16, 1995 and will expire on
November 16, 2004 During the year ended December 31, 1995, options to
purchase 50,000 shares of Series A TCI Group Stock and options to
purchase 12,500 shares of Series A Liberty Media Group Stock were
canceled.
Estimated compensation relating to restricted stock awards, options
with tandem SARs and SARs has been recorded through December 31, 1995,
but is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights
are exercised or the restricted stock awards are vested.
Other
In connection with the exercise of a stock option by an
officer/director of Liberty, a note was given to Liberty as partial
payment of the exercise price. This note bore interest at 7.54% per
annum. At the date of the TCI/Liberty Combination, the Company
recorded the net assumed note receivable, amounting to approximately
$15 million, from such officer as a reduction of stockholders' equity.
On October 27, 1994, such officer tendered to the Company 634,917
shares of TCI Class B common stock in full payment of principal and
interest amounting to $15 million.
The shares issued by Liberty upon exercise of the aforementioned
Liberty option, together with all subsequent dividends and
distributions thereon, were subject to repurchase by Liberty under
certain circumstances. Such shares were exchanged for 15,600,000
shares of TCI Class A common stock and 200,000 shares of Class B
Preferred Stock in the TCI/Liberty Combination. The Company's
repurchase right terminates as to 20% of the Option Units per year,
commencing March 28, 1992, and will terminate as to all of the Option
Units on March 28, 1996 or in the event of death, disability or under
certain other circumstances.
(continued)
V-62
<PAGE> 213
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The excess of consideration received on debentures converted or
options exercised over the par value of the stock issued is credited
to additional paid-in capital.
At December 31, 1995, there were 75,466,614 shares of Series A TCI
Group Stock and 19,179,651 shares of Series A Liberty Group Stock
reserved for issuance under exercise privileges related to options,
convertible debt securities and convertible preferred stock and upon
vesting of the restricted stock awards described in this note 11 and
in notes 9 and 10. Additionally, in January of 1996, the Company
issued 7,259,380 shares each of Series G Preferred Stock and Series H
Preferred Stock (see note 10). Such preferred stocks are convertible
into 7,622,349 shares of Series A TCI Group Stock and 1,905,587 shares
of Series A Liberty Group Stock. In addition, one share of Series A
TCI Group Stock is reserved for each outstanding share of Series B TCI
Group Stock and one share of Series A Liberty Group Stock is reserved
for each outstanding share of Series B Liberty Group Stock. See note
1 for the effect of the Distribution on the conversion rights of
holders of convertible securities.
(12) Transactions with Officers and Directors
Effective January 31, 1996, a director of the Company purchased
one-third of the Company's interest in two limited partnerships and
obtained two ten-year options to purchase the Company's remaining
partnership interests. The purchase price for the one-third partnership
interests was 37.209 shares of WestMarc Communications, Inc. (a
wholly-owned subsidiary of the Company) Series C Cumulative Compounding
Preferred Stock owned by such director, and the purchase price for the
ten-year options was $100 for each option. All options are exercisable
for cash in the aggregate amount of $3,000,000.
(13) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the
"IPO") in which it sold 20 million shares of TINTA Series A common
stock to the public for consideration of $16.00 per share aggregating
$320 million, before deducting related expenses (approximately $19
million). The shares sold to the public represented 17% of TINTA's
total issued and outstanding common stock. Also in July 1995, TINTA
issued 687,500 shares of TINTA Series A common stock as partial
consideration for a 35% ownership interest in Torneos Y Competencias
S.A., an Argentine sports programming company (the "TYC Acquisition").
As a result of the IPO and the TYC Acquisition, the Company has
recognized a gain amounting to $123 million. Subsequent to the IPO and
the TYC Acquisition, TCI owns 82% of the issued and outstanding stock
of TINTA, representing in excess of 90% of the voting power of TINTA.
In June 1995, Flextech issued share capital for cash and preferred
shares of Thomson Directories Limited. In connection with such
issuance, the Company recorded a $51 million increase to stockholders'
equity and a $93 million increase to minority interests in equity of
consolidated subsidiaries. No gain was recognized in the Company's
consolidated statement of operations due primarily to the existence of
the Company's contingent obligations to repurchase certain of the
Flextech share capital.
(continued)
V-63
<PAGE> 214
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Income Taxes
TCI files a consolidated Federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which the
Company owns less than 80% each file a separate income tax return.
TCI and such subsidiaries calculate their respective tax liabilities
on a separate return basis which are combined in the accompanying
consolidated financial statements.
Income tax benefit (expense) for the years ended December 31, 1995, 1994 and
1993 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal $ (23) 130 107
State and local (10) 23 13
-------- -------- --------
$ (33) 153 120
======== ======== ========
Year ended December 31, 1994:
Federal $ (69) (29) (98)
State and local (14) (8) (22)
-------- -------- --------
$ (83) (37) (120)
======== ======== ========
Year ended December 31, 1993:
Federal $ (14) (120) (134)
State and local (15) (20) (35)
-------- -------- --------
$ (29) (140) (169)
======== ======== ========
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the Federal income tax rate of 35% as a result of the
following:
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax benefit
(expense) $ 102 (64) (57)
Adjustment to deferred tax assets
and liabilities for enacted change
in Federal income tax rate -- -- (76)
Amortization not deductible for
tax purposes (25) (13) (12)
Minority interest in losses (earnings)
of consolidated subsidiaries 9 (3) (1)
Gain on sale of subsidiary stock 43 -- --
Recognition of losses of
consolidated partnership -- (10) (8)
State and local income taxes,
net of Federal income tax benefit (4) (20) (23)
Valuation allowance on
foreign corporation -- (10) --
Other (5) -- 8
-------- -------- --------
$ 120 (120) (169)
======== ======== ========
</TABLE>
(continued)
V-64
<PAGE> 215
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- --------
amounts in millions
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 583 490
Less - valuation allowance (121) (100)
Investment tax credit carryforwards 118 122
Less - valuation allowance (41) (36)
Alternative minimum tax credit
carryforwards 95 90
Investments in affiliates, due
principally to losses of affiliates
recognized for financial statement
purposes in excess of losses
recognized for income tax purposes 176 294
Future deductible amounts principally
due to non-deductible accruals 90 52
Other 10 19
-------- --------
Net deferred tax assets 910 931
-------- --------
Deferred tax liabilities:
Property and equipment, principally
due to differences in depreciation 1,111 1,197
Franchise costs, principally due to
differences in amortization 3,569 2,600
Investment in affiliates, due
principally to undistributed
earnings of affiliates 499 452
Intangible assets, principally due to
differences in amortization 42 108
Leases capitalized for tax purposes 53 --
Other 166 83
-------- --------
Total gross deferred tax liabilities 5,440 4,440
-------- --------
Net deferred tax liability $ 4,530 3,509
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1995
was $162 million. Such balance increased by $26 million from December
31, 1994.
At December 31, 1995, the Company had net operating loss carryforwards
for income tax purposes aggregating approximately $1,177 million of
which, if not utilized to reduce taxable income in future periods, $134
million expires in 2003, $116 million in 2004, $344 million in 2005,
$325 million in 2006, $138 million in 2009 and $120 million in 2010.
Certain subsidiaries of the Company had additional net operating loss
carryforwards for income tax purposes aggregating approximately $245
million and these net operating losses are subject to certain rules
limiting their usage.
(continued)
V-65
<PAGE> 216
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1995, the Company had remaining available investment
tax credits of approximately $63 million which, if not utilized to
offset future Federal income taxes payable, expire at various dates
through 2005. Certain subsidiaries of the Company had additional
investment tax credit carryforwards aggregating approximately $55
million and these investment tax credit carryforwards are subject to
certain rules limiting their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries
which filed separate income tax returns are presently under examination
by the Internal Revenue Service for the years 1981 through 1992. A
subsidiary of the Company has filed a petition in United States Tax
Court protesting the disallowance of certain Transitional Investment
Tax Credits and such issue will likely be litigated in 1996. In the
opinion of management, any additional tax liability, not previously
provided for, resulting from these examinations, ultimately determined
to be payable, should not have a material adverse effect on the
consolidated financial position of the Company.
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate
from 34% to 35%. The Company has reflected the tax rate change in its
consolidated statements of operations. Such tax rate change resulted
in an increase of $76 million to income tax expense and deferred
income tax liability.
(15) Commitments and Contingencies
During 1994, subsidiaries of the Company, Comcast, Cox (collectively,
the "Cable Partners") and Sprint formed a partnership ("WirelessCo")
to engage in the business of providing wireless communications
services on a nationwide basis. Through WirelessCo, in which the
Company owns an indirect 30% interest, the partners participated in
auctions ("PCS Auctions") of broadband personal communications
services ("PCS") licenses conducted by the Federal Communications
Commission ("FCC"). In the first round auction, which concluded
during the first quarter of 1995, WirelessCo was the winning bidder
for PCS licenses for 29 markets, including New York, San
Francisco-Oakland-San Jose, Detroit, Dallas-Fort Worth,
Boston-Providence, Minneapolis-St. Paul and Miami-Fort Lauderdale.
The aggregate license cost for these licenses was approximately $2.1
billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and agreed to make capital
contributions to APC equal to 49/51 of the cost of APC's PCS license.
Additional capital contributions may be required in the event APC is
unable to finance the full cost of its PCS license. WirelessCo may
also be required to finance the build-out expenditures for APC's PCS
system. Cox, which holds a pioneer preference PCS license for the Los
Angeles-San Diego market, and WirelessCo have also agreed on the
general terms and conditions upon which Cox (with a 51% interest) and
WirelessCo (with a 49% interest) would form a partnership to hold and
develop a PCS system using the Los Angeles-San Diego license. APC and
the Cox partnership would affiliate their PCS systems with WirelessCo
and be part of WirelessCo's nationwide integrated network, offering
wireless communications services under the "Sprint" brand.
(continued)
V-66
<PAGE> 217
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1994, subsidiaries of Cox, Sprint and the Company also formed a
separate partnership ("PhillieCo"), in which the Company owns a 35.3%
interest. PhillieCo was the winning bidder in the first round auction
for a PCS license for the Philadelphia market at a license cost of $85
million. To the extent permitted by law, the PCS system to be
constructed by PhillieCo would also be affiliated with WirelessCo's
nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful
bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal
partnership is MajorCo, to which they contributed their respective
interests in WirelessCo and through which they formed another
partnership, NewTelco, L.P. ("New Telco") to engage in the business of
providing local wireline communications services to residences and
businesses on a nationwide basis. The Cable Partners agreed to
contribute their interests in TCG to NewTelco. TCG is one of the
largest competitive access providers in the United States in terms of
route miles.
Effective January 31, 1996, the Partners amended the MajorCo
partnership agreement (the "Partnership Agreement") and certain other
agreements related thereto. Under the Partnership Agreement, the
business of MajorCo and its subsidiaries will be the provision of
certain wireless and other services described in the Partnership
Agreement. The Partners intend for WirelessCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in
the wireless telephony service businesses, subject to certain
exceptions. MajorCo will no longer be authorized to engage in the
business of providing local wireline communications services to
residences and businesses. In connection with the amendment of the
Partnership Agreement, the Partners, also agreed to the termination of
the agreement to contribute the Cable Partners' interests in TCG to
NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint
have agreed to negotiate in good faith on a market-by-market basis for
the provision of local wireline telephony services over the cable
television facilities of the respective Cable Partner under the Sprint
brand. Accordingly, local wireline telephony offerings in each market
would be the subject of individual agreements to be negotiated with
Sprint, rather than being provided by MajorCo, as originally
contemplated. The Cable Partners and Sprint also reaffirmed their
intention to continue to attempt to integrate the business of TCG with
that of MajorCo. In addition, each Cable Partner agreed to certain
restrictions on its ability to offer, promote, or package certain of
its products or services with certain products and services of other
persons and agreed to make its facilities available to Sprint for
specified purposes to the extent and on the terms that it has made
such facilities available to others for such purposes. Such
agreements have a term of five years, but under certain circumstances
may terminate after three years.
(continued)
V-67
<PAGE> 218
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Execution of the foregoing agreements was a condition to the
effectiveness of a previously approved business plan for the build out
of WirelessCo's nationwide network for wireless personal
communications services. Pursuant to the business plan, the Partners
are obligated to make additional cash capital contributions to MajorCo
in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996. The business plan
contemplates that MajorCo will require additional equity thereafter.
In July 1995, TCIC and TCI entered into certain agreements with Viacom
Inc. ("Viacom") and certain subsidiaries of Viacom regarding the
purchase by TCIC of all of the common stock of a subsidiary of Viacom
("Cable Sub") which, at the time of purchase, will own Viacom's cable
systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets,
as well as all of its liabilities other than current liabilities, to a
new subsidiary of Viacom ("New Viacom Sub"). Cable Sub will also
transfer to New Viacom Sub the proceeds (the "Loan Proceeds") of a
$1.7 billion loan facility (the "Loan Facility") to be arranged by
TCIC, TCI and Cable Sub. Following these transfers, Cable Sub will
retain cable assets with an estimated value at closing of
approximately $2.2 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan
Proceeds will be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common
Stock and Viacom Class B Common Stock (collectively, "Viacom Common
Stock") the opportunity to exchange (the "Exchange Offer") a portion
of their shares of Viacom Common Stock for shares of Class A Common
Stock, par value $100 per share, of Cable Sub ("Cable Sub Class A
Stock"). The Exchange Offer will be subject to a number of
conditions, including a condition (the "Minimum Condition") that
sufficient tenders are made of Viacom Common Stock that permit the
number of shares of Cable Sub Class A Stock issued pursuant to the
Exchange Offer to equal the total number of shares of Cable Sub Class
A Stock issuable in the Exchange Offer.
(continued)
V-68
<PAGE> 219
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Immediately following the completion of the Exchange Offer, TCIC will
acquire from Cable Sub shares of Cable Sub Class B common stock for
$350 million (which will be used to reduce Cable Sub's obligations
under the Loan Facility). At the time of such acquisition, the Cable
Sub Class A Stock received by Viacom stockholders pursuant to the
Exchange Offer will automatically convert into a series of senior
cumulative exchangeable preferred stock (the "Exchangeable Preferred
Stock") of Cable Sub with a stated value of $100 per share (the
"Stated Value"). The terms of the Exchangeable Preferred Stock,
including its dividend, redemption and exchange features, will be
designed to cause the Exchangeable Preferred Stock, in the opinion of
two investment banks, to initially trade at the Stated Value. The
Exchangeable Preferred Stock will be exchangeable, at the option of
the holder commencing after the fifth anniversary of the date of
issuance, for shares of Series A TCI Group Stock. The Exchangeable
Preferred Stock will also be redeemable, at the option of Cable Sub,
after the fifth anniversary of the date of issuance, and will be
subject to mandatory redemption on the tenth anniversary of the date
of issuance at a price equal to the Stated Value per share plus
accrued and unpaid dividends, payable in cash or, at the election of
Cable Sub, in shares of Series A TCI Group Stock, or in any
combination of the foregoing. If insufficient tenders are made by
Viacom stockholders in the Exchange Offer to permit the Minimum
Condition to be satisfied, Viacom will extend the Exchange Offer for
up to 15 business days and, during such extension, TCI and Viacom are
to negotiate in good faith to determine mutually acceptable changes to
the terms and conditions for the Exchangeable Preferred Stock and the
Exchange Offer that each believes in good faith will cause the Minimum
Condition to be fulfilled and that would cause the Exchangeable
Preferred Stock to trade at a price equal to the Stated Value
immediately following the expiration of the Exchange Offer. In the
event the Minimum Condition is not thereafter met, TCI and Viacom will
each have the right to terminate the transaction. In addition, either
party may terminate the transaction if the exchange offer has not
commenced by June 24, 1996 or been consummated by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal
Revenue Service that the transaction qualifies as a tax-free
transaction and the satisfaction or waiver of all of the conditions of
the Exchange Offer. A request for a letter ruling from the Internal
Revenue Service has been filed by Viacom. The Company believes that,
based upon the unique and complex structure of the transaction, there
exists significant uncertainty as to whether a favorable ruling will
be obtained. In light of the foregoing, management of the Company has
concluded that consummation of the transaction is not yet probable.
No assurance can be given that the transaction will be consummated.
(continued)
V-69
<PAGE> 220
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On October 31, 1995, Liberty Media Group announced that it had entered
into a binding agreement in principle with The News Corporation
Limited ("News Corp.") and TINTA. In the United States, Liberty Media
Group and News Corp. agreed to form a partnership (the "Fox-Liberty
Venture") into which Liberty Media Group will contribute interests in
its national and regional sports networks and into which News Corp.
will contribute its fx cable network and certain other assets. Upon
consummation, Liberty Media Group will receive a 50% interest in the
Fox-Liberty Venture and $350 million in cash. The fx network will be
transformed into a nationally distributed, general entertainment and
sports network. The regional sports networks currently operated under
the Prime Sports name will be relaunched under the Fox Sports banner.
Internationally, News Corp., and a 50/50 partnership forms by Liberty
Sports, Inc., a wholly-owned subsidiary of Liberty Media Group, and
TINTA (the "Liberty-TINTA Partnership") have agreed to form a venture
to operate currently existing sports services in Asia, Latin American
and Australia and a variety of new sports services throughout the
world except in the United Kingdom, Japan and New Zealand where prior
arrangements preclude an immediate collaboration. The Liberty-TINTA
Partnership will own 50% of the international venture with News Corp.
owning the other 50%. News Corp. is contributing various
international sports rights, including the Star Sports channel which
is broadcast throughout Asia as part of the Star package of services.
The Liberty-TINTA Partnership is contributing Prime Deportiva, a
Spanish language sports service distributed in Latin American and in
Hispanic markets in the United States, an interest in Torneos y
Competencias S.A., an Argentinean sports programming and production
business, various international sports and satellite transponder
rights and cash. The Liberty-TINTA Partnership will also contribute
their 50% interest in Premiere Sports and All-Star Sports in
Australia. Both are 24-hour sports services available via MMDS or
cable television in Australia.
The transactions contemplated by the above agreements are expected to
close during 1996.
On November 27, 1995, the Company announced that it had agreed to
exchange its controlling interest in Home Shopping Network, Inc.
("HSN") for shares of Silver King Communications, Inc. ("Silver
King"). The Company will receive approximately 11 million newly
issued shares of Silver King in exchange for it 37.5 million shares of
HSN.
(continued)
V-70
<PAGE> 221
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995
pursuant to which an option owned by Liberty Media Group to purchase 2
million shares of Silver King Class B common stock (the "Option")
(which shares would constitute voting control of Silver King) would be
transferred to Silver Management Company ("Silver Company"), an entity
in which Liberty Media Group would own all of the non-voting equity
interests (which would constitute substantially all of the equity of
such entity) and Mr. Diller would own all of the voting equity
interests. Silver Company would thereafter exercise the Option and
hold the shares of Silver King Class B Common Stock purchased
thereunder. In an amendment to such agreement entered into in
November 1995, Liberty Media Group agreed to contribute all of its
shares of HSN (which shares constitute approximately 41% of the equity
of HSN and approximately 80% of the voting power of HSN) to Silver
Company in return for additional non-voting equity interests in Silver
Company. Following such contribution Silver Company would exchange
such HSN shares with Silver King for additional shares of Silver King
Common Stock and Class B Common Stock (thereby increasing Silver
Company's controlling interest in Silver King to in excess of 80% of
the voting power of Silver King). Each such transaction is subject to
the satisfaction of certain conditions, including the receipt of all
necessary regulatory consents and approvals. If consummated, HSN
would cease to be a subsidiary of the Company and therefore, the
financial results of HSN would not be consolidated with the financial
results of Liberty Media Group. Although the Company would cease to
possess voting control over HSN, it would continue to have an indirect
equity interest in HSN through its ownership of the equity securities
of Silver Company. No assurance can be given that the transaction
will be consummated.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In
1993 and 1994, the FCC adopted certain rate regulations required by
the 1992 Cable Act and imposed a moratorium on certain rate increases.
As a result of such actions, the Company'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 evaluated
against competitive benchmark rates as published by the FCC, and
equipment and installation charges are based on actual costs. Any
rates for Regulated Services that exceeded the benchmarks were reduced
as required by the 1993 and 1994 rate regulations. The rate
regulations do not apply to the relatively few systems which are
subject to "effective competition" or to services offered on an
individual service basis, such as premium movie and pay-per-view
services.
(continued)
V-71
<PAGE> 222
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company believes that it has complied in all material respects
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, the Company's rates for Regulated Services are
subject to review by the FCC, if a complaint has been filed, or the
appropriate franchise authority, if such authority has been certified.
If, as a result of the review process, a system cannot substantiate
its rates, it could be required to retroactively reduce its rates to
the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of tier service rates
would be retroactive to the date of complaint. Any refunds of the
excess portion of all other Regulated Service rates would be
retroactive to one year prior to the implementation of the rate
reductions.
On October 30, 1995, the FCC accepted for comment a proposed
resolution of all complaints against the cable programming services
tier ("CPST") currently pending against cable systems owned by the
Company. If the proposed resolution is accepted by the FCC, the
Company will settle all pending complaints by a one-time credit to
each subscriber in CPST regulated franchises. The aggregate amount of
such credits is approximately $9 million and had previously been
accrued by the Company. In addition, the FCC will find that the CPST
rates in CPST regulated franchises on September 15, 1995 comply with
federal regulations. The Company has committed not to file any
additional cost-of-service filings until May 15, 1996 in franchises
that were subject to CPST regulation prior to September 15, 1995.
However, the Company will be able to avail itself of the other
mechanisms under FCC rules to recover costs, including abbreviated
cost-of-service filings covering system rebuilds and upgrades. In the
proposed resolution, the Company does not admit any violation of, or
any failure to conform to, the 1992 Cable Act or the rules promulgated
thereunder. The comment period has ended and the Company is awaiting
action by the FCC.
The Company is obligated to pay fees for the license to exhibit
certain qualifying films that are released theatrically by various
motion picture studios through February 28, 2009 (the "Film Licensing
Obligations"). The aggregate minimum liability under certain of the
license agreements is approximately $414 million. The aggregate
amount of the Film Licensing Obligations under other license
agreements is not currently estimable because such amount is dependent
upon certain variable factors. Nevertheless, the Company's aggregate
payments under the Film License Obligations could prove to be
significant. Additionally, the Company has guaranteed up to $67
million of similar license fee obligations of an affiliate.
The Company has long-term sports program rights contracts which
require payments through 2006. Future payments for each of the next
five years as follows (amounts in millions):
<TABLE>
<S> <C>
1996 $84
1997 73
1998 62
1999 55
2000 46
</TABLE>
(continued)
V-72
<PAGE> 223
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $222 million at December 31, 1995. Although there can
be no assurance, management of the Company believes that it will not
be required to meet its obligations under such guarantees, or if it is
required to fulfill any of such guarantees, that they will not be
material to the Company.
The Company has also committed to provide additional debt or equity
funding to certain of its affiliates. At December 31, 1995, such
commitments aggregated $95 million.
The Company leases business offices, has entered into pole rental
agreements and transponder lease agreements and uses certain equipment
under lease arrangements. Rental expense under such arrangements
amounted to $142 million, $82 million and $70 million in 1995, 1994
and 1993, respectively.
Future minimum lease payments under noncancellable operating leases
for each of the next five years are summarized as follows (amounts in
millions):
<TABLE>
<S> <C>
1996 $104
1997 101
1998 89
1999 86
2000 73
</TABLE>
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less
than the amount shown for 1996.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statement, but are subject to
future adjustment based upon the market value of the respective common
stock and, ultimately, on the final market value when the rights are
exercised or the restricted stock awards are vested.
The Company has contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(continued)
V-73
<PAGE> 224
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Information about the Company's Operations
Subsequent to the consummation of the TCI/Liberty Combination, the
Company operates primarily in two industry segments: cable and
communications services ("Cable") and programming services
("Programming"). Programming includes the production, acquisition and
distribution of globally branded entertainment, education and
information programming services and software for distribution through
all available formats and media; and home shopping via television and
other interactive media, direct marketing, advertising sales,
infomercials and transaction processing. Home shopping is a
programming service which includes a retail function. Separate
amounts of the aforementioned home shopping service have been provided
to enhance the readers understanding of the Company. The Company has
investments, accounted for under the equity method and the cost
method, which also operate in the Cable and Programming industries.
The following is selected information about the Company's operations
for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Programming
-----------------------------
Electronic Other Intersegment
Cable Retailing Programming Eliminations Total
----- --------- ----------- ------------ -----
1995 amounts in millions
----
<S> <C> <C> <C> <C> <C>
Revenue $ 5,384 1,019 521 (73) 6,851
======== ========== ============ ============ ========
Operating income
(loss) $ 653 (85) (26) -- 542
======== ========== ============ ============ ========
Depreciation and
amortization $ 1,274 43 55 -- 1,372
======== ========== ============ ============ ========
Capital
expenditures $ 1,733 13 36 -- 1,782
======== ========== ============ ============ ========
Identifiable assets $ 22,612 725 1,793 -- 25,130
======== ========== ============ ============ ========
1994
----
Revenue $ 4,247 482 240 (33) 4,936
======== ========== ============ ============ ========
Operating income
(loss) $ 781 9 (2) -- 788
======== ========== ============ ============ ========
Depreciation and
amortization $ 992 15 11 -- 1,018
======== ========== ============ ============ ========
Capital
expenditures $ 1,239 19 6 -- 1,264
======== ========== ============ ============ ========
Identifiable assets $ 17,121 739 1,448 (32) 19,276
======== ========== ============ ============ ========
</TABLE>
(continued)
V-74
<PAGE> 225
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in millions,
1995: except per share amounts
----
<S> <C> <C> <C> <C>
Revenue:
As previously reported $ 1,524 1,660 1,761
Adjustment to reflect Cablevision
operations on a current basis -- 14 --
-------- -------- --------
As adjusted $ 1,524 1,674 1,761 1,892
======== ======== ======== ========
Operating income:
As previously reported $ 180 151 182
Adjustment to restate amortization of
of intangibles upon reallocation of
purchase price
Adjustment to reflect Cablevision -- (20) (4)
operations on a current basis
As adjusted $ -- 4 (2)
-------- -------- --------
180 135 176 51
======== ======== ======== ========
Income tax benefit:
As previously reported $ 19 48 37
Adjustment for effect of adopting
equity method of accounting for BET -- -- (1)
Adjustment to restate amortization of
of intangibles upon reallocation of
purchase price
Adjustment to reflect Cablevision -- 8 1
operations on a current basis -- 3 (1)
-------- -------- --------
As adjusted $ 19 59 36 6
======== ======== ======== ========
Net earnings (loss):
As previously reported $ (45) (83) 36
Adjustment for effect of adopting
equity method of accounting for BET 1 -- --
Adjustment to restate amortization of
of intangibles upon reallocation of
purchase price
Adjustment to reflect Cablevision -- (12) (3)
operations on a current basis -- -- (1)
-------- -------- --------
As adjusted $ (44) (95) 32 (64)
======== ======== ======== ========
Primary and fully diluted earnings
(loss) attributable to common
stockholders per common and
common equivalent share:
TCI Class A and Class B common stock
As previously reported $ (.08) (.14) .12
Adjustment for effect of adopting equity
method of accounting for BET -- -- --
Adjustment to restate amortization of
of intangibles upon reallocation of
purchase price
Adjustment to reflect Cablevision -- (.02) --
operations on a current basis -- -- --
-------- -------- --------
As adjusted $ (.08) (.16) .12 N/A
======== ======== ========
</TABLE>
(continued)
V-75
<PAGE> 226
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in millions,
1995 (continued): except per share amounts
----------------
<S> <C> <C> <C> <C>
Series A and Series B TCI Group Stock
As previously reported $ (.09)
Adjustment to reflect Cablevision
operations on a current basis --
--------
As adjusted N/A N/A $ (.09) (.07)
======== ========
Series A and Series B Liberty Group Stock
As previously reported $ (.02)
Adjustment for effect of adopting equity
method of accounting for BET --
Adjustment to restate amortization of
of intangibles upon reallocation of
purchase price (.01)
--------
As adjusted N/A N/A $ (.03) (.13)
======== ========
1994:
----
Revenue $ 1,060 1,081 1,286 1,509
Operating income $ 234 205 186 163
Income tax expense:
As previously reported $ (31) (21) (33) (31)
Adjustment for effect of adopting
equity method of accounting for
investments:
QVC -- (1) -- (2)
BET -- -- -- (1)
-------- -------- -------- --------
As adjusted $ (31) (22) (33) (34)
======== ======== ======== ========
Net earnings (loss):
As previously reported $ 32 6 25 (8)
Adjustment for effect of adopting
equity method of accounting for
investments:
QVC -- -- 2 3
BET -- 1 -- 1
-------- -------- -------- --------
As adjusted $ 32 7 27 (4)
======== ======== ======== ========
Primary and fully diluted
earnings (loss) attributable to
common stockholders per
common and common equivalent
share:
As previously reported $ .07 .01 .04 (.02)
Adjustment for effect of adopting
equity method of accounting for
investments:
QVC -- -- -- .01
BET -- -- -- --
-------- -------- -------- --------
As adjusted $ .07 .01 .04 (.01)
======== ======== ======== ========
</TABLE>
V-76
<PAGE> 227
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Subsequent Event (Unaudited)
On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International, Inc, and Viacom, Inc. ("Viacom"),
TCIC acquired all of the common stock of a subsidiary of Viacom
("Cable Sub") which owned Viacom's cable systems and related assets
(the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
(the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following
these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor
New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class
B Common Stock (collectively, "Viacom Common Stock") the opportunity
to exchange (the "Exchange Offer") a portion of their shares of Viacom
Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following
the completion of the Exchange Offer, TCIC acquired from Cable Sub
shares of Cable Sub Class B Common Stock (the "Share Issuance") for
$350 million (which was used to reduce Cable Sub's obligations under
the Loan Facility). At the time of the Share Issuance, the Cable Sub
Class A Stock received by Viacom stockholders pursuant to the Exchange
Offer automatically converted into 5% Class A Senior Cumulative
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock") of
Cable Sub with a stated value of $100 per share (the "Stated Value").
The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance,
for shares of Series A TCI Group Stock at an initial exchange rate of
4.81 shares of Series A TCI Group Stock for each share of Exchangeable
Preferred Stock exchanged. The Exchangeable Preferred stock is subject
to redemption, at the option of Cable Sub, after the fifth anniversary
of the date of issuance, initially at a redemption price of $102.50
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. The
Exchangeable Preferred Stock is also subject to mandatory redemption
on the tenth anniversary of the date of issuance at a price equal to
the Stated Value per share plus accrued and unpaid dividends. Amounts
payable by Cable Sub in satisfaction of its optional or mandatory
redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of Cable Sub, in shares
of Series A TCI Group Stock, or in any combination of the foregoing.
V-77
<PAGE> 228
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995. The following discussion focuses on
material changes in the trends, risks and uncertainties affecting the Company's
results of operations and financial condition.
(1) Material changes in financial condition:
The Company is organized based upon four lines of business: Domestic
Cable and Communications; Programming; TINTA; and Technology/Venture Capital.
Such organization provides for financial and operational independence in the
four operating units, each under the direction of its own chief executive
officer, while maintaining the synergies and scale economies provided by a
common corporate parent. While neither TINTA nor the Technology/Venture
Capital unit is currently significant to the Company as a whole, the Company
believes each unit has growth potential and each unit is unique enough in
nature to warrant separate operational focus.
On August 10, 1995, TCI distributed to its security holders of record
one hundred percent of the equity value of TCI attributable to Liberty Media
Group. The Liberty Group Stock is intended to reflect the separate performance
of Liberty Media Group. While the Liberty Group Stock constitutes common stock
of TCI, the issuance of the Liberty Group Stock did not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect the rights
of holders of TCI's or any of its subsidiaries' debt. The TCI Group Stock is
intended to reflect the performance of TCI Group.
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in
Sprint Spectrum which was formed to engage in the business of providing
wireless communications services on a nationwide basis. The Company owns an
indirect 30% interest in Sprint Spectrum. Sprint Spectrum was the successful
bidder for PCS licenses for 29 markets in an auction conducted by the FCC that
ended in March 1995. The aggregate license cost for these licenses was
approximately $2.1 billion, all of which has been paid. Sprint Spectrum may
elect to bid in subsequent auctions of PCS licenses and/or acquire PCS licenses
from other holders, has invested in APC which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that will hold
the PCS license for the Los Angeles-San Diego market, and may invest in other
entities that hold PCS licenses. Subsidiaries of Cox, Sprint and the Company
are also partners in PhillieCo which holds a PCS license for the Philadelphia
market which was acquired at a license cost of $85 million. The Company has an
indirect 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. The Company
has agreed to contribute approximately $0.6 billion of such aggregate amount,
$0.2 billion of which was contributed during the nine months ended September
30, 1996. The business plan contemplates that Sprint Spectrum will require
additional equity thereafter.
(continued)
V-78
<PAGE> 229
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(1) Material changes in financial condition (continued):
On July 31, 1996, TCIC consummated the Viacom Acquisition whereby TCIC
acquired all of the common stock of Cable Sub which owned Viacom's cable
systems and related assets.
The transaction was structured as a tax-free reorganization in which
Cable Sub initially transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to New Viacom Sub. Cable Sub
also transferred to New Viacom Sub the proceeds of the Loan Facility.
Following these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom Sub
has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of Viacom Common Stock the opportunity to exchange a portion of
their shares of Viacom Common Stock for shares of Cable Sub Class A Stock.
Immediately following the completion of the Exchange Offer, TCIC acquired from
Cable Sub shares of Cable Sub Class B common stock for $350 million. At the
time of the Share Issuance, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer automatically converted into
Exchangeable Preferred Stock. For additional discussion of the Viacom
Acquisition, see note 7 to the accompanying consolidated financial statements.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $9 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
Additionally, during the nine months ended September 30, 1996, the
Company, through certain subsidiaries, issued (i) 4.6 million shares of
Cumulative Exchangeable Preferred Stock for net cash proceeds of $223 million,
(ii) 20 million preferred securities of 8.72% Trust Originated Preferred
Securities(SM) for net cash proceeds of $486 million (through a special purpose
entity formed as a Delaware business trust) (iii) 20 million preferred
securities of 10% Trust Preferred Securities for net cash proceeds of $485
million (through a special purpose entity formed as a Delaware business trust)
and (iv) $2.06 billion of publicly-placed senior and medium term notes with
interest rates ranging from 6.2% to 7.9% and maturity dates ranging through
2026. The Company used the proceeds from the aforementioned debt and equity
issuances to retire commercial paper and to repay certain variable and
fixed-rate indebtedness. In connection with the prepayment of certain
fixed-rate indebtedness, the Company recognized a loss on early extinguishment
of debt of $62 million. Such loss related to prepayment penalties amounting to
$60 million and the retirement of deferred loan costs.
The Company has a credit facility which matures in September of 1997.
The outstanding balance of such facility was $387 million at September 30,
1996. The Company currently anticipates that it will refinance such
borrowings, but there can be no assurance that it can do so on terms acceptable
to the Company.
(continued)
V-79
<PAGE> 230
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(1) Material changes in financial condition (continued):
During the second quarter of 1996, certain subsidiaries of the Company
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. The Company
does not believe that such terminations will adversely affect its future
liquidity. At September 30, 1996, subsidiaries of the Company had
approximately $2.2 billion of availability under lines of credit, excluding
amounts related to lines of credit which provide availability to support
commercial paper. Although such subsidiaries of the Company were in compliance
with the restrictive covenants contained in their credit facilities at said
date, additional borrowings under the credit facilities are subject to the
subsidiaries' continuing compliance with the restrictive covenants (which
relate primarily to the maintenance of certain ratios of cash flow to total
debt and cash flow to debt service, as defined in the credit facilities) after
giving effect to such additional borrowings. See note 8 to the accompanying
consolidated financial statements for additional information regarding the
material terms of the subsidiaries' lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,706 million and $1,510 million for the nine
months ended September 30, 1996 and 1995, respectively) to interest expense
($803 million and $746 million for the nine months ended September 30, 1996 and
1995, respectively), is determined by reference to the consolidated statements
of operations. The Company's interest coverage ratio was 212% and 202% for the
nine months ended September 30, 1996 and 1995, respectively. Management of the
Company believes that the foregoing interest coverage ratio is adequate in
light of the consistent and nonseasonal nature of its cable television
operations and the relative predictability of the Company's interest expense,
almost half of which results from fixed rate indebtedness. Operating Cash Flow
is a measure of value and borrowing capacity within the cable television
industry and is not intended to be a substitute for cash flows provided by
operating activities, a measure of performance prepared in accordance with
generally accepted accounting principles, and should not be relied upon as
such. Operating Cash Flow, as defined, does not take into consideration
substantial costs of doing business, such as interest expense, and should not
be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($844 million and $670
million for the nine months ended September 30, 1996 and 1995, respectively)
reflects net cash from the operations of the Company available for the
Company's liquidity needs after taking into consideration the aforementioned
additional substantial costs of doing business not reflected in Operating Cash
Flow. Amounts expended by the Company for its investing activities exceed net
cash provided by operating activities. However, management believes that net
cash provided by operating activities, the ability of the Company and its
subsidiaries to obtain additional financing (including the subsidiaries
available lines of credit and access to public debt markets), issuances and
sales of the Company's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See the Company's consolidated statements of cash
flows included in the accompanying consolidated financial statements.
(continued)
V-80
<PAGE> 231
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(1) Material changes in financial condition (continued):
In late April, 1996, TCIC was notified by Moody's Investors Service,
Inc. and Duff & Phelps Credit Rating Co. that those rating agencies had
downgraded by one level their respective ratings of TCIC's senior debt to the
first level below investment grade. Fitch Investors Service, L.P. reaffirmed
its rating for TCIC's senior debt at the last level of investment grade. On
October 18, 1996, Standard and Poor's Securities, Inc. ("Standard & Poor's)
issued a press release stating that TCIC's senior debt would be placed on
CreditWatch with negative implications. TCIC's senior debt is currently rated
BBB- by Standard & Poor's (the last level of investment grade). A downgrade by
Standard & Poor's of TCIC's senior debt would lower such debt to the first
level below investment grade. These actions are expected to marginally
increase TCIC's cost of borrowings under certain bank credit facilities, and
may adversely affect TCIC's access to the public debt market and its overall
cost of future borrowings.
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, the Company has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, the Company
pays (i) fixed interest rates ranging from 7.2% to 9.3% on notional amounts of
$460 million at September 30, 1996 and (ii) variable interest rates on notional
amounts of $2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, the Company's net payments pursuant to the Fixed
Rate Agreements were $3 million and $1 million, respectively; and the Company's
net receipts pursuant to the Variable Rate Agreements were $11 million and less
than $1 million, respectively. The Company is exposed to credit losses for the
periodic settlements of amounts due under the interest rate exchange agreements
in the event of nonperformance by the other parties to the agreements.
However, the Company does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the counterparties.
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $307
million at September 30, 1996. Although there can be no assurance, management
of the Company believes that it will not be required to meet its obligations
under such guarantees, or if it is required to meet any of such obligations,
that they will not be material to the Company.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009. Based on subscriber
levels at September 30, 1996, these agreements require minimum payments
aggregating approximately $624 million. The aggregate amount of the Film
Licensing Obligations under other license agreements is not currently estimable
because such amount is dependent upon certain variable factors. Nevertheless,
the Company's aggregate payments under the Film Licensing Obligations could
prove to be significant.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
(continued)
V-81
<PAGE> 232
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(1) Material changes in financial condition (continued):
The Company's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by the Company)
and through net cash provided by their own operating activities.
The Company's subsidiaries generally finance acquisitions and capital
expenditures through net cash provided by operating and financing activities.
Amounts expended for acquisitions and capital expenditures exceed net cash
provided by operating activities.
(2) Material changes in results of operations:
Communications and Programming Services Revenue
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, the Company'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. The regulations established
benchmark rates in 1993 which were further reduced in 1994, to which the rates
charged by cable operators for Regulated Services were required to conform.
The Company reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 and 1996 in response to FCC regulations. The Company
believes that it has complied in all material respects with the provisions of
the 1992 Cable Act, including its rate setting provisions. However, the
Company's rates for Regulated Services are subject to review by the FCC, if a
complaint has been filed, or by the appropriate franchise authority, if such
authority has been certified. If, as a result of the review process, a system
cannot substantiate its rates, it could be required to retroactively reduce its
rates to the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Any refunds of the excess portion of all
other Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Telecom Act") was signed into law. Because the 1996 Telecom Act does not
deregulate cable programming service tier rates until 1999 (and basic service
tier rates will remain regulated thereafter), the Company believes that the
1993 and 1994 rate regulations have had and will continue to have a material
adverse effect on its results of operations.
Revenue from communications and programming services increased 25% and
27% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. In the
Company's regulated cable systems, the Company implemented rate increases for
its Regulated Services in June 1996. As allowed by FCC regulations, such rate
increases include amounts intended to recover increased programming costs
incurred during the first five months of 1996 and not previously recovered, as
well as interest on said amounts.
(continued)
V-82
<PAGE> 233
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(2) Material changes in results of operations (continued):
The increase in revenue for the three months ended September 30, 1996
is due to the net effect of certain acquisitions (including the Viacom
Acquisition) (14%), increases in rates charged to the Company's subscribers due
to inflation, programming cost increases as previously discussed and channel
additions (5%), growth in the Company's satellite subscribers (3%), growth in
subscriber levels within the Company's cable television systems (3%) and
increases in the Company's domestic and international programming and other
revenue (4%) offset by a 4% decrease due to the deconsolidation of the
Company's sports programming businesses (see discussion below). The increase
in revenue for the nine months ended September 30, 1996 is due to the effect of
certain acquisitions (including the Viacom Acquisition) (12%), growth in the
Company's satellite subscribers (5%), increases in rates charged to the
Company's subscribers as noted above (5%), growth in subscriber levels within
the Company's cable television systems (2%) and increases in the Company's
domestic and international programming and other revenue (4%) offset by a 1%
decrease due to the deconsolidation of the Company's sports programming
businesses (see discussion below).
TCI's domestic programming services contributed $298 million and $371
million of revenue for the nine months ended September 30, 1996 and 1995,
respectively. This revenue was attributable to subscription and advertising
revenue at TCI's sports programming businesses through April 29, 1996 (see
related discussion below), revenue from Netlink USA, a marketer and distributor
of programming to the United States home satellite dish subscriber market and
subscription revenue generated by Southern and Encore Media Corporation.
As of April 29, 1996, Liberty Media Group, News Corp. and TINTA formed
two sports programming ventures. In the United States, Liberty Media Group and
News Corp. formed the Fox-Liberty Venture into which Liberty Media Group
contributed interests in its national and regional sports networks and into
which News Corp. contributed its fx cable network and certain other assets.
Liberty Media Group received a 50% interest in the Fox-Liberty Venture and $350
million in cash.
Internationally, News Corp. and the Liberty-TINTA LLC formed the
International Venture to operate currently existing sports services in Latin
American and Australia and a variety of new sports services throughout the
world except in Asia and in the United Kingdom, Japan and New Zealand where
prior arrangements preclude an immediate collaboration. The Liberty-TINTA LLC
owns 50% of the International Venture with News Corp. owning the other 50%.
News Corp. contributed various international sports rights and certain
trademark rights. The Liberty-TINTA LLC contributed Prime Deportiva, a Spanish
language sports service distributed in Latin America and in Hispanic markets in
the United States; an interest in Torneos y Competencias S.A., an Argentinean
sports programming and production business; various international sports and
satellite transponder rights and cash. The Liberty-TINTA LLC also contributed
their 50% interest in Premiere Sports and All-Star Sports. Both are Australian
24-hour sports services available via MMDS or cable television.
As part of the formation of the International Venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the
outstanding stock of Star Television Limited. Upon delivery of such stock to
the Liberty-TINTA LLC, News Corp. is entitled to receive from the Liberty-TINTA
LLC $20 million and rights under various Asian sports programming agreements.
Star Television Limited operates a satellite-delivered television platform in
Asia.
(continued)
V-83
<PAGE> 234
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(2) Material changes in results of operations (continued):
Net Sales From Electronic Retailing Services
HSN's net sales from electronic retailing services increased 8% and
11% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods in 1995. Such increases
are due primarily to 22% and 13% increases in the number of packages shipped
and a decrease of 14% and an increase of 1% in the average price per unit sold.
HSN believes that seasonality does impact its business, but not to the
same extent it impacts the retail industry in general.
In August 1996, the Company entered into a series of agreements which
involved exchanging its controlling interest in HSN for shares of BDTV. If
consummated, HSN would cease to be a subsidiary of the Company and therefore,
the financial results of HSN would not be consolidated with the financial
results of the Company. Although the Company would cease to possess voting
control over HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of BDTV, as well as a direct
interest in HSN which would be exchangeable into shares of Silver King. No
assurance can be given that the transaction will be consummated. For
additional discussion of the foregoing transaction, see note 12 to the
accompanying consolidated financial statements.
Operating Costs and Expenses
Operating expenses increased 33% and 35% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (10% and 13%) and
Primestar (2% and 3%) (see discussion below), such expenses increased 21% and
19%. Programming and salary expenses accounted for the majority of such
increases. The Company cannot determine whether and to what extent increases
in the cost of programming will affect its future operating costs. However,
such programming costs have increased at a greater percentage than increases in
revenue of Regulated Services.
For the three months and nine months ended September 30, 1996, cost of
sales decreased $3 million or 2% and increased $33 million or 8%, respectively,
as compared to the same periods in 1995. As a percentage of net sales, cost of
sales decreased from 65% to 59% and from 64% to 62% for the three months and
nine months ended September 30, 1996, as compared to the corresponding periods
in 1995. Such decrease are due to promotional events in 1995 which had the
effect of lowering revenue but not cost of sales and to a change in product
sales mix in 1996.
Selling general and administrative expenses ("SG&A") increased 27% and
30% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. Exclusive of
the effects of acquisitions (6% and 7%) and Primestar (7% and 9%) (see
discussion below), SG&A increased 14% and 14%. Such increases are due
primarily to salaries, related payroll expenses and those expenses that vary
with revenue and/or subscribers. Additionally, during the nine months ended
September 30, 1996 and 1995, the Company incurred $34 million and $14 million,
respectively, of costs related to newly created material support centers,
initiatives to improve its customer service and the continued redesign of its
computer and accounting systems.
(continued)
V-84
<PAGE> 235
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(2) Material changes in results of operations (continued):
The Company has an interest in Primestar, which provides programming
and marketing support to its partners who distribute a multi-channel
programming service via a medium power communications satellite to home
satellite dish owners. During the three months and nine months ended September
30, 1996, the Company's revenue and expenses related to its Primestar satellite
service increased significantly over the corresponding periods in 1995 as the
number of the Company's Primestar subscribers increased from approximately
370,000 subscribers at September 30, 1995 to approximately 735,000 subscribers
at September 30, 1996. During the three months ended September 30, 1996,
revenue increased from $59 million to $110 million and operating, selling,
general and administrative expenses increased from $54 million to $108 million,
as compared to the three months ended September 30, 1995. During the nine
months ended September 30, 1996, revenue increased from $120 million to $304
million and operating, selling, general and administrative expenses increased
from $111 million to $295 million, as compared to the nine months ended
September 30, 1995. The Company incurs significant sales commissions and
installation costs when customers initially subscribe. Therefore, as long as
the Company continues to launch this new service and increase its Primestar
subscriber base at such a rapid pace, management expects operating costs and
expenses will increase as well.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off of SatCo to the holders of TCI Group Stock. At the time of the
Satellite Spin-Off, SatCo's assets and operations will include the Company's
interest in Primestar and the Company's business of distributing Primestar
programming. Although there is no assurance, the Satellite Spin-Off is
anticipated to be completed in the fourth quarter of 1996. Upon completion of
the Satellite Spin-Off, SatCo's operations will no longer be consolidated with
the Company's.
The increase in the Company's depreciation expense in 1996 is due to
acquisitions, as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in the Company's cable systems.
The increase in amortization expense in 1996 is due to acquisitions.
The Company records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees. Such compensation is
subject to future adjustment based upon market value, and ultimately, on the
final determination of market value when the rights are exercised or the
restricted stock awards are vested.
(continued)
V-85
<PAGE> 236
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Nine months ended September 30, 1996 and 1995
(2) Material changes in results of operations (continued):
Other Income (Expense) and Net Loss
At September 30, 1996, the Company had an effective ownership interest
of approximately 27% in TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). TeleWest, which is accounted for under the equity method, had a
carrying value at September 30, 1996 of $459 million and comprised $99 million
and $43 million of the Company's share of its affiliates' losses during the
nine months ended September 30, 1996 and 1995, respectively. The increase in
the Company's share of losses of TeleWest is due, in part, to an increase in
TeleWest's interest expense and foreign currency translation losses related to
the issuance of dollar denominated debentures by TeleWest. In addition, the
Company has other less significant investments accounted for under the equity
method in video distribution and programming businesses located in the UK,
other parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying value of
$407 million at September 30, 1996 and accounted for $55 million and $38
million of the Company's share of its affiliates' losses for the nine months
ended September 30, 1996 and 1995, respectively. Additionally, included in
share of losses of affiliates for the nine months ended September 30, 1996 is
$112 million attributable to Sprint Spectrum. Such amount includes $34 million
associated with prior periods.
The Company is reflecting minority interests in earnings of
consolidated subsidiaries of $28 million and $32 million for the three months
and nine months ended September 30, 1996, respectively, as compared to minority
interests in losses of consolidated subsidiaries for the corresponding periods
in 1995. Such changes are due primarily to the accrual of dividends on the
Trust Securities in 1996. See note 9 to the accompanying consolidated
financial statements.
As a result of the TCG IPO, the Company recognized a gain of $12
million during the third quarter of 1996. As a result of the TINTA IPO and the
TYC Acquisition, the Company recognized a gain of $123 million during the third
quarter of 1995. There is no assurance that the Company will realize similar
gains in future periods. See notes 5 and 11 to the accompanying consolidated
financial statements.
As a result of the consummation of the TBS/Time Warner Merger, the
Company will recognize a gain of approximately $1.5 billion in the fourth
quarter of 1996. See note 6 to the accompanying consolidated financial
statements.
The Company's net loss (before preferred stock dividend requirements)
of $136 million for the three months ended September 30, 1996 represents a
change of $168 million, as compared to the Company's net earnings (before
preferred stock dividend requirements) of $32 million for the three months
ended September 30, 1995. The Company's net loss (before preferred stock
dividend requirements) of $438 million for the nine months ended September 30,
1996 represents an increase of $331 million, as compared to the Company's net
loss (before preferred stock dividend requirements) of $107 million for the
nine months ended September 30, 1995. Such changes are primarily the result of
the gain recognized in 1995 related to the TINTA IPO, an increase in share of
losses of affiliates, including the aforementioned share of losses from
TeleWest and Sprint Spectrum, loss on early extinguishment of debt resulting
primarily from the prepayment of certain fixed-rate indebtedness and the change
in minority interests in losses (earnings) of consolidated subsidiaries
discussed above.
V-86
<PAGE> 237
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 465 118
Trade and other receivables, net 430 407
Inventories, net 91 104
Prepaid expenses 95 65
Prepaid program rights 47 47
Committed film inventory 136 122
Investments in affiliates, accounted for under the equity method,
and related receivables (note 5) 2,714 2,372
Investment in Turner Broadcasting System, Inc. ("TBS") (note 6) 1,022 955
Property and equipment, at cost:
Land 94 88
Distribution systems 11,286 9,545
Support equipment and buildings 1,753 1,429
--------- ------
13,133 11,062
Less accumulated depreciation 4,366 3,653
--------- ------
8,767 7,409
--------- ------
Franchise costs 17,486 14,322
Less accumulated amortization 2,349 2,092
--------- ------
15,137 12,230
--------- ------
Other assets, at cost, net of amortization 1,671 1,748
--------- ------
$ 30,575 25,577
========= ======
</TABLE>
(continued)
V-87
<PAGE> 238
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Liabilities and Stockholders' Equity amounts in millions
------------------------------------
<S> <C> <C>
Accounts payable $ 200 243
Accrued interest 170 233
Accrued programming expense 394 318
Other accrued expenses 1,178 1,114
Debt (note 8) 15,118 13,211
Deferred income taxes 5,731 4,584
Other liabilities 183 195
------------ -------
Total liabilities 22,974 19,898
------------ -------
Minority interests in equity of consolidated subsidiaries 1,585 651
Redeemable preferred stock 654 478
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts ("Trust Securities") holding solely
subordinated debt securities of TCI Communications, Inc.
("TCIC")(note 9) 1,000 --
Stockholders' equity (notes 2 and 9):
Series Preferred Stock, $.01 par value Class B 6% Cumulative
Redeemable Exchangeable Junior Preferred Stock, $.01 par
value -- --
Tele-Communications, Inc. Series A TCI Group common stock, $1
par value. Authorized 1,750,000,000 shares; issued
684,974,998 shares in 1996 and 672,211,009 shares in 1995 685 672
Tele-Communications, Inc. Series B TCI Group common stock, $1
par value. Authorized 150,000,000 shares; issued 84,663,501
shares in 1996 and 84,691,554 shares in 1995 85 85
Tele-Communications, Inc. Series A Liberty Media Group common
stock, $1 par value. Authorized 750,000,000 shares; issued
146,078,965 shares in 1996 and 142,896,264 shares in 1995 146 143
Tele-Communications, Inc. Series B Liberty Media Group common
stock, $1 par value. Authorized 75,000,000 shares; issued
21,192,269 shares in 1996 and 21,196,868 shares in 1995 21 21
Additional paid-in capital 4,308 4,068
Cumulative foreign currency translation adjustment (12) (9)
Unrealized holding gains for available-for-sale securities, net
of taxes 335 338
Accumulated deficit (892) (454)
------------ -------
4,676 4,864
Treasury stock, at cost (100,524,365 shares and 100,524,364
shares of Series A TCI Group common stock in 1996 and 1995) (314) (314)
------------ -------
Total stockholders' equity 4,362 4,550
------------ -------
Commitments and contingencies (note 12)
$ 30,575 25,577
============ =======
</TABLE>
See accompanying notes to consolidated financial statements.
V-88
<PAGE> 239
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- --------------------------
1996 1995 1996 1995
------- ------ ------- ------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue (note 7):
Communications and programming services $ 1,901 1,521 5,355 4,229
Net sales from electronic retailing services 234 217 734 659
------- ------ ------- ------
2,135 1,738 6,089 4,888
------- ------ ------- ------
Operating costs and expenses:
Operating 723 544 2,056 1,524
Cost of sales from electronic retailing services 137 140 453 420
Selling, general and administrative 669 521 1,874 1,434
Compensation relating to stock appreciation rights -- 8 -- 26
Adjustment to compensation relating to stock
appreciation rights (11) -- (16) --
Restructuring charges -- 6 -- 8
Depreciation 258 228 769 660
Amortization 136 115 381 325
------- ------ ------- ------
1,912 1,562 5,517 4,397
------- ------ ------- ------
Operating income 223 176 572 491
Other income (expense):
Interest expense (277) (262) (803) (746)
Interest and dividend income 18 18 42 36
Share of losses of affiliates, net (note 5) (97) (63) (308) (134)
Loss on early extinguishment of debt (note 8) (7) -- (73) --
Minority interests in losses (earnings) of consolidated
subsidiaries, net (28) 19 (32) 40
Gain on sale of subsidiary stock (note 11) -- 123 -- 123
Gain on sale of stock by equity investee (note 5) 12 -- 12 --
Other, net (13) (17) (8) (27)
------- ------ ------- ------
(392) (182) (1,170) (708)
------- ------ ------- ------
Loss before income taxes (169) (6) (598) (217)
Income tax benefit 33 38 160 110
------- ------ ------- ------
Net earnings (loss) (note 7) (136) 32 (438) (107)
Dividend requirements on preferred stocks (9) (9) (27) (26)
------- ------ ------- ------
Net earnings (loss) attributable to common
stockholders $ (145) 23 (465) (133)
======= ====== ======= ======
Net earnings (loss) attributable to common stockholders:
TCI Class A and Class B common stock $ -- 85 -- (71)
TCI Group Series A and Series B common stock (162) (57) (501) (57)
Liberty Media Group Series A and Series B common
stock 17 (5) 36 (5)
------- ------ ------- ------
$ (145) 23 (465) (133)
======= ====== ======= ======
Net earnings (loss) attributable to common stockholders
per common share (notes 3 and 7):
TCI Class A and Class B common stock $ -- .12 -- (.11)
TCI Group Series A and Series B common stock $ (.24) (.09) (.75) (.09)
Liberty Media Group Series A and Series B common
stock $ .10 (.03) .22 (.03)
</TABLE>
See accompanying notes to consolidated financial statements.
V-89
<PAGE> 240
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------
Class B TCI Group Liberty Media Group Additional
Preferred ------------------ --------------------- paid-in
Stock Series A Series B Series A Series B capital
--------- -------- -------- -------- -------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- 672 85 143 21 4,068
Net loss -- -- -- -- -- --
Issuance of common stock for acquisition -- 11 -- 3 -- 255
Issuance of common stock upon conversion of notes -- 1 -- -- -- --
Issuance of common stock upon conversion of
preferred stock -- 1 -- -- -- 15
Accreted dividends on all classes of preferred
stock -- -- -- -- -- (27)
Accreted dividends on all classes of preferred
stock not subject to mandatory redemption
requirements -- -- -- -- -- 7
Payment of preferred stock dividends -- -- -- -- -- (10)
Foreign currency translation adjustment -- -- -- -- -- --
Change in unrealized holding gains for available-
for-sale securities -- -- -- -- -- --
---- ---- ---- ---- ---- ------
Balance at September 30, 1996 $ -- 685 85 146 21 4,308
==== ==== ==== ==== ==== ======
<CAPTION>
Unrealized
holding
Cumulative gains for
foreign available-
currency for-sale Total
translation securities, Accumulated Treasury stockholders'
adjustment net of taxes deficit stock equity
----------- ------------ ----------- -------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (9) 338 (454) (314) 4,550
Net loss -- -- (438) -- (438)
Issuance of common stock for acquisition -- -- -- -- 269
Issuance of common stock upon conversion of notes -- -- -- -- 1
Issuance of common stock upon conversion of
preferred stock -- -- -- -- 16
Accreted dividends on all classes of preferred
stock -- -- -- -- (27)
Accreted dividends on all classes of preferred
stock not subject to mandatory redemption
requirements -- -- -- -- 7
Payment of preferred stock dividends -- -- -- -- (10)
Foreign currency translation adjustment (3) -- -- -- (3)
Change in unrealized holding gains for available-
for-sale securities -- (3) -- -- (3)
----- ---- ----- ---- ------
Balance at September 30, 1996 (12) 335 (892) (314) 4,362
===== ==== ===== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-90
<PAGE> 241
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1996 1995
------ ------
amounts in millions
(see note 4)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (438) (107)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,150 985
Compensation relating to appreciation rights -- 26
Adjustment to compensation relating to stock appreciation rights (16) --
Share of losses of affiliates 308 134
Loss on early extinguishment of debt 73 --
Minority interests in earnings (losses) 32 (40)
Gain on sale of subsidiary stock -- (123)
Gain on sale of stock by equity investee (12) --
Deferred income tax benefit (178) (152)
Other noncash charges 3 2
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (20) 14
Change in inventories 11 (18)
Change in prepaids (32) (86)
Change in accrued interest (64) (18)
Change in other accruals and payables 27 53
------- ------
Net cash provided by operating activities 844 670
------- ------
Cash flows from investing activities:
Cash paid for acquisitions (62) (251)
Capital expended for property and equipment (1,526) (1,205)
Additional investments in and loans to affiliates and others (677) (958)
Repayments of loans to affiliates 329 20
Proceeds from disposition of assets 255 29
Other investing activities (148) (209)
------- ------
Net cash used in investing activities (1,829) (2,574)
------- ------
Cash flows from financing activities:
Borrowings of debt 7,449 7,088
Repayments of debt (7,476) (5,970)
Prepayment penalties (60) --
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Contributions by minority shareholders of subsidiaries 315 --
Issuance of common stock -- 431
Proceeds from sale of subsidiary stock -- 445
Payment of preferred stock dividends (34) (22)
Payment of dividends on subsidiary preferred stock and Trust Securities (56) --
------- ------
Net cash provided by financing activities 1,332 1,972
------- ------
Net increase in cash 347 68
Cash at beginning of period 118 74
------- ------
Cash at end of period $ 465 142
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
V-91
<PAGE> 242
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
(unaudited)
(1) General
The accompanying consolidated financial statements include the
accounts of Tele-Communications, Inc. and those of all majority-owned
subsidiaries ("TCI" or the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in TCI's Annual Report on Form
10-K for the year ended December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In June 1996, the Company announced its intention to pursue a tax-free
spin-off (the "Satellite Spin-Off") of its direct broadcast satellite
subsidiary, TCI Satellite Entertainment, Inc. ("SatCo"), to the holders
of TCI Group Stock. At the time of the Satellite Spin-Off, SatCo's
assets and operations will include the Company's interest in PRIMESTAR
Partners, L.P. ("Primestar") and the Company's business of distributing
Primestar programming. Although there is no assurance, the Satellite
Spin-Off is anticipated to be completed in the fourth quarter of 1996.
Upon completion of the Satellite Spin-Off, SatCo's operations will no
longer be consolidated with the Company's.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years
beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement No. 121 effective January
1, 1996. Such adoption did not have a significant effect on the
financial position or results of operations of the Company.
(continued)
V-92
<PAGE> 243
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to Statement No. 121, the Company periodically reviews the
carrying amount of its long-lived assets, franchise costs and certain
other assets to determine whether current events or circumstances
warrant adjustments to such carrying amounts. The Company considers
historical and expected future net operating losses to be its primary
indicators of potential impairment. Assets are grouped and evaluated
for impairment at the lowest level for which there are identifiable
cash flows that are largely independent of the cash flows of other
groups of assets ("Assets"). The Company deems Assets to be impaired
if the Company is unable to recover the carrying value of such Assets
over their expected remaining useful life through a forecast of
undiscounted future operating cash flows directly related to the
Assets. If Assets are deemed to be impaired, the loss is measured as
the amount by which the carrying amount of the Assets exceeds their
fair value. The Company generally measures fair value by considering
sales prices for similar assets or by discounting estimated future
cash flows. Considerable management judgment is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
(2) Liberty Group Stock
On August 3, 1995, the TCI stockholders authorized the TCI Board of
Directors (the "Board") to issue a new class of stock ("Liberty Group
Stock") which is intended to reflect the separate performance of TCI's
business which produces and distributes cable television programming
services ("Liberty Media Group"). While the Liberty Group Stock
constitutes common stock of TCI, the issuance of the Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI
or any of its subsidiaries or affect the rights of holders of TCI's or
any of its subsidiaries' debt. On August 10, 1995, TCI distributed
one hundred percent of the equity value attributable to Liberty Media
Group (the "Distribution") to its security holders of record on August
4, 1995. Additionally, the stockholders of TCI approved the
redesignation of the previously authorized TCI Class A and Class B
common stock into Series A TCI Group and Series B TCI Group common
stock ("TCI Group Stock").
Upon the Distribution and subsequent to the redesignation of TCI Class
A and Class B common stock into Series A and Series B TCI Group Stock,
the TCI Group Stock is intended to reflect the separate performance of
the subsidiaries and assets not attributed to Liberty Media Group,
including (i) TCI's Cable and Communications unit, (ii) TCI's
International Cable and Programming Unit ("TINTA") and (iii) TCI's
Technology/Venture Capital unit. Such subsidiaries and assets are
referred to as "TCI Group".
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense to TCI Group or to Liberty Media Group for
purposes of preparing their combined financial statements, the change
in the capital structure of TCI does not affect the ownership or the
respective legal title to assets or responsibility for liabilities of
TCI or any of its subsidiaries. TCI and its subsidiaries will each
continue to be responsible for their respective liabilities. Holders
of TCI Group Stock or Liberty Group Stock are holders of common stock
of TCI and continue to be subject to risks associated with an
investment in TCI and all of its businesses, assets and liabilities.
The issuance of Liberty Group Stock did not affect the rights of
creditors of TCI.
(continued)
V-93
<PAGE> 244
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Earnings (Loss) Per Common and Common Equivalent Share
TCI Class A and Class B Common Stock
Primary earnings per common and common equivalent share attributable
to common stockholders for the period from July 1, 1995 through the
Distribution was computed by dividing net earnings attributable to
common stockholders by the weighted average number of common and
common equivalent shares outstanding (703.9 million).
Fully diluted earnings per common and common equivalent share
attributable to common stockholders for the period from July 1, 1995
through the Distribution was computed by dividing earnings
attributable to common stockholders by the weighted average number of
common and common equivalent shares outstanding (704.0 million).
The loss attributable to common stockholders per common share for the
period from January 1, 1995 through the Distribution was computed by
dividing net loss attributable to common stockholders by the weighted
average number of common shares outstanding during the period (648.2
million). Common stock equivalents were not included in the
computation of weighted average shares outstanding because their
inclusion would be anti-dilutive.
TCI Group Series A and Series B Common Stock
The loss attributable to TCI Group stockholders per common share for
the three months and nine months ended September 30, 1996 and for the
period from the Distribution through September 30, 1995 was computed
by dividing net loss attributable to TCI Group Series A and Series B
common stockholders by the weighted average number of common shares
outstanding of TCI Group Series A and Series B common stock during the
period (669.1 million, 665.0 million and 656.4 million, respectively).
Common stock equivalents were not included in the computation of
weighted average shares outstanding because their inclusion would be
anti-dilutive.
Liberty Media Group Series A and Series B Common Stock
Earnings attributable to Liberty Media Group stockholders per common
share for the three months and nine months ended September 30, 1996
was computed by dividing net earnings attributable to Liberty Media
Group Series A and Series B common stockholders by the weighted
average number of common shares outstanding of Liberty Media Group
Series A and Series B common stock during the period (167.3 million
and 166.2 million, respectively). Common stock equivalents were not
included in the computation because their inclusion would be
anti-dilutive to TCI.
The loss attributable to Liberty Media Group stockholders per common
share for the period from the Distribution through September 30, 1995
was computed by dividing net loss attributable to Liberty Media Group
Series A and Series B common stockholders by the weighted average
number of common shares outstanding of Liberty Media Group Series A
and Series B common stock during the period (164.1 million). Common
stock equivalents were not included in the computation of weighted
average shares outstanding because their inclusion would be anti-
dilutive.
(continued)
V-94
<PAGE> 245
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $867 million and $763 million for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for
income taxes was $8 million and $62 million for the nine months ended
September 30, 1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1996 1995
---- ----
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 4,661 3,394
Liabilities assumed, net of current assets (2,095) (495)
Deferred tax liability recorded in acquisitions (1,310) (1,095)
Minority interests in equity of acquired entities (733) 62
Common stock and preferred stock issued in acquisitions (461) (1,615)
-------- -------
Cash paid for acquisitions $ 62 251
======== =======
Exchange of consolidated subsidiaries for note receivable and
equity investments $ 560 --
======== =======
Effect of foreign currency translation adjustment on book
value of foreign equity investments $ 3 1
======== =======
Change in unrealized gains, net of deferred income taxes, on
available-for-sale securities $ 3 294
======== =======
Accrued preferred stock dividends $ 20 4
======== =======
Exchange of common stock held by subsidiaries for Series F
Preferred Stock $ -- 632
======== =======
Distribution of Series A and Series B Liberty Group Stock to
TCI common stockholders $ -- 164
======== =======
Redesignation of TCI common stock into Series A and Series B
TCI Group Stock $ -- 656
======== =======
Conversion of Series F Preferred Stock by subsidiary of TCI
into Series A TCI Group Stock $ -- 314
======== =======
Conversion of debt into additional minority interest in
consolidated subsidiary $ -- 14
======== =======
Common stock issued to subsidiaries in Reorganization
reflected as treasury stock $ -- 6
======== =======
Common stock issued in exchange for cost investment $ -- 73
======== =======
Retirement of Class A common stock previously held by
subsidiary $ -- 29
======== =======
Issuance of subsidiary stock for equity investment $ -- 11
======== =======
</TABLE>
(continued)
V-95
<PAGE> 246
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted
for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- -----------------------
1996 1995
----------- -------
amounts in millions
<S> <C> <C>
Revenue $ 3,989 3,123
Operating expenses (3,570) (2,664)
Depreciation and amortization (501) (375)
----------- -------
Operating income (loss) (82) 84
Interest expense (359) (230)
Other, net (202) (94)
----------- -------
Net loss $ (643) (240)
=========== =======
</TABLE>
The Company has various investments accounted for under the equity
method. Some of the more significant investments held by the Company
at September 30, 1996 were a partnership ("Sprint Spectrum") formed by
the Company, Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and Sprint Corporation ("Sprint") (carrying value of $783
million) (see note 12), Teleport Communications Group, Inc.
("TCG")(carrying value of $277 million), TeleWest Communications plc
("TeleWest") (carrying value of $459 million), various other foreign
equity investments (cumulative carrying value of $407 million),
Intermedia Capital Partners IV L.P. (carrying value of $287 million)
and Discovery Communications, Inc. (carrying value of $119 million).
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410,000,000. As a result of
the TCG IPO, the Company's ownership interest in TCG was reduced from
approximately 35% to approximately 31%. Accordingly, the Company
recognized a gain amounting to $12 million (before deducting deferred
income tax expense of approximately $5 million).
As of April 29, 1996, Liberty Media Group, The News Corporation
Limited ("News Corp.") and TINTA formed two sports programming
ventures. In the United States, Liberty Media Group and News Corp.
formed a partnership (the "Fox-Liberty Venture") into which Liberty
Media Group contributed interests in its national and regional sports
networks and into which News Corp. contributed its fx cable network
and certain other assets. Liberty Media Group received a 50% interest
in the Fox-Liberty Venture and $350 million in cash.
(continued)
V-96
<PAGE> 247
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Internationally, News Corp. and a limited liability company (the
"Liberty-TINTA LLC") formed by Liberty Sports, Inc., a wholly-owned
subsidiary of Liberty Media Group, and TINTA formed a venture (the
"International Venture") to operate previously existing sports
services in Latin America and Australia and a variety of new sports
services throughout the world, except in Asia and in the United
Kingdom, Japan and New Zealand where prior arrangements preclude an
immediate collaboration. The Liberty-TINTA LLC owns 50% of the
International Venture with News Corp. owning the other 50%. News
Corp. contributed various international sports rights and certain
trademark rights. The Liberty-TINTA LLC contributed Prime Deportiva,
a Spanish language sports service distributed in Latin American and in
Hispanic markets in the United States; an interest in Torneos y
Competencias S.A., an Argentinean sports programming and production
business; various international sports and satellite transponder
rights and cash. The Liberty-TINTA LLC also contributed their 50%
interest in Premiere Sports and All-Star Sports. Both are Australian
24-hour sports services available via multichannel, multipoint
distribution systems ("MMDS") or cable television.
As part of the formation of the International Venture, the
Liberty-TINTA LLC is entitled to receive from News Corp. 7.5% of the
outstanding stock of Star Television Limited. Upon delivery of such
stock to the Liberty-TINTA LLC, News Corp. is entitled to receive
from the Liberty-TINTA LLC $20 million and rights under various Asian
sports programming agreements. Star Television Limited operates a
satellite-delivered television platform in Asia.
Certain of the Company's affiliates are general partnerships and any
subsidiary of the Company that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(6) Investment in Turner Broadcasting System, Inc.
At September 30, 1996, the Company owned shares of TBS common stock
with an aggregate market value of $844 million (including unrealized
holding gains of $520 million) and shares of a class of TBS preferred
stock that were convertible into TBS common stock with an aggregate
market value of $1,007 million (which exceeded cost by $829 million).
The Company's total holdings represented an approximate 7.5% voting
interest for those matters which preferred and common stock voted as a
single class.
On October 10, 1996, Time Warner, Inc. ("Time Warner") and TBS
consummated a merger (the "TBS/Time Warner Merger") whereby TBS
shareholders received 0.75 of a Time Warner common share for each TBS
Class A and Class B common share, and each holder of TBS Class C
preferred stock received 0.80 of a Time Warner common share for each
of the 6 shares of TBS Class B common stock into which each share of
Class C preferred stock could have been converted. The Company
received approximately 50.6 million shares of Time Warner common stock
in exchange for its TBS holdings. As a result of this like-kind
exchange, the Company will recognize a pre-tax gain of approximately
$1.5 billion in the fourth quarter of 1996.
(continued)
V-97
<PAGE> 248
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On July 16, 1996, Time Warner, TBS, TCI, Liberty Media Group and the
Federal Trade Commission ("FTC") entered into an agreement in
principle, pursuant to which, among other things, Liberty Media Group
agreed to receive Time Warner securities with limited voting rights
(the "TW Exchange Stock") in exchange for its TBS common and preferred
stock. In addition, subject to a number of conditions, including
receipt of a ruling from the Internal Revenue Service that such
dividend would be tax free to the Liberty Media Group stockholders,
TCI agreed that it would distribute in the form of a stock dividend
(the "Spin-Off") to the Liberty Media Group stockholders the stock of
a new company ("Spinco") which would hold the TW Exchange Stock and
the business of Southern Satellite Systems, Inc. ("Southern"), a
wholly owned subsidiary of Liberty Media Group which distributes the
TBS SuperStation ("WTBS") signal in the United States and Canada. The
level of Liberty Media Group's ownership interest in Time Warner would
be restricted until the Spin-Off occurs, at which time, such
restriction would be eased for Spinco.
If the Spin-Off occurs, certain control stockholders of TCI, Bob
Magness, John C. Malone and Kearns-Tribune Corporation, would exchange
the Spinco common stock they receive for a Spinco convertible
preferred security which would only be entitled to vote on major
corporate transactions involving Spinco.
(7) Acquisition
On July 31, 1996, pursuant to certain agreements entered into among
TCIC, TCI, Viacom International, Inc. and Viacom, Inc. ("Viacom"),
TCIC acquired all of the common stock of a subsidiary of Viacom
("Cable Sub") which owned Viacom's cable systems and related assets
(the "Viacom Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). Cable Sub also transferred to New Viacom
Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan facility
(the "Loan Facility") arranged by TCIC, TCI and Cable Sub. Following
these transfers, Cable Sub retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom
nor New Viacom Sub has any obligation with respect to repayment of the
Loan Proceeds.
(continued)
V-98
<PAGE> 249
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class
B Common Stock (collectively, "Viacom Common Stock") the opportunity
to exchange (the "Exchange Offer") a portion of their shares of Viacom
Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). Immediately
following the completion of the Exchange Offer, TCIC acquired from
Cable Sub shares of Cable Sub Class B Common Stock (the "Share
Issuance") for $350 million (which was used to reduce Cable Sub's
obligations under the Loan Facility). At the time of the Share
Issuance, the Cable Sub Class A Stock received by Viacom stockholders
pursuant to the Exchange Offer automatically converted into 5% Class A
Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock") of Cable Sub with a stated value of $100 per share
(the "Stated Value"). The Exchangeable Preferred Stock is
exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Series A TCI Group
Stock at an initial exchange rate of 4.81 shares of Series A TCI Group
Stock for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option
of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 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. The Exchangeable Preferred Stock
is also subject to mandatory redemption on the tenth anniversary of
the date of issuance at a price equal to the Stated Value per share
plus accrued and unpaid dividends. Amounts payable by Cable Sub in
satisfaction of its optional or mandatory redemption obligations with
respect to the Exchangeable Preferred Stock may be made in cash or, at
the election of Cable Sub, in shares of Series A TCI Group Stock, or
in any combination of the foregoing.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of Cable Sub have been
consolidated with those of the Company since the date of acquisition.
On a pro forma basis, the Company's revenue, net loss, and net loss
per share of TCI Group Stock would have been increased by $276
million, $57 million and $.09, respectively, for the nine months ended
September 30, 1996; and revenue, net loss, net loss per share of TCI
Group Stock and net loss per share of TCI Class A Common Stock would
have been increased by $327 million, $90 million, $.03 and $.11,
respectively, for the nine months ended September 30, 1995 had Cable
Sub been consolidated with the Company on January 1, 1995. The
foregoing unaudited pro forma financial information is based upon
historical results of operations adjusted for acquisition costs and,
in the opinion of management, is not necessarily indicative of the
results had the Company operated Cable Sub since January 1, 1995.
(continued)
V-99
<PAGE> 250
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- -------
amounts in millions
<S> <C> <C>
Notes payable $ 9,405 7,713
Bank credit facilities 4,338 3,854
Commercial paper 1,179 1,469
Convertible notes (a) 43 45
Other debt 153 130
-------- -------
$ 15,118 13,211
======== =======
</TABLE>
(a) These convertible notes, which are stated net of unamortized
discount of $181 million at September 30, 1996 and $186
million at December 31, 1995, mature on December 18, 2021.
The notes require, so long as conversion of the notes has not
occurred, an annual interest payment through 2003 equal to
1.85% of the face amount of the notes. During the nine months
ended September 30, 1996, certain of these notes were
converted into 1,063,800 shares of Series A TCI Group Stock
and 265,950 shares of Series A Liberty Group Stock. At
September 30, 1996, the notes were convertible, at the option
of the holders, into an aggregate of 37,643,774 shares of
Series A TCI Group Stock and 9,410,937 shares of Series A
Liberty Group Stock.
During the nine months ended September 30, 1996, the Company redeemed
certain notes payable which had an aggregate principle balance of $809
million and fixed interest rates ranging from 8.67% to 10.44% (the
"Redemption"). In connection with the Redemption, the Company
recognized a loss on early extinguishment of debt of $62 million.
Such loss related to prepayment penalties amounting to $60 million and
the retirement of deferred loan costs.
During the nine months ended September 30, 1996, certain subsidiaries
of the Company terminated, at such subsidiaries' option, certain
revolving bank credit facilities with aggregate commitments of
approximately $2 billion and refinanced certain other bank credit
facilities. In connection with such termination and refinancings, the
Company recognized a loss on early extinguishment of debt of $11
million related to the retirement of deferred loan costs.
The bank credit facilities and various other debt instruments of the
Company's subsidiaries generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of the Company's bank credit
facilities, the Company has pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of the Company. Also, as security
for borrowings under another of the Company's credit facilities, the
Company has pledged a portion of the Time Warner common stock received
in the TBS/Time Warner Merger. Additionally, as security for one of
the Company's notes payable (with a balance of $26 million at
September 30, 1996), the Company has pledged the stock of one of its
majority-owned subsidiaries.
(continued)
V-100
<PAGE> 251
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The fair value of the debt of the Company's subsidiaries is estimated
based on the current market prices for the same or similar issues or
on the current rates offered to the subsidiaries of the Company for
debt of the same remaining maturities. The fair value of debt, which
has a carrying value of $15,118 million, was $15,452 million at
September 30, 1996.
In order to achieve the desired balance between variable and fixed
rate indebtedness, the Company has entered into various interest rate
exchange agreements pursuant to which it pays (i) fixed interest rates
(the "Fixed Rate Agreements") ranging from 7.2% to 9.3% on notional
amounts of $460 million at September 30, 1996 and (ii) variable
interest rates (the "Variable Rate Agreements") on notional amounts of
$2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, the Company's net payments pursuant to
the Fixed Rate Agreements were $3 million and $1 million,
respectively; and the Company's net receipts pursuant to the Variable
Rate Agreements were $11 million and less than $1 million,
respectively.
The Company's Fixed Rate Agreements and Variable Rate Agreements
expire as follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
--------------------- ------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
-------------- ------------- -------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
November 1996 8.9% $ 150 April 1997 7.0% $ 200
October 1997 7.2%-9.3% 80 September 1998 4.8%-5.4% 450
December 1997 8.7% 230 April 1999 7.4% 100
------ September 1999 7.2%-7.4% 300
$ 460 February 2000 5.8%-6.6% 650
====== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
--------
$ 2,450
========
</TABLE>
The Company is exposed to credit losses for the periodic settlements
of amounts due under these interest rate exchange agreements in the
event of nonperformance by the other parties to the agreements.
However, the Company does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance
by the counterparties.
The fair value of the interest rate exchange agreements is the
estimated amount that the Company would pay or receive to terminate
the agreements at September 30, 1996, taking into consideration
current interest rates and the current creditworthiness of the
counterparties. The Company would be required to pay $33 million at
September 30, 1996 to terminate the agreements.
Certain of TCI's subsidiaries are required to maintain unused
availability under bank credit facilities to the extent of outstanding
commercial paper. Also, certain of TCI's subsidiaries pay fees
ranging from 1/4% to 1/2% per annum on the average unborrowed portion
of the total amount available for borrowings under bank credit
facilities.
(continued)
V-101
<PAGE> 252
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of
TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an
indirect wholly-owned subsidiary of the Company, issued $16 million in
common securities to TCIC, a subsidiary of the Company, and issued
$500 million of 8.72% Trust Originated Preferred Securities(SM) (the
"Trust I Preferred Securities" and together with the common
securities, the "Trust I Securities") to the public. Trust I exists
for the exclusive purposes of issuing Trust I Securities and investing
the proceeds thereof into an aggregate principal amount of $516
million of 8.72% Subordinated Deferrable Interest Notes due January
31, 2045 (the "8.72% Subordinated Debt Securities") of TCIC. The
8.72% Subordinated Debt Securities are unsecured obligations of TCIC
and are subordinate and junior in right of payment to certain other
indebtedness of the Company. Upon redemption of the 8.72%
Subordinated Debt Securities, the Trust I Preferred Securities will be
mandatorily redeemable. TCIC effectively provides a full and
unconditional guarantee of Trust I's obligations under the Trust I
Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of the Company, issued $16 million in common
securities to TCIC, and issued $500 million of 10% Trust Preferred
Securities (the "Trust II Preferred Securities" and together with the
common securities, the "Trust II Securities") to the public. Trust II
exists for the exclusive purposes of issuing Trust II Securities and
investing the proceeds thereof into an aggregate principal amount of
$516 million of 10% Subordinated Deferrable Interest Notes due May 31,
2045 (the "10% Subordinated Debt Securities") of TCIC. The 10%
Subordinated Debt Securities are unsecured obligations of TCIC and are
subordinate and junior in right of payment to certain other
indebtedness of the Company. Upon redemption of the 10% Subordinated
Debt Securities, the Trust II Preferred Securities will be mandatorily
redeemable. TCIC effectively provides a full and unconditional
guarantee of Trust II's obligations under the Trust II Preferred
Securities.
The Trust I and Trust II Preferred Securities are presented together
in a separate line item in the accompanying consolidated balance sheet
captioned "Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely subordinated debt
securities of TCI Communications, Inc." Dividends accrued on the Trust
I and Trust II Preferred Securities are included in minority interests
in losses (earnings) of consolidated subsidiaries in the accompanying
consolidated financial statements.
(10) Stockholders' Equity
Stock Options
Estimated compensation relating to restricted stock awards, stock
appreciation rights ("SARs") and options with tandem SARs awarded by
the Company has been recorded through September 30, 1996, but is
subject to future adjustment based upon market value, and ultimately,
on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
(continued)
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
At September 30, 1996, there were 119,821,579 shares of Series A TCI
Group Stock and 20,967,181 shares of Series A Liberty Group Stock
reserved for issuance under exercise privileges related to options,
convertible debt securities and convertible preferred stock. Also,
one share of Series A TCI Group Stock is reserved for each share of
Series B TCI Group Stock, and one share of Series A Liberty Group
Stock is reserved for each share of Series B Liberty Group Stock.
Additionally, subsidiaries of TCI own an aggregate of 278,307 shares
of TCI Convertible Redeemable Participating Preferred Stock, Series F
("Series F Preferred Stock"). Each share of Series F Preferred Stock
is convertible into 1,287.51 shares of Series A TCI Group Stock.
Subsequent to September 30, 1996, a subsidiary of the Company issued
2,000 shares of exchangeable preferred stock, which shares are
exchangeable into 957,341 shares of Series A TCI Group Stock.
(11) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the
"TINTA IPO") in which it sold 20 million shares of TINTA Series A
common stock to the public for consideration of $16.00 per share
aggregating $320 million, before deducting related expenses
(approximately $19 million). The shares sold to the public
represented 17% of TINTA's total issued and outstanding common stock
and 9% of the aggregate voting interest represented by such issued and
outstanding common stock. Also in July 1995, TINTA issued 687,500
shares of TINTA Series A common stock as partial consideration for a
35% ownership interest in Torneos Y Competencias S.A., an Argentine
sports programming company (the "TYC Acquisition"). As a result of
the TINTA IPO and the TYC Acquisition, the Company recognized a gain
amounting to $123 million.
(12) Commitments and Contingencies
Subsidiaries of the Company, Comcast, Cox and Sprint are partners in
Sprint Spectrum which was formed to engage in the business of
providing wireless communications services on a nationwide basis. The
Company owns an indirect 30% interest in Sprint Spectrum. Sprint
Spectrum was the successful bidder for personal communications
services ("PCS") licenses for 29 markets in an auction conducted by
the FCC that ended in March 1995. The aggregate license cost for
these licenses was approximately $2.1 billion, all of which has been
paid. Sprint Spectrum may elect to bid in subsequent auctions of PCS
licenses and/or acquire PCS licenses from other holders, has invested
in an entity ("APC") which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that
will hold the PCS license for the Los Angeles-San Diego market, and
may invest in other entities that hold PCS licenses. Subsidiaries of
Cox, Sprint and the Company are also partners in a partnership
("PhillieCo") that holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. The Company has
an indirect 35.3% interest in PhillieCo.
(continued)
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments
described above, will be substantial. Pursuant to the business plan
adopted by the partners in Sprint Spectrum for the build out of Sprint
Spectrum's nationwide network, the partners are obligated to make
additional cash capital contributions to Sprint Spectrum in the
aggregate amount of approximately $1.9 billion during the two-year
period that commenced January 1, 1996. The Company has agreed to
contribute approximately $0.6 billion of such aggregate amount, $0.2
billion of which was contributed during the nine months ended
September 30, 1996. The business plan contemplates that Sprint
Spectrum will require additional equity thereafter.
On November 27, 1995, the Company announced that it had agreed to
exchange its controlling interest in Home Shopping Network, Inc.
("HSN") for shares of Silver King Communications, Inc. ("Silver
King"). The Company would receive approximately 11 million newly
issued shares of Silver King in exchange for its 37.5 million shares
of HSN.
Liberty Media Group and Mr. Barry Diller and certain of their
respective affiliates entered into an agreement in August 1995
pursuant to which an option owned by Liberty Media Group to purchase 2
million shares of Silver King Class B common stock (the "Option")
(which shares would constitute voting control of Silver King) would be
transferred to BDTV, Inc. ("BDTV") (formerly referred to as "Silver
Management Company"), an entity in which Liberty Media Group would own
all of the non-voting equity interests (which would constitute
substantially all of the equity of such entity) and Mr. Diller would
own all of the voting equity interests and have the right to control
such entity (subject to certain exceptions relating to fundamental
corporate actions). BDTV would thereafter exercise the Option and
hold the shares of Silver King Class B Common Stock purchased
thereunder. In an amendment to such agreement entered into in
November 1995, Liberty Media Group agreed to contribute all of its
shares of HSN (which shares constitute approximately 41% of the equity
of HSN and approximately 80% of the voting power of HSN) to BDTV in
return for additional non-voting equity interests in BDTV. Following
such contribution, BDTV would exchange such HSN shares with Silver
King for additional shares of Silver King Common Stock and Class B
Common Stock (thereby increasing BDTV's controlling interest in Silver
King to in excess of 80% of the voting power of Silver King). In June
1996, the FCC granted its approval to the change in control of Silver
King resulting from such exercise of the Option. Thereafter, in
August 1996, the Option was exercised and BDTV became the controlling
stockholder of Silver King. The FCC approval, received in connection
with the exercise of the Option, however, included a condition that
any increase in TCI's equity interest in Silver King (which would
result from the proposed transfer of HSN shares to Silver King), as
well as any material amendment to the August 1995 agreement with Mr.
Diller, would require the prior approval of the FCC.
(continued)
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In light of these restrictions, Liberty Media Group and Mr. Diller
began to discuss a restructuring of the November transaction, as well
as certain other alternative structures. On August 25, 1996, Silver
King, HSN and Liberty Media Group entered into a merger agreement and
related transaction agreements pursuant to which (i) Liberty Media
Group agreed to exchange all of its shares of HSN common stock and
approximately 739,000 shares of its HSN Class B Common Stock with the
wholly owned subsidiary of Silver King which was to be merged into HSN
("SK Sub") for shares of stock of SK Sub, (ii) SK Sub would be merged
into HSN (the "HSN Merger"), with HSN being the surviving corporation
owned 80.1% by Silver King and 19.9% by Liberty Media Group, (iii)
Liberty Media Group would receive in the HSN Merger, in exchange for
its remaining 19.3 million shares of HSN Class B Common Stock,
approximately 7.8 million shares of Silver King Class B Common Stock
and the contingent right to receive from time to time approximately
2.6 million additional shares of Silver King Class B Common Stock as
permitted under applicable FCC regulations, and (iv) Liberty Media
Group and Silver King would enter into an exchange agreement providing
for the terms upon which Liberty Media Group's remaining shares of
HSN, as the surviving corporation in the HSN Merger, would be
exchanged from time to time for stock of Silver King as permitted
under applicable FCC regulations. All of the shares of Silver King
Class B Common Stock actually received by Liberty Media Group at the
time of the HSN Merger would be immediately contributed to an entity
("BDTV II") in which Mr. Diller owns all of the voting equity
interests and Liberty Media Group owns a non-voting equity interest
(which non-voting interest constitutes substantially all the equity of
BDTV II) and which (other than with respect to certain fundamental
corporate actions) is controlled by Mr. Diller.
The HSN Merger is subject to the satisfaction of certain conditions,
including the receipt of all necessary regulatory consents and
approvals, consummation of the merger of Savoy Pictures Entertainment,
Inc. and a subsidiary of Silver King, and approval of such
transactions by the stockholders of Silver King and HSN. Liberty
Media Group has entered into agreements with both Silver King and HSN
pursuant to which Liberty Media Group has agreed to vote or cause to
be voted shares of Silver King and HSN owned by it in favor of the HSN
Merger and the other related transactions to be voted upon by the
stockholders of HSN and Silver King. In addition, such voting
agreements prohibit Liberty Media Group from disposing of shares of
HSN or Silver King except pursuant to the HSN Merger or following a
termination of the HSN merger agreement. If consummated, HSN would
cease to be a subsidiary of the Company and therefore, the financial
results of HSN would not be consolidated with the Company's financial
results. Although the Company would cease to possess voting control
over HSN, it would continue to have an indirect equity interest in HSN
through its ownership of the equity securities of BDTV, as well as a
direct interest in HSN. No assurance can be given that the HSN Merger
and related transactions will be consummated or if such transactions
are consummated, when such additional shares may be received by
Liberty media Group or that any or all such shares are ultimately
issued to Liberty Media Group.
The Company is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through 2009 (the "Film
Licensing Obligations"). Based on subscriber levels at September 30,
1996, these agreements require minimum payments aggregating
approximately $624 million. The aggregate amount of the Film
Licensing Obligations under other license agreements is not currently
estimable because such amount is dependent upon certain variable
factors. Nevertheless, the Company's aggregate payments under the
Film Licensing Obligations could prove to be significant.
(continued)
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TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of
approximately $307 million at September 30, 1996. Although there can
be no assurance, management of the Company believes that it will not
be required to meet its obligations under such guarantees, or if it is
required to meet any of such obligations, that they will not be
material to the Company.
The Company has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30,
1996, such commitments aggregated $228 million.
Certain key employees of the Company hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statements, but are subject to
future adjustment based upon the market value of the respective common
stock and, ultimately, on the final market value when the rights are
exercised or the restricted stock awards are vested.
The Company has contingent liabilities related to legal proceedings
and other matters arising in the ordinary course of business. In the
opinion of management, it is expected that amounts, if any, which may
be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
On December 4, 1996, the Board of Directors of Tele-Communications,
Inc. (the "Board") authorized, subject to shareholder approval (the "Telephony
Stock Proposal"), the issuance of a new class of stock ("Telephony Group
Stock") which is intended to reflect the separate performance of the Telephony
Group. The Telephony Group would initially consist of TCI Group's interest in
TCI Telephony Services, Inc., a direct wholly owned subsidiary of
Tele-Communications, Inc. ("TCI" or the "Company"), its subsidiaries, their
respective assets, and all assets and liabilities of the TCI Group to the
extent attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TCI Telephony Services, Inc.
(together with its consolidated subsidiaries (unless the context indicates
otherwise), "TCI Telephony"). The principal assets of TCI Telephony are its
non-consolidating investments in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residences
and businesses nationwide under the "Sprint" brand (the "PCS Ventures"), and
its investment in Teleport Communications Group, Inc., a Delaware corporation
("TCG"). The PCS Ventures include Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the partners of
each of which are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI, and
PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries of
Sprint, Cox and TCI. TCI, through subsidiaries, has a 30% interest as a partner
in the Sprint PCS Partnerships and 35.3% interest as a partner in
PhillieCo. TCG is a competitive local exchange carrier that offers a wide range
of local telecommunications services in major metropolitan markets nationwide,
primarily to businesses, long distance carriers and resellers, and wireless
communications companies. The Company has a 31.1% equity interest (which
represents a 36.5% voting interest) in TCG. The Telephony Group would also
include such other assets of the TCI Group as the Board may in the future
determine to attribute to the Telephony Group and such other businesses, assets
and liabilities as TCI may in the future acquire for the Telephony Group, as
determined by the Board. It is currently the intention of TCI that any
businesses, assets and liabilities so attributed to the Telephony Group in the
future would be businesses, assets and liabilities of, or related to, the
interests of the TCI Group in the domestic wireless and wireline
communications businesses (the "Telephony Business").
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
As of the date of these financial statements, the only interests of
the TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a subsidiary of
the TCI Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital broadband
microwave network located in the Western United States (the "Microwave
Business"), and the Company's business, which is in the development stage, of
providing wireline residential telephony services to customers in certain of
the geographic areas served by the Company's cable television systems (the
"ResTel Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. Telephony Group has the
right, but not the obligation, to acquire the ResTel Business from the Company
in whole or in part (by geographic area) for the appraised fair market value of
the ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that Telephony Group
is at the time a subsidiary of the Company and the Company is then conducting
such business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or sales of
assets), in funds borrowed from the TCI Group or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony
Group. Whether or not Telephony Group will exercise its rights to acquire the
ResTel Business (in whole or in part) will depend upon a number of factors,
including the penetration rates for the service in the geographic area or areas
in which the service has been commercially launched (with the penetration rate
being the percentage that the number of subscribers to the service in such
geographic area represent of the homes technically capable of subscribing to
the service), the cost of providing the service at the penetration rate
achieved in that area, and the ability of Telephony Group to fund the
continued development and ongoing operation of the ResTel Business in that
area. With regard to the Microwave Business, the Board has not yet determined
whether and for what consideration this business would be transferred to the
Telephony Group, other than that any such transfer would be at fair market
value (as determined by the Board).
The common stockholders' equity value of TCI attributable to the
Telephony Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group
is 100%. As any shares of Telephony Group Stock are issued and distributed or
sold, the TCI Group's Inter-Group Interest in the Telephony Group will be
reduced accordingly.
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group
Stock (when issued) will be common stockholders of TCI and will be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities.
Summary of Operations
Certain corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that would approximate the costs
Telephony Group would incur for comparable services on a stand alone basis.
During 1995 and 1994, Telephony Group was allocated $358,000 and $50,000,
respectively, in corporate general and administrative costs by TCI Group.
Telephony Group records compensation relating to stock appreciation
rights and restricted stock awards granted to certain employees involved with
Telephony Group matters by TCI. Such compensation is subject to future
adjustment based upon market value, and ultimately, on the final determination
of market value when the rights are exercised or the restricted stock awards are
vested.
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Other Income and Expenses
Telephony Group's share of losses of affiliates of $65.3 million for
the year ended December 31, 1995 represents an increase of $44.9 million or
220%, when compared to the Telephony Group's share of losses of $20.4 million
for the year ended December 31, 1994. The increase is directly attributable to
the Telephony Group's share of losses in the PCS Ventures, TCG and other
affiliates accounted for under the equity method.
The share of losses from the Telephony Group's investment in the PCS
Ventures was $33.9 million for the year ended December 31, 1995 which
represents an increase of $32.9 million, as compared to the share of losses of
$1 million for the year ended December 31, 1994. The increase in the share of
losses is attributed primarily to general and administrative costs associated
with the start-up of operations and the PCS Ventures' share of losses in
American PCS L.P. The PCS Ventures are in the development stage of operations
and generated no revenue during 1995.
The share of losses from the Telephony Group's investment in TCG was
$30.0 million for the year ended December 31, 1995 which represents an increase
of $10.6 million, as compared to the share of losses of $19.4 million for the
year ended December 31, 1994. The increase in the share of losses is largely
attributed to costs incurred by TCG in the expansion of their local
telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets
and the growth of TCG's customer base.
Telephony Group's share of losses of affiliates was $20.4 million for
the year ended December 31, 1994, which represents an increase of $12.2 million
over the corresponding period in 1993. Such increase is principally the result
of the Telephony Group's share of losses from TCG.
Interest income increased to $5.8 million in 1995 from $1.7 million in
1994, representing an increase of $4.1 million or 240%. The increase is largely
attributed to an increase in the note receivable from TCG from $61.3 million at
December 31, 1994 to $83.4 million at December 31, 1995.
Net Earnings (Loss)
Telephony Group's net loss of $39.0 million for the year ended
December 31, 1995 represents an increase of $27.2 million, as compared to
Telephony Group's net loss of $11.8 million for 1994. Telephony Group's net
loss of $11.8 million for 1994 represents an increase of $7.0 million, as
compared to Telephony Group's net loss of $4.8 million for 1993. Such increases
in the net loss of Telephony Group are primarily the result of the
aforementioned increases in share of losses of affiliates.
Inflation has not had a significant impact on Telephony Group's
results of operations during the three-year period ended December 31, 1995.
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Recent Accounting Pronouncements
Statement No. 123 was issued by the FASB in October 1995. Statement
No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Telephony Group will include the disclosures required by
Statement No. 123 in the notes to future financial statements.
Liquidity and Capital Resources
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company currently
proposes to offer shares of Series A Telephony Group Stock for cash in an
initial public offering, in which event the proceeds of such offering would be
allocated to the Telephony Group to be used to fund a portion of its anticipated
capital requirements and for general corporate purposes. The timing and the
size of any such public offering and the price at which such shares would be
sold will be determined by the Board, without further approval of stockholders,
prior to such offering based upon then prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group and
the Telephony Group (collectively, the "Groups") for the purpose of preparing
the combined financial statements of the TCI Group, the Liberty Media Group and
the Telephony Group, the change in the capital structure of the Company
contemplated by the Telephony Group Stock Proposal will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group Common
Stock and Telephony Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, any net losses of any
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common
Stock, and dividends on, or certain repurchases of, Preferred Stock, will
reduce funds of the Company legally available for the payment of dividends on
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group should be read in
conjunction with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available
for dividends and the available dividend amount with respect to Telephony
Group, as defined. Determinations to pay dividends on Telephony Group Stock
will be based primarily upon the financial condition, results of operations and
business requirements of Telephony Group and TCI as a whole.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Telephony Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Telephony Group Stock Proposal, such cash activities will be included in
borrowings from the loans to TCI Group or, if determined by the Board of
Directors, as an equity contribution to the Telephony Group.
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance and sale of Telephony Group Stock would (unless the
Board otherwise provides) be specifically attributed to and reflected on the
combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity
incurring the debt or issuing the preferred stock is Tele-Communications, Inc.,
the TCI Group. The Board could, however, determine from time to time that debt
incurred or preferred stock issued by entities included in a Group should be
specifically attributed to and reflected on the combined financial statement of
one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the Telephony Group, reflected as the creation of, or
increase in, the TCI Group's Inter-Group Interest in such Group or, in the case
of a transfer from either the Liberty Media Group or the Telephony Group to the
TCI Group, reflected as a reduction in the TCI Group's Inter-Group Interest in
such Group. There are no specific criteria for determining when a transfer will
be reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the financing needs and
objectives of the Groups, the investment objectives of the Groups, the
availability, cost and time associated with alternative financing sources,
prevailing interest rates and general economic conditions. Generally, it is
expected that entities included in the Liberty Media Group will seek their own
long-term debt financing, whereas the Telephony Group is expected to require
additional advances from the TCI Group for some period of time. To satisfy
this need, TCI Group expects to provide as of January 1, 1997 a revolving loan
facility to Telephony Group that would permit borrowings of up to $150 million
to $200 million over a five-year period. The interest rate on such revolving
loans and the terms and conditions of borrowings have not yet been determined.
Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable polices from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Group,
the capital expenditure plans and investment opportunities available to each
Group and the availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group would reflect its net loans to
or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or expense,
as the case may be, associated with such loans or borrowings and the respective
combined statements of cash flows of the Groups would reflect changes in the
amounts of loans or borrowings deemed outstanding. In the historical financial
statements, net borrowings of the Telephony Group have been included as a
component of the Telephony Group's combined equity. Subsequent to the date of
such financial statements, a portion of such net borrowings was converted into a
$500 million investment in Telephony preferred stock as described below. The
balance of such net borrowings through January 1, 1997 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group subsequent to January 1,
1997, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
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"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
On December 1, 1996, the TCI Group converted $500 million of its
interest in the Telephony Group into a 6% cumulative compounding redeemable
preferred stock due from the Telephony Group. Such preferred stock is due
December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at
a time when such shares could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial impacts of
equity offerings are and will be attributed entirely to the TCI Group. After
the Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock are and will be attributed entirely to the TCI Group,
all financial impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the Liberty Media Group
are and will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of which are
attributed to the TCI Group in respect of a reduction in any Inter-Group
Interest in the Liberty Media Group are and will be to such extend reflected in
the combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which are
attributed to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and all financial impacts
of issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the TCI Group in respect of a reduction in the TCI Group's
Inter-Group Interest in the Telephony Group will be to such extent reflected in
the combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on, and purchases of, TCI Group Common Stock
will be attributed entirely to the TCI Group, and financial impacts of
dividends or other distributions on Telephony Group Common Stock will be
attributed entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time there is
an Inter-Group Interest in the Telephony Group) result in the TCI Group being
credited, and the Telephony Group being charged (in addition to the charge for
the dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common Stock
and a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of Telephony
Group Common Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Common Stock the consideration for which is charged to the TCI Group will be to
such extend reflected in the combined financial statements of the TCI Group and
will result in an increase in the TCI Group's Inter-Group Interest in the
Telephony Group.
V-112
<PAGE> 263
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
During 1994, Telephony Group, Comcast, Cox (together with the Company
and Comcast, the "Cable Partners") and Sprint formed a partnership
("WirelessCo") to engage in the business of providing wireless communications
services on a nationwide basis. Through WirelessCo, in which Telephony Group
owns an indirect 30% interest, the partners participated in auctions ("PCS
Auctions") of broadband PCS licenses conducted by the Federal Communications
Commission ("FCC"). In the first round auction, which concluded during the
first quarter of 1995, WirelessCo was the winning bidder for PCS licenses for
29 markets, including New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and Miami-Fort
Lauderdale. The aggregate license cost for these licenses was approximately
$2.1 billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited partnership
interest in APC for $23 million and agreed to make capital contributions to APC
equal to 49/51 of the cost of APC's PCS license. Additional capital
contributions may be required in the event APC is unable to finance the full
cost of its PCS license. WirelessCo may also be required to finance the
build-out expenditures for APC's PCS system. Cox, which holds a pioneer
preference PCS license for the Los Angeles-San Diego market, and WirelessCo
have also agreed on the general terms and conditions upon which Cox (with a 51%
interest) and WirelessCo (with a 49% interest) would form a partnership to hold
and develop a PCS system using the Los Angeles-San Diego license. APC and the
Cox partnership would affiliate their PCS systems with WirelessCo and be part
of WirelessCo's nationwide integrated network, offering wireless communications
services under the "Sprint" brand.
During 1994, subsidiaries of Cox, Sprint and Telephony Group also
formed a separate partnership ("PhillieCo"), in which the Telephony Group owns
a 35.3% interest. PhillieCo was the winning bidder in the first round auction
for a PCS license for the Philadelphia market at a license cost of $85 million.
To the extent permitted by law, the PCS system to be constructed by PhillieCo
would also be affiliated with WirelessCo's nationwide network.
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful bidders.
The capital that WirelessCo will require to fund the construction of the PCS
systems, in addition to the license costs and investments described above, will
be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal partnership is
MajorCo, L.P. ("MajorCo"), to which they contributed their respective interests
in WirelessCo and through which they formed another partnership, NewTelco, L.P.
("NewTelco") to engage in the business of providing local wireline
communications services to residences and businesses on a nationwide basis. The
Cable Partners agreed to contribute their interests in TCG to NewTelco. TCG is
one of the largest competitive access providers in the United States in terms
of route miles.
V-113
<PAGE> 264
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Effective January 31, 1996, the Partners amended the MajorCo
partnership agreement (the "Partnership Agreement") and certain other
agreements related thereto. Under the Partnership Agreement, the business of
MajorCo and its subsidiaries will be the provision of certain wireless and
other services described in the Partnership Agreement. The partners intend for
WirelessCo and its subsidiary partnerships to be the exclusive vehicles through
which they engage in the wireless telephony service businesses, subject to
certain exceptions. MajorCo will no longer be authorized to engage in the
businesses of providing local wireline communications services to residences
and businesses. In connection with the amendment of the Partnership Agreement,
the Partners, also agreed to the termination of the agreement to contribute the
Cable Partners' interests in TCG to NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint
have agreed to negotiate in good faith on a market-by-market basis for the
provision of local wireline telephony services over the cable television
facilities of the respective Cable Partner under the Sprint brand. Accordingly,
local wireline telephony offerings in each market would be the subject of
individual agreements to be negotiated with Sprint, rather than being provided
by MajorCo, as originally contemplated. The Cable Partners and Sprint also
reaffirmed their intention to continue to attempt to integrate the business of
TCG with that of MajorCo. In addition, each Cable Partner agreed to certain
restrictions on its ability to offer, promote, or package certain of its
products or services with certain products and services of other persons and
agreed to make its facilities available to Sprint for specified purposes to the
extent and on the terms that it has made such facilities available to others
for such purposes. Such agreements have a term of five years, but under certain
circumstances may terminate after three years.
Execution of the foregoing agreements was a condition to the
effectiveness of a previously approved business plan for the build out of
WirelessCo's nationwide network for wireless personal communications services.
Pursuant to the business plan, the Partners are obligated to make additional
cash capital contributions to MajorCo in the aggregate amount of approximately
$1.9 billion during the two-year period that commenced January 1, 1996. The
business plan contemplates that MajorCo will require additional equity
thereafter.
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or
loans, the most significant of which is the funding of MajorCo. As previously
described, the Partners are obligated to make cash capital contributions to
MajorCo in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to MajorCo) are estimated as follows (amounts
in thousands):
1996 $219,000
1997 371,000
1998 79,000
--------
$669,000
========
V-114
<PAGE> 265
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Historically, the Telephony Group has relied upon the TCI Group as its
sole source of financing. The Telephony Group is expected to require additional
advances from the TCI Group for some period of time. In that regard, the
aforementioned revolving loan facility which the Company expects to provide
will provide a source of short term and long term liquidity to the Telephony
Group for its general corporate purposes. However, the Telephony Group's
partnership funding commitments exceed the anticipated availability under the
proposed revolving credit facility. As such, should the Company choose not to
offer shares of Series A Telephony Group Stock for cash and allocate the
proceeds to the Telephony Group, the Telephony Group would require funding from
the TCI Group in excess of the proposed revolving loan facility.
V-115
<PAGE> 266
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31,
1995 and 1994 and for each of the years in the three-year period ended December
31, 1995.
We have also audited the accompanying combined balance sheets of Telephony
Group (a combination of certain assets of Tele-Communications, Inc., as defined
in note 1) as of December 31, 1995 and 1994, and the related combined
statements of operations, equity, and cash flows for each of the years in the
three-year period ended December 31, 1995. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The combined financial statements of Telephony Group are presented for purposes
of additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of Telephony Group are intended to reflect
the performance of the assets of Tele-Communications, Inc. consisting of
certain entities engaged in the domestic wireline and wireless telephony
distribution and communications businesses. The combined financial statements
of Telephony Group should be read in conjunction with the consolidated
financial statements of Tele-Communications, Inc. and subsidiaries.
In our opinion, the combined financial statements referred to in the second
paragraph above present fairly, in all material respects, the financial
position of Telephony Group as of December 31, 1995 and 1994, and the results
of their operations and cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1996
V-116
<PAGE> 267
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
-------- -------
Assets amounts in thousands
<S> <C> <C>
Investments in Sprint Spectrum Holding Company, L.P. and MinorCo, L.P.
(and their respective predecessor) and PhillieCo (collectively,
the "PCS Ventures"), accounted for under the equity method (note 4) $689,062 37,930
Investments in Teleport Communications Group, Inc., TCG Partners and certain
local market partnerships (collectively, "TCG"), accounted
for under the equity method, and related receivables (note 5) 244,012 197,424
Other investments in affiliates, accounted for under the equity
method, and related receivables (note 6) 5,722 1,368
Deferred tax asset (note 7) 4,857 3,612
-------- -------
$943,653 240,334
======== =======
Combined Equity
Combined equity (note 8) $943,653 240,334
======== =======
</TABLE>
Commitments and contingencies (notes 4 and 9)
See accompanying notes to combined financial statements.
V-117
<PAGE> 268
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- ------
amounts in thousands
<S> <C> <C> <C>
Operating costs and expenses:
Charges from TCI Group (note 8) $ 358 50 --
Compensation relating to stock appreciation rights (note 8) 119 -- --
-------- ------- ------
477 50 --
-------- ------- ------
Operating loss (477) (50) --
Other income (expense):
Share of losses of the PCS Ventures (note 4) (33,890) (992) --
Share of losses of TCG (note 5) (29,975) (19,366) (8,182)
Share of losses of other equity affiliates (note 6) (1,468) -- --
Interest income from affiliates (note 5) 5,854 1,718 531
-------- ------- ------
(59,479) (18,640) (7,651)
-------- ------- ------
Loss before income taxes (59,956) (18,690) (7,651)
Income tax benefit (note 7) 21,002 6,919 2,883
-------- ------- ------
Net loss $(38,954) (11,771) (4,768)
======== ======= ======
</TABLE>
See accompanying notes to combined financial statements.
V-118
<PAGE> 269
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Combined
equity
---------
amounts in thousands
<S> <C>
Balance at January 1, 1993 $103,873
Net loss (4,768)
Intergroup tax allocation (676)
Net cash transfers from TCI Group 19,222
--------
Balance at December 31, 1993 117,651
Net loss (11,771)
Cost allocations from TCI Group 50
Intergroup tax allocation (2,657)
Transfers of assets from TCI Group,
net of deferred taxes 7,584
Net cash transfers from TCI Group 129,477
--------
Balance at December 31, 1994 240,334
Net loss (38,954)
Cost allocations from TCI Group 358
Allocation to Telephony Group of compensation
relating to stock appreciation rights 119
Intergroup tax allocation (17,513)
Transfers of assets from TCI Group,
net of deferred taxes 15,926
Net cash transfers from TCI Group 743,383
--------
Balance at December 31, 1995 $943,653
========
</TABLE>
See accompanying notes to combined financial statements.
V-119
<PAGE> 270
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -------
amounts in thousands
(see note 3)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (38,954) (11,771) (4,768)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Compensation relating to stock appreciation rights 119 -- --
Share of losses of affiliates 65,333 20,358 8,182
Intergroup tax allocation (17,513) (2,657) (676)
Deferred income tax benefit (3,489) (4,262) (2,207)
--------- -------- -------
Net cash provided by operating activities 5,496 1,668 531
--------- -------- -------
Cash flows from investing activities:
Additional investments in and loans to affiliates (750,861) (132,835) (60,173)
Repayments of receivables from affiliates 1,624 1,640 40,420
--------- -------- -------
Net cash used by investing activities (749,237) (131,195) (19,753)
--------- -------- -------
Cash flows from financing activities -
Cash transfers to Telephony Group 743,741 129,527 19,222
--------- -------- -------
Net change in cash -- -- --
Cash at beginning of year -- -- --
--------- -------- -------
Cash at end of year $ -- -- --
========= ======== =======
</TABLE>
See accompanying notes to combined financial statements.
V-120
<PAGE> 271
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
December 31, 1995, 1994 and 1993
(1) Basis of Presentation
On December 4, 1996 the Board of Directors of Tele-Communications,
Inc. (the "Board") authorized, subject to shareholder approval (the
"Telephony Stock Proposal"), the issuance of a new class of stock
("Telephony Group Stock") which is intended to reflect the separate
performance of the Telephony Group. The Telephony Group would
initially consist of TCI Group's interest in TCI Telephony Services,
Inc., a direct wholly owned subsidiary of Tele-Communications, Inc.
("TCI" or the "Company"), its subsidiaries, their respective assets,
and all assets and liabilities of the TCI Group to the extent
attributed to any of the foregoing assets, whether or not such assets
or liabilities are assets and liabilities of TCI Telephony Services,
Inc. (together with its consolidated subsidiaries (unless the context
indicates otherwise), "TCI Telephony"). The principal assets of TCI
Telephony are its non-consolidating investments in a series of
partnerships, the PCS Ventures, formed to engage in the business of
providing wireless communications services, using the radio spectrum
for broadband personal communications services ("PCS"), to residences
and businesses nationwide under the "Sprint" brand, and its investment
in TCG. The PCS Ventures include Sprint Spectrum Holding Company, L.P.
and MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the
partners of each of which are subsidiaries of Sprint Corporation
("Sprint"), Comcast Corporation ("Comcast"), Cox Communications, Inc.
("Cox") and TCI, and PhillieCo, L.P. ("PhillieCo"), the partners of
which are subsidiaries of Sprint, Cox and TCI. TCI, through
subsidiaries, has a 30% interest as a partner in the Sprint PCS
Partnerships and a 35.3% interest as a partner in PhillieCo. TCG is a
competitive local exchange carrier that offers a wide range of local
telecommunications services in major metropolitan markets nationwide,
primarily to businesses, long distance carriers and resellers, and
wireless communications companies. The Company has a 31.1% equity
interest (which represents a 36.5% voting interest) in TCG. The
Telephony Group would also include such other assets of the TCI Group
as the Board may in the future determine to attribute to the Telephony
Group and such other businesses, assets and liabilities as TCI may in
the future acquire for the Telephony Group, as determined by the Board.
It is currently the intention of TCI that any businesses, assets and
liabilities so attributed to the Telephony Group in the future would
be businesses, assets and liabilities of, or related to, the
interests of the TCI Group in the domestic wireless and wireline
communications businesses (the "Telephony Business").
V-121
<PAGE> 272
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of the date of these financial statements, the only interests of
the TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a
subsidiary of the TCI Group which provides long-distance video, voice,
data and other telecommunications services on a wholesale basis
through its digital broadband microwave network located in the Western
United States (the "Microwave Business"), and the Company's business,
which is in the development stage, of providing wireline residential
telephony services to customers in certain of the geographic areas
served by the Company's cable television systems (the "ResTel
Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. Telephony Group
has the right, but not the obligation, to acquire the ResTel Business
from the Company in whole or in part (by geographic area) for the
appraised fair market value of the ResTel Business (or the portion of
the ResTel Business being transferred), at any time or from time to
time, as applicable, provided that Telephony Group is at the time a
subsidiary of the Company and the Company is then conducting such
business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or
sales of assets), in funds borrowed from the TCI Group or through an
increase in the Inter-Group Interest (as defined below) of the TCI
Group in the Telephony Group. Whether or not Telephony Group will
exercise its rights to acquire the ResTel Business (in whole or in
part) will depend upon a number of factors, including the penetration
rates for the service in the geographic area or areas in which the
service has been commercially launched (with the penetration rate
being the percentage that the number of subscribers to the service in
such geographic area represent of the homes technically capable of
subscribing to the service), the cost of providing the service at the
penetration rate achieved in that area, and the ability of Telephony
Group to fund the continued development and ongoing operation of the
ResTel Business in that area. With regard to the Microwave Business,
the Board has not yet determined whether and for what consideration
this business would be transferred to the Telephony Group, other than
that any such transfer would be at fair market value (as determined by
the Board).
The common stockholders' equity value of TCI attributable to the
Telephony Group that, at any relevant time, is attributed to the TCI
Group, and accordingly, not represented by outstanding Telephony Group
Stock is referred to as "Inter-Group Interest". Prior to the issuance
of any shares of Telephony Group Stock, the Inter-Group Interest of
the TCI Group in the Telephony Group is 100%. As any shares of
Telephony Group Stock are issued and distributed or sold, the TCI
Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
While the Telephony Group Stock constitutes common stock of TCI,
issuance of the Telephony Group Stock will not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group
Stock (when issued) will be common stockholders of TCI and will be
subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company
currently purposes to offer shares of Series A Telephony Group Stock
for cash in an initial public offering, in which event the proceeds of
such offering would be allocated to the Telephony Group to be used to
fund a portion of its anticipated capital requirements and for general
corporate purposes. The timing and the size of any such public offering
and the price at which such shares would be sold will be determined by
the Board, without further approval of stockholders, prior to such
offering based upon then prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media
Group and the Telephony Group (collectively, the "Groups") for the
purpose of preparing the combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group, the change in
the capital structure of the Company contemplated by the Telephony
Group Stock Proposal will not affect legal title to such assets or
responsibility for such liabilities of the Company or any of its
subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group
Common Stock and Telephony Group Common Stock will be common
stockholders of the Company and will be subject to risks associated
with an investment in the Company and all of its businesses, assets
and liabilities.
(continued)
V-122
<PAGE> 273
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect
the combined results of operations or financial condition of the other
Groups and the market price of the TCI Group Common Stock, the Liberty
Media Group Common Stock and the Telephony Group Common Stock. In
addition, any net losses of any Group, dividends or distributions on,
or repurchases of, the TCI Group Common Stock, the Liberty Media Group
Common Stock or the Telephony Group Common Stock, and dividends on, or
certain repurchases of, Preferred Stock, will reduce funds of the
Company legally available for the payment of dividends on the TCI
Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the
TCI Group, the Liberty Media Group and the Telephony Group should be
read in conjunction with the consolidated financial statements of the
Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends and the available dividend amount with respect
to Telephony Group, as defined. Determinations to pay dividends on
Telephony Group Stock are based primarily upon the financial
condition, results of operations and business requirements of
Telephony Group and TCI as a whole.
(2) Summary of Significant Accounting Policies
Investments
Investments in which the ownership interest is less than 20% but are
not considered marketable securities are generally carried at cost.
For those investments in affiliates in which Telephony Group's voting
interest is 20% to 50%, the equity method of accounting is generally
used. Under this method, the investment, originally recorded at cost,
is adjusted to recognize Telephony Group's share of the net earnings
or losses of the affiliates as they occur rather than as dividends or
other distributions are received, limited to the extent of Telephony
Group's investment in, advances to and commitments for the investee.
Telephony Group's share of net earnings or losses of affiliates
includes the amortization of the difference between Telephony Group's
investment and its share of the net assets of the investee.
Recognition of gains on sales of properties to affiliates accounted
for under the equity method is deferred in proportion to Telephony
Group's ownership interest in such affiliates.
Changes in Telephony Group's proportionate share of the underlying
equity of a subsidiary or equity method investee, which result from
the issuance of additional equity securities by such subsidiary or
equity investee, generally are recognized as gains or losses in
Telephony Group's combined statements of operations.
(continued)
V-123
<PAGE> 274
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB
in October 1995. Statement No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as
well as transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. Telephony Group will
include the disclosures required by Statement No. 123 in the notes to
future financial statements.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) Supplemental Disclosures to Combined Statements of Cash Flows
There was no cash paid for interest for the years ended December 31,
1995, 1994 and 1993, respectively. Cash paid for income taxes was not
material in any of the years presented.
Noncash transfers of assets to the Telephony Group aggregated
$18,170,000 and $10,668,000, with associated deferred income taxes of
$2,244,000 and $3,084,000 for the years ended December 31, 1995 and
1994, respectively.
(4) Investments in the PCS Ventures
Summarized unaudited results of operations for the PCS Ventures,
accounted for under the equity method, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
Combined Financial Position 1995 1994
----------- -------
amounts in thousands
<S> <C> <C>
Cash $ 1,149 5,024
Investments and related receivables 2,296,130 123,794
Other assets, net 31,972 423
----------- -------
Total assets $ 2,329,251 129,241
=========== =======
Other liabilities $ 53,436 3,755
Owners' equity 2,275,815 125,486
----------- -------
Total liabilities and equity $ 2,329,251 129,241
=========== =======
</TABLE>
(continued)
V-124
<PAGE> 275
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
Combined Operations 1995 1994 1993
-------------- ----------- ------------
amounts in thousands
<S> <C> <C> <C>
Operating expenses $ (66,720) (3,295) --
Depreciation and amortization (211) (38) --
-------------- ----------- ------------
Operating loss (66,931) (3,333) --
Other, net (45,749) 24 --
-------------- ------------ ------------
Net loss $ (112,680) (3,309) --
============== ============ ============
</TABLE>
During 1994, Telephony Group, Comcast, Cox (together with the Company
and Comcast, the "Cable Partners") and Sprint formed a partnership
("WirelessCo") to engage in the business of providing wireless
communications services on a nationwide basis. Through WirelessCo, in
which Telephony Group owns an indirect 30% interest, the partners
participated in auctions ("PCS Auctions") of broadband PCS licenses
conducted by the Federal Communications Commission ("FCC"). In the
first round auction, which concluded during the first quarter of 1995,
WirelessCo was the winning bidder for PCS licenses for 29 markets,
including New York, San Francisco-Oakland-San Jose, Detroit,
Dallas-Fort Worth, Boston-Providence, Minneapolis-St. Paul and
Miami-Fort Lauderdale. The aggregate license cost for these licenses
was approximately $2.1 billion.
WirelessCo also invested in American PSC, L.P. ("APC"), which holds a
PCS license granted under the FCC's pioneer preference program for the
Washington-Baltimore market. WirelessCo acquired its 49% limited
partnership interest in APC for $23 million and agreed to make capital
contributions to APC equal to 49/51 of the cost of APC's PCS license.
Additional capital contributions may be required in the event APC is
unable to finance the full cost of its PCS license. WirelessCo may
also be required to finance the build-out expenditures for APC's PCS
system. Cox, which holds a pioneer preference PCS license for the Los
Angeles-San Diego market, and WirelessCo have also agreed on the
general terms and conditions upon which Cox (with a 51% interest) and
WirelessCo (with a 49% interest) (the "Cox Partnership") would form a
partnership to hold and develop a PCS system using the Los Angeles-San
Diego license. APC and the Cox partnership would affiliate their PCS
systems with WirelessCo and be part of WirelessCo's nationwide
integrated network, offering wireless communications services under
the "Sprint" brand
During 1994, subsidiaries of Cox, Sprint and Telephony Group also
formed a separate partnership ("PhillieCo"), in which Telephony Group
owns a 35.3% interest. PhillieCo was the winning bidder in the first
round auction for a PCS license for the Philadelphia market at a
license cost of $85 million. To the extent permitted by law, the PCS
system to be constructed by PhillieCo would also be affiliated with
WirelessCo's nationwide network.
(continued)
V-125
<PAGE> 276
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
WirelessCo may bid in subsequent rounds of the PCS Auctions and may
invest in, affiliate with or acquire licenses from other successful
bidders. The capital that WirelessCo will require to fund the
construction of the PCS systems, in addition to the license costs and
investments described above, will be substantial.
In March of 1995, the Cable Partners and Sprint (collectively, the
"Partners") formed two new partnerships, of which the principal
partnership is MajorCo, L.P. ("MajorCo"), to which they contributed
their respective interests in WirelessCo and through which they formed
another partnership, NewTelco, L.P. ("New Telco") to engage in the
business of providing local wireline communications services to
residences and businesses on a nationwide basis. The Cable Partners
agreed to contribute their interests in TCG to NewTelco. TCG is one of
the largest competitive access providers in the United States in terms
of route miles.
Effective January 31, 1996, the Partners amended the MajorCo
partnership agreement (the "Partnership Agreement") and certain other
agreements related thereto. Under the Partnership Agreement, the
business of MajorCo and its subsidiaries will be the provision of
certain wireless and other services described in the Partnership
Agreement. The Partners intend for WirelessCo and its subsidiary
partnerships to be the exclusive vehicles through which they engage in
the wireless telephony service businesses, subject to certain
exceptions. MajorCo will no longer be authorized to engage in the
business of providing local wireline communications services to
residences and businesses. In connection with the amendment of the
Partnership Agreement, the Partners, also agreed to the termination of
the agreement to contribute the Cable Partners' interests in TCG to
NewTelco.
Pursuant to separate agreements, each of the Cable Partners and Sprint
have agreed to negotiate in good faith on a market-by-market basis for
the provision of local wireline telephony services over the cable
television facilities of the respective Cable Partner under the Sprint
brand. Accordingly, local wireline telephony offerings in each market
would be the subject of individual agreements to be negotiated with
Sprint, rather than being provided by MajorCo, as originally
contemplated. The Cable Partners and Sprint also reaffirmed their
intention to continue to attempt to integrate the business of TCG with
that of MajorCo. In addition, each Cable Partner agreed to certain
restrictions on its ability to offer, promote, or package certain of
its products or services with certain products and services of other
persons and agreed to make its facilities available to Sprint for
specified purposes to the extent and on the terms that it has made
such facilities available to others for such purposes. Such agreements
have a term of five years, but under certain circumstances may
terminate after three years.
Execution of the foregoing agreements was a condition to the
effectiveness of a previously approved business plan for the build out
of WirelessCo's nationwide network for wireless personal
communications services. Pursuant to the business plan, the Partners
are obligated to make additional cash capital contributions to MajorCo
in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996. The business plan
contemplates that MajorCo will require additional equity thereafter.
(continued)
V-126
<PAGE> 277
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investment in TCG
TCG is a competitive local exchange carrier which provides integrated
local telecommunications services in major metropolitan markets
nationwide. TCG's customers are principally telecommunications
intensive businesses, long distance carriers and resellers of wireless
communications companies. During 1992, the Telephony Group acquired a
30% ownership interest in Teleport Communications Group, Inc.,
("TCGI"). Subsequent to the acquisition, the Telephony Group advanced
funds to TCGI in the form of notes receivable. Such notes receivable
bore interest at a variable rate (which approximated 7% at December 31,
1995) and amounted to (including accrued interest) $87,511,000 and
$61,372,000 at December 31, 1995 and 1994, respectively. In
conjunction with the Reorganization (as defined below), $57.8 million
of such receivables were converted to equity of TCGI. The remaining
note receivable of $26 million was exchanged for a new note which bears
interest at 7.5% and is due in 2001.
Also during 1992, TCGI, with Cox, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG
Partners to invest, with TCGI, the Cable Stockholders and other cable
operators, in 14 partnerships (the "Local Market Partnership") to
develop and operate local telecommunications networks.
The Telephony Group's investment in TCG is accounted for under the
equity method of accounting.
Summarized unaudited combined results of operations for TCG, accounted
for under the equity method, are as follows:
<TABLE>
<CAPTION>
December 31,
Combined Financial Position 1995 1994
---------- -----------
amounts in thousands
<S> <C> <C>
Cash $ 32,835 48,987
Investments and related receivables 99,299 53,958
Other assets, net 931,297 707,936
---------- -----------
Total assets $1,063,431 810,881
========== ===========
Debt $ 356,500 197,500
Other liabilities 236,421 205,267
Minority interest 4,409 2,903
Owners' equity 466,101 405,211
---------- -----------
Total liabilities and equity $1,063,431 810,881
========== ===========
</TABLE>
(continued)
V-127
<PAGE> 278
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
Combined Operations 1995 1994 1993
------------ -------- -------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 216,445 144,426 84,872
Operating expenses (215,861) (160,233) (90,637)
Depreciation and amortization (61,482) (30,149) (16,382)
------------ -------- -------
Operating loss (60,898) (45,956) (22,147)
Interest expense (28,953) (9,862) (1,601)
Other, net (12,819) (7,182) 3,971
------------ -------- -------
Net loss $ (102,670) (63,000) (19,777)
============ ======== =======
</TABLE>
In June 1996, TCGI and the Cable Stockholders agreed to simplify the
TCG capital structure by consolidating the ownership of TCG Partners
and the Local Market Partnerships as wholly owned subsidiaries of
TCGI. As part of this process, certain of the other cable operators
agreed to exchange their interests in the Local Market Partnerships
with TCGI directly or through a Cable Stockholder for TCGI common
stock.
TCGI and the Cable Stockholders entered into a reorganization
agreement pursuant to which TCGI, TCG Partners and the Local Market
Partnerships were reorganized (the "Reorganization"). The principal
transactions comprising the Reorganization include:
The acquisition by TCGI of TCG Partners in exchange for TCGI
Class B Common Stock issued to the Cable Stockholders.
The acquisition by TCGI of all interests in 12 of the 14
Local Market Partnerships in exchange for TCGI Class B Common
Stock issued to the Cable Stockholders and Class A Common
Stock issued to other cable operators.
The contribution to TCGI of $269 million in aggregate
principal amount of indebtedness, plus accrued interest from
May 1995, owed by TCGI to the Cable Stockholders (except that
the Telephony Group retained a $26 million subordinated note
due from TCGI) in exchange for Class B Common Stock issued to
the Cable Stockholders.
Also in July, 1996, TCGI issued approximately 27 million shares
representing approximately 15.4% of Class A Common Stock and $300
million of Senior Notes and $1,073 million of Senior Discount Notes as
part of an initial public offering (the "Offering").
In consideration of the transfer by each of the Cable Stockholders of
its respective interests in TCG Partners and the Local Market
Partnerships and the contribution to TCGI of the indebtedness
described above, the Company issued immediately prior to the Offerings
approximately 69 million additional shares of Class B Common Stock to
the Cable Stockholders.
(continued)
V-128
<PAGE> 279
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with Continental's announced merger with U S WEST, Inc.,
TCGI purchased approximately 8 million shares (out of approximately
25.8 million shares) of Class B Common Stock owned by Continental for
$121 million. On November 5, 1996, the U.S. Department of Justice
announced a settlement with U S WEST, Inc., and Continental pursuant
to which Continental will be required to reduce its ownership
percentage in TCGI to below 10% by June 30, 1997 and to eliminate such
ownership entirely by December 31, 1998.
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local
Market Partnerships have become wholly owned subsidiaries of TCGI.
Subsequent to the Reorganization, the remaining minority interests
related to another cable operator's interests in TCG San Francisco and
TCG Seattle were acquired by the Company. Subsequent to this
acquisition, the ownership interest in these entities were acquired by
the Telephony Group. The issuance of shares received by the Telephony
Group in the Offering assumes that subsequent to the Offerings, the
Telephony Group will contribute its current and acquired partnership
interests in TCG San Francisco and TCG Seattle to TCG. The transfer of
such interests are expected to occur in the fourth quarter of 1996.
Additionally, the Telephony Group will be issued 638,862 shares of
TCGI Class A Common Stock in consideration for the transfer to TCGI of
the partnership interest which the Telephony Group acquired from
MicroNet, Inc. in TCG San Francisco. The Telephony Group also has
acquired a 4.2% interest in TCG San Francisco from InterMedia
Partners. The Telephony Group will be issued 372,666 shares of Class A
Common Stock for the transfer to TCGI of such acquired partnership
interest. These transfers are also expected to occur in the fourth
quarter of 1996.
(6) Investment in Other Affiliates
Summarized unaudited results of operations for other affiliates
accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
Combined Financial Position 1995 1994
------- -----
amounts in thousands
<S> <C> <C>
Cash $ 177 417
Other assets, net 14,735 3,126
------- -----
Total assets $14,912 3,543
======= =====
Other liabilities $ 9,856 121
Owners' equity 5,056 3,422
------- -----
Total liabilities and equity $14,912 3,543
======= =====
</TABLE>
(continued)
V-129
<PAGE> 280
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
<TABLE>
<CAPTION>
Years ended December 31,
Combined Operations 1995 1994 1993
------------ --------- ---------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 3,204 12 --
Operating expenses (4,578) (5) --
Depreciation and amortization (1,599) (12) --
------------ --------- ---------
Operating loss (2,973) (5) --
Interest expense (342) -- --
Other, net (14) -- --
------------ --------- ---------
Net loss $ (3,329) (5) --
============ ========= =========
</TABLE>
(7) Income Taxes
TCI files a consolidated Federal income tax return with all of its 80%
or more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying combined financial
statements.
Federal income taxes and certain state and local taxes would be paid on
a consolidated basis. However, pursuant to a tax sharing agreement,
federal income taxes are calculated, with certain adjustments, on a
separate return basis for each Group (applying provisions of the
Internal Revenue Code of 1986, as amended, and related regulations as
if such Group filed a separate consolidated return for federal income
tax purposes). Based upon these separate calculations, an allocation of
tax liabilities is made such that each separate Group is responsible to
the Company for its gross share of the Company's consolidated federal
income tax liabilities, such gross share being determined without
regard to (a) tax benefits that are attributable to the Company or the
other Groups or (b) certain tax benefits that are attributable to a
Group but that are taken into account in determining the Company's
consolidated federal income tax benefit carryovers. Similarly, the
Company is responsible to each Group for tax benefits attributable to
such Group and actually used by the Company in determining its
consolidated federal income tax liability. Notwithstanding the
foregoing, the Company and Telephony Group have agreed that the Company
may use up to $500 million of tax benefits generated by the Telephony
Group in determining its consolidated federal income tax liability
without providing a credit to the Telephony Group in such amount. Tax
attributes, including but not limited to net operating losses,
investment tax credits, alternative minimum tax net operating losses,
alternative minimum tax credits, deferred intercompany gains and tax
basis in assets, would be inventoried and tracked for each Group. In
addition, pursuant to such tax sharing agreement, state and local
income taxes are calculated on a separate return basis for each Group
(applying provisions of state and local tax law and related regulations
as if the Group were a separate unitary or combined group for tax
purposes), and the Company's combined or unitary tax liability is
allocated between the Groups based upon such separate calculation. The
Company has retained the right to file all returns, make all elections
and control all audits and contests. The Company anticipates that the
assets and entities comprising the Telephony Group will be transferred
to a direct subsidiary of TCI. At such time, the Telephony Group will
become party to the Tax Sharing Agreement. Such transfers will be
recorded at carryover basis for financial reporting purposes.
(continued)
V-130
<PAGE> 281
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Income tax benefit for the years ended December 31, 1995, 1994 and
1993 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
----------- ---------- -----------
amounts in thousands
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal $ 17,513 3,463 20,976
State and local -- 26 26
----------- ---------- -----------
$ 17,513 3,489 21,002
=========== ========== ===========
Year ended December 31, 1994:
Federal $ 2,657 3,654 6,311
State and local -- 608 608
----------- ---------- -----------
$ 2,657 4,262 6,919
=========== ========== ===========
Year ended December 31, 1993:
Federal $ 676 1,892 2,568
State and local -- 315 315
----------- ---------- -----------
$ 676 2,207 2,883
=========== ========== ===========
</TABLE>
Income tax benefit differs from the amounts computed by applying the
Federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
amounts in thousands
<S> <C> <C> <C>
Computed "expected" tax benefit $ 20,985 6,542 2,678
State and local income taxes, net of Federal
income tax benefit 17 377 205
----------- ----------- -----------
$ 21,002 6,919 2,883
=========== =========== ===========
</TABLE>
(continued)
V-131
<PAGE> 282
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
---------- ----------
amounts in thousands
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,307 --
Investments in affiliates, due principally to losses of
affiliates recognized for financial statement purposes in
excess of losses recognized for income tax purposes 1,504 3,612
Future deductible amounts principally due to non-deductible
accruals 46 --
---------- ----------
Net deferred tax assets $ 4,857 3,612
========== ==========
</TABLE>
At December 31, 1995, Telephony Group had net operating loss
carryforwards for income tax purposes aggregating approximately $9.5
million, the entire amount of which, if not utilized to reduce taxable
income in future periods, expires in 2010.
Certain of the Federal income tax returns of TCI and its subsidiaries
which filed separate income tax returns are presently under
examination by the Internal Revenue Service for the years 1981 through
1992. In the opinion of management, any additional tax liability, not
previously provided for, resulting from these examinations, ultimately
determined to be payable, should not have a material adverse effect on
the combined financial position of Telephony Group.
New tax legislation was enacted in the third quarter of 1993 which,
among other matters, increased the corporate Federal income tax rate
from 34% to 35%. Telephony Group has reflected the tax rate change in
its combined statements of operations. Such tax rate change resulted
in an immaterial change to income tax expense and deferred income tax
liability.
(8) Combined Equity
General
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Common Stock will have one vote per share and
the Series B Telephony Group Common Stock will have ten votes per
share.
(continued)
V-132
<PAGE> 283
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Shares of Series B Telephony Group Common Stock will be convertible at
any time at the option of the holder only into the same number of
shares of Series A Telephony Group Common Stock.
The rights of holders of the Telephony Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market
capitalization, as defined, of the Telephony Group Stock to the
aggregate market capitalization, as defined, of the TCI Group Stock,
the Telephony Group Stock and the Liberty Group Stock.
Stock Options and Stock Appreciation Rights
Certain key employees of TCI involved with Telephony Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI
Group Stock and Series A Liberty Group Stock as well as restricted
stock awards of Series A TCI Group Stock. Estimates of the compensation
relating to the options and/or stock appreciation rights as well as
restricted stock awards granted to such employees have been recorded in
the accompanying combined financial statements, but are subject to
future adjustment based upon the market value of Series A TCI Group
Stock and Series A Liberty Group Stock (see note 1) and, ultimately, on
the final determination of market value when the rights are exercised
or the restricted shares are vested.
On December 1, 1996, two executive officers of TCI Communications,
Inc., a subsidiary of TCI, were each granted options representing 1.0%
of the equity value of the Telephony Group. Upon the approval of the
Telephony Group Stock Proposal, each of such options will convert to
options to purchase shares of Series A Telephony Group Stock
representing 1.0% of the number of shares of Series A Telephony Group
Stock issuable with respect to the Telephony Group Inter-Group
Interest. The aggregate exercise price for each option is equal to 1.0%
of TCI's cumulative investment in the Telephony Group as of December 1,
1996 less $500 million representing preferred stock of the Telephony
Group due to the TCI Group and further reduced by tax benefits
generated by the Telephony Group (up to $500 million) as and when used
by the TCI Group. Such exercise price shall be adjusted to reflect an
assumed interest cost of 6% per annum or TCI's cumulative investment
reduced by the foregoing amounts through the date of exercise. Such
executive officers were also granted options representing 1.0% of the
equity value of the Restel Business. The exercise of the Telephony
Group options is inseparable from the Restel Business options. Such
options vest 20% per annum, first become exercisable on February 1,
1997 and expire February 1, 2006.
Transactions with TCI Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are
set at levels that management believes to be reasonable and that
approximate the costs Telephony Group would incur for comparable
services on a stand alone basis. During the years ended December 31,
1995 and 1994, Telephony Group was allocated $358,000 and $50,000,
respectively, in corporate general and administrative costs by TCI
Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by
TCI on a daily basis. Prior to the implementation of the Telephony
Group Stock Proposal the net amounts of such cash activities are
included in combined equity in the accompanying combined financial
statements. Subsequent to the implementation of the Telephony Group
Stock Proposal, such cash activities will be included in borrowings
from or loans to TCI Group or, if determined by the Board of
Directors, as an equity contribution to the Telephony Group.
(continued)
V-133
<PAGE> 284
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its
subsidiaries following the issuance and sale of Telephony Group Stock
would (unless the Board otherwise provides) be specifically attributed
to and reflected on the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected on the combined financial
statements of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The
TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities
included in the other Groups are remitted to the TCI Group and certain
cash disbursements of the other Groups will be funded by the TCI Group
on a daily basis. Such transfers of funds between the Groups will be
reflected as borrowings or, if determined by the Board of Directors,
in the case of a transfer from the TCI Group to either the Liberty
Media Group or the Telephony Group, reflected as the creation of, or
increase in, the TCI Group's Inter-Group Interest in such Group or, in
the case of a transfer from either the Liberty Media Group or the
Telephony Group to the TCI Group, reflected as a reduction in the TCI
Group's Inter-Group Interest in such Group. There are no specific
criteria for determining when a transfer will be reflected as a
borrowing or as an increase or reduction in an Inter-Group Interest.
The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from
time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the
financing needs and objectives of the Groups, the investment
objectives of the Groups, the availability, cost and time associated
with alternative financing sources, prevailing interest rates and
general economic conditions. Generally, it is expected that entities
included in the Liberty Media Group will seek their own long-term debt
financing, whereas the Telephony Group is expected to require
additional advances from the TCI Group for some period of time. To
satisfy this need, TCI Group expects to provide as of January 1, 1997
a revolving loan facility to Telephony Group that would permit
borrowings of up to $150 million to $200 million over a five-year
period. The interest rate on such revolving loans and the terms and
conditions of borrowings have not yet been determined.
(continued)
V-134
<PAGE> 285
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures
established by, the Board of Directors. The Board of Directors expects
to make such determinations, either in specific instances or by
setting generally applicable polices from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans
and investment opportunities available to each Group and the
availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group would reflect its net loans to
or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings
and the respective combined statements of cash flows of the Groups
would reflect changes in the amounts of loans or borrowings deemed
outstanding. In the historical financial statements, net borrowings of
the Telephony Group have been included as a component of the Telephony
Group's combined equity. Subsequent to the date of such financial
statements, a portion of such net borrowings was converted into a $500
million investment in Telephony preferred stock as described below. The
balance of such net borrowings through January 1, 1997 will continue to
be reflected as a component of the Telephony Group's combined equity.
Amounts borrowed by the Telephony Group from another Group subsequent
to January 1, 1997, will be reflected on the Telephony Group's
financial statements as indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its
interest in the Telephony Group into a 6% cumulative compounding
redeemable preferred stock due from the Telephony Group. Such
preferred stock is due December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to
convert a portion of the amount invested by the Company in the
investments attributed to the Telephony Group into the aforementioned
$500 million preferred stock and a contractual right to use up to $500
million of tax benefits generated by Telephony Group (principally
arising from its partnership interest in the PCS Ventures) without
charge to the TCI Group. Such right can be satisfied only through and
to the extent of future income tax benefits generated by Telephony
Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group
to the Telephony Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the Telephony Group to the TCI
Group would be determined by reference to the Market Value of the
Series A Telephony Group Common Stock as of the date of such transfer,
such an increase could occur at a time when such shares could be
considered undervalued and such a decrease could occur at a time when
such shares could be considered overvalued.
(continued)
V-135
<PAGE> 286
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial
impacts of equity offerings are and will be attributed entirely to the
TCI Group. After the Distribution, all financial impacts of issuances
of additional shares of TCI Group Common Stock are and will be
attributed entirely to the TCI Group, all financial impacts of
issuances of additional shares of Liberty Media Group Common Stock the
proceeds of which are attributed to the Liberty Media Group are and
will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of
which are attributed to the TCI Group in respect of a reduction in any
Inter-Group Interest in the Liberty Media Group are and will be to
such extend reflected in the combined financial statements of the TCI
Group. All financial impacts of issuances of shares of Telephony Group
Common Stock the proceeds of which are attributed to the Telephony
Group will be to such extent reflected in the combined financial
statements of the Telephony Group, and all financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of
which are attributed to the TCI Group in respect of a reduction in the
TCI Group's Inter-Group Interest in the Telephony Group will be to
such extent reflected in the combined financial statements of the TCI
Group. Financial impacts of dividends or other distributions on, and
purchases of, TCI Group Common Stock will be attributed entirely to
the TCI Group, and financial impacts of dividends or other
distributions on Telephony Group Common Stock will be attributed
entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time
there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in
addition to the charge for the dividend or other distribution paid),
with an amount equal to the product of the aggregate amount of such
dividend or other distribution paid or distributed in respect of
outstanding shares of Telephony Group Common Stock and a fraction the
numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of
Telephony Group Common Stock the consideration for which is charged to
the Telephony Group will be to such extent reflected in the combined
financial statements of the Telephony Group, and financial impacts of
repurchases of Telephony Group Common Stock the consideration for
which is charged to the TCI Group will be to such extend reflected in
the combined financial statements of the TCI Group and will result in
an increase in the TCI Group's Inter-Group Interest in the Telephony
Group.
(continued)
V-136
<PAGE> 287
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(9) Commitments and Contingencies
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity
or loans, the most significant of which is the funding of MajorCo. As
previously described, the Partners are obligated to make cash capital
contributions to MajorCo in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to MajorCo) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1996 $ 219,000
1997 371,000
1998 79,000
---------
$ 669,000
=========
</TABLE>
Certain of Telephony Group's affiliates are general partnerships and
any subsidiary of Telephony Group that is a general partner in a
general partnership is, as such, liable as a matter of partnership law
for all debts of that partnership in the event liabilities of that
partnership were to exceed its assets.
V-137
<PAGE> 288
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with Telephony Group's Management's Discussion and Analysis of Financial
Condition and Results of Operations for the year ended December 31, 1995. The
following discussion focuses on material changes in trends, risks and
uncertainties affecting Telephony Group's results of operations and financial
condition.
(1) Material changes in financial condition:
On December 4, 1996, the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholder approval, (the "Telephony Stock
Proposal") the issuance of a new class of stock ("Telephony Group Stock") which
is intended to reflect the separate performance of the Telephony Group. The
Telephony Group would initially consist of TCI Group's interest in TCI Telephony
Services, Inc., a direct wholly owned subsidiary of Tele-Communications, Inc.
("TCI" or the "Company"), its subsidiaries, their respective assets, and all
assets and liabilities of the TCI Group to the extent attributed to any of the
foregoing assets, whether or not such assets or liabilities are assets and
liabilities of TCI Telephony Services, Inc. (together with its consolidated
subsidiaries (unless the context indicates otherwise), "TCI Telephony"). The
principal assets of TCI Telephony are its non-consolidating investments in a
series of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband personal
communications services ("PCS"), to residences and businesses nationwide under
the "Sprint" brand (the "PCS Ventures"), and its investment in Teleport
Communications Group, Inc., a Delaware corporation ("TCG"). The PCS Ventures
include Sprint Spectrum Holding Company, L.P. and MinorCo. L.P. (collectively,
the "Sprint PCS Partnerships"), the partners of each of which are subsidiaries
of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and TCI, and PhillieCo, L.P. ("PhillieCo"), the
partners of which are subsidiaries of Sprint, Cox and TCI. TCI, through
subsidiaries, has a 30% interest as a partner in the Sprint PCS Partnerships and
a 35.3% interest as a partner in PhillieCo. TCG is a competitive local exchange
carrier that offers a wide range of local telecommunications services in major
metropolitan markets nationwide, primarily to businesses, long distance carriers
and resellers, and wireless communications companies. The Company has a 31.1%
equity interest (which represents a 36.5% voting interest) in TCG. The Telephony
Group would also include such other assets of the TCI Group as the Board may in
the future determine to attribute to the Telephony Group and such other
businesses, assets and liabilities as TCI may in the future acquire for the
Telephony Group, as determined by the Board. It is currently the intention of
TCI that any businesses, assets and liabilities so attributed to the Telephony
Group in the future would be businesses, assets and liabilities of, or related
to, the interests of the TCI Group in the domestic wireless and wireline
communications businesses (the "Telephony Business").
(continued)
V-138
<PAGE> 289
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
As of the date of these financial statements, the only interests of
the TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a subsidiary of
the TCI Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital broadband
microwave network located in the Western United States (the "Microwave
Business"), and the Company's business, which is in the development stage, of
providing wireline residential telephony services to customers in certain of
the geographic areas served by the Company's cable television systems (the
"ResTel Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. Telephony Group has the
right, but not the obligation, to acquire the ResTel Business from the Company
in whole or in part (by geographic area) for the appraised fair market value of
the ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that Telephony Group
is at the time a subsidiary of the Company and the Company is then conducting
such business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations on sales of
assets), in funds borrowed from the TCI Group or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony
Group. Whether or not Telephony Group will exercise its rights to acquire the
ResTel Business (in whole or in part) will depend upon a number of factors,
including the penetration rates for the service in the geographic area or areas
in which the service has been commercially launched (with the penetration rate
being the percentage that the number of subscribers to the service in such
geographic area represent of the homes technically capable of subscribing to
the service), the cost of providing the service at the penetration rate
achieved in that area, and the ability of Telephony Group to fund the
continued development and ongoing operation of the ResTel Business in that
area. With regard to the Microwave Business, the Board has not yet determined
whether and for what consideration this business would be transferred to the
Telephony Group, other than that any such transfer would be at fair market
value (as determined by the Board).
The common stockholders' equity value of TCI attributable to the
Telephony Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group
is 100%. As any shares of Telephony Group Stock are issued and distributed or
sold, the TCI Group's Inter-Group Interest in the Telephony Group will be
reduced accordingly.
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group
Stock (when issued) will be common stockholders of TCI and will be subject to
risks associated with an investment in TCI and all of its businesses, assets and
liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company currently
proposes to offer shares of Series A Telephony Group Stock for cash in an
initial public offering, in which event the proceeds of such offering would be
allocated to the Telephony Group to be used to fund a portion of its
anticipated capital requirements and for general corporate purposes. The timing
and the size of any such public offering and the price at which such shares
would be sold will be determined by the Board, without further approval of
stockholders, prior to such offering based upon then prevailing market and other
conditions.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group and
the Telephony Group (collectively, the "Groups") for the purpose of preparing
the combined financial statements of the TCI Group, the Liberty Media Group and
the Telephony Group, the change in the capital structure of the Company
contemplated by the Telephony Group Stock Proposal will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group Common
Stock and Telephony Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
(continued)
V-139
<PAGE> 290
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, any net losses of any
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common
Stock, and dividends on, or certain repurchases of, Preferred Stock, will
reduce funds of the Company legally available for the payment of dividends on
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group should be read in
conjunction with the consolidated financial statements of the Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally available
for dividends and the available dividend amount with respect to Telephony
Group, as defined. Determinations to pay dividends on Telephony Group Stock
will be based primarily upon the financial condition, results of operations and
business requirements of Telephony Group and TCI as a whole.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Liberty Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board, as an
equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance and sale of Telephony Group Stock would (unless the Board
otherwise provides) be specifically attributed to and reflected on the combined
financial statements of the Group that includes the entity which incurred the
debt or issued the preferred stock or, in case the entity incurring the debt or
issuing the preferred stock is Tele-Communications, Inc., the TCI Group. The
Board could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be specifically
attributed to and reflected on the combined financial statement of one of the
other Groups to the extent that the debt is incurred or the preferred stock is
issued for the benefit of such other Group.
(continued)
V-140
<PAGE> 291
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board of Directors, in the case of a transfer from the TCI Group to either the
Liberty Media Group or the Telephony Group, reflected as the creation of, or
increase in, the TCI Group's Inter-Group Interest in such Group or, in the case
of a transfer from either the Liberty Media Group or the Telephony Group to the
TCI Group, reflected as a reduction in the TCI Group's Inter-Group Interest in
such Group. There are no specific criteria for determining when a transfer will
be reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. Generally, it is expected that entities included in
the Liberty Media Group will seek their own long-term debt financing, whereas
the Telephony Group is expected to require additional advances from the TCI
Group for some period of time. To satisfy this need, TCI Group expects to
provide as of January 1, 1997 a revolving loan facility to Telephony Group that
would permit borrowings of up to $150 million to $200 million over a five-year
period. The interest rate on such revolving loans and the terms and conditions
of borrowings have not yet been determined.
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established from time
to time by, or pursuant to procedures established by, the Board. The Board
expects to make such determinations, either in specific instances or by setting
generally applicable polices from time to time, after consideration of such
factors as it deems relevant, including, without limitation, the needs of the
Company, the use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative financing
sources.
The combined balance sheets of a Group would reflect its net loans to
or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings and the
respective combined statements of cash flows of the Groups would reflect changes
in the amounts of loans or borrowings deemed outstanding. In the historical
financial statements, net borrowings of the Telephony Group have been included
as a component of the Telephony Group's combined equity. Subsequent to the date
of such financial statements, a portion of such net borrowings was converted
into a $500 million investment in Telephony preferred stock as described below.
The balance of such net borrowings through January 1, 1997 will continue to be
reflected as a component of the Telephony Group's combined equity. Amounts
borrowed by the Telephony Group from another Group subsequent to January 1,
1997, will be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its
interest in the Telephony Group into a 6% cumulative compounding redeemable
preferred stock due from the Telephony Group. Such preferred stock is due
December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
(continued)
V-141
<PAGE> 292
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at
a time when such shares could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial impacts of
equity offerings are and will be attributed entirely to the TCI Group. After
the Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock are and will be attributed entirely to the TCI Group,
all financial impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the Liberty Media Group
are and will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of which are
attributed to the TCI Group in respect of a reduction in any Inter-Group
Interest in the Liberty Media Group are and will be to such extend reflected in
the combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which are
attributed to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and all financial impacts
of issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the TCI Group in respect of a reduction in the TCI Group's
Inter-Group Interest in the Telephony Group will be to such extent reflected in
the combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on, and purchases of, TCI Group Common Stock
will be attributed entirely to the TCI Group, and financial impacts of
dividends or other distributions on Telephony Group Common Stock will be
attributed entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time there is
an Inter-Group Interest in the Telephony Group) result in the TCI Group being
credited, and the Telephony Group being charged (in addition to the charge for
the dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common Stock
and a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of Telephony
Group Common Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Common Stock the consideration for which is charged to the TCI Group will be to
such extend reflected in the combined financial statements of the TCI Group and
will result in an increase in the TCI Group's Inter-Group Interest in the
Telephony Group.
(continued)
V-142
<PAGE> 293
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Subsidiaries of Telephony Group, Comcast, Cox and Sprint are partners
in Sprint Spectrum which was formed to engage in the business of providing
wireless communications services on a nationwide basis. Telephony Group owns an
indirect 30% interest in Sprint Spectrum. Sprint Spectrum was the successful
bidder for PCS licenses for 29 markets in an auction conducted by the Federal
Communications Commission that ended in March 1995. The aggregate license cost
for these licenses was approximately $2.1 billion, all of which has been paid.
Sprint Spectrum may elect to bid in subsequent auctions of PCS licenses and/or
acquire PCS licenses from other holders, has invested in American PSC, L.P.
("APC") which holds the PCS license for the Washington-Baltimore market, has
agreed to invest in the entity that will hold the PCS license for the Los
Angeles-San Diego market, and may invest in other entities that hold PCS
licenses. Subsidiaries of Cox, Sprint and Telephony Group are also partners in
PhillieCo which holds a PCS license for the Philadelphia market which was
acquired at a license cost of $85 million. Telephony Group has an indirect
35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments described
above, will be substantial. Pursuant to the business plan adopted by the
partners in Sprint Spectrum for the build out of Sprint Spectrum's nationwide
network, the partners are obligated to make additional cash capital
contributions to Sprint Spectrum in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996. Telephony
Group has agreed to contribute approximately $0.6 billion of such aggregate
amount, $0.2 billion of which was contributed during the nine months ended
September 30, 1996. The business plan contemplates that Sprint Spectrum will
require additional equity thereafter.
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity or
loans, the most significant of which is the funding of MajorCo. As previously
described, the Partners are obligated to make cash capital contributions to
MajorCo in the aggregate amount of approximately $1.9 billion during the
two-year period that commenced January 1, 1996.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to MajorCo) are estimated as follows (amounts
in thousands):
<TABLE>
<S> <C>
1997 $371,000
1998 79,000
--------
$450,000
========
</TABLE>
Pursuant to an agreement entered into in connection with certain
financings by MajorCo, under certain circumstances the Partners may be required
to make additional contributions to MajorCo to fund projected cash shortfalls
to the extent that the amount of the Partners' aggregate contributions to
MajorCo (exclusive of certain amounts, including amounts invested in certain
affiliates of MajorCo), following December 31, 1995 are less than $1.0 billion;
however, based on the currently expected timing and use of the Partners'
contributions to MajorCo, the Company currently believes that such agreement
will not result in the Company's being required to make any incremental
capital contributions in addition to its pro rata portion of such $1.9 billion
amount.
Historically, the Telephony Group has relied upon the TCI Group as its
sole source of financing. The Telephony Group is expected to require additional
advances from the TCI Group for some period of time. In that regard, the
aforementioned revolving loan facility which the Company expects to provide
will provide a source of short term and long term liquidity to the Telephony
Group for its general corporate purposes. However, the Telephony Group's
partnership funding commitments exceed the anticipated availability under the
proposed revolving credit facility. As such, should the Company choose not to
offer shares of Series A Telephony Group Stock for cash and allocate the
proceeds to the Telephony Group, the Telephony Group would require funding from
the TCI Group in excess of the proposed revolving loan facility.
(continued)
V-143
<PAGE> 294
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations:
Certain corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on projected
utilization for that year. The utilization-based charges are set at levels that
management believes to be reasonable and that would approximate the costs
Telephony Group would incur for comparable services on a stand alone basis.
During the nine months ended September 30, 1996 and 1995, Telephony Group was
allocated $548,000 and $211,000, respectively, in corporate general and
administrative costs by TCI Group.
Telephony Group records compensation relating to stock appreciation
rights and restricted stock awards granted to certain employees involved in
Telephony Group matters by TCI. Such compensation is subject to future
adjustment based upon market value, and ultimately, on the final determination
of market value when the rights are exercised or the restricted stock awards
are vested.
Telephony Group's share of losses of affiliates of $111.3 million for
the nine months ended September 30, 1996 represents an increase of $79.5
million or 250%, when compared to the Telephony Group's share of losses of
$31.8 million for the nine months ended September 30, 1995. The increase is
directly attributable to the Telephony Group's share of losses in the PCS
Ventures, TCG and other affiliates accounted for under the equity method.
The share of losses from the Telephony Group's investment in the PCS
Ventures was $78.4 million for the nine months ended September 30, 1996 which
represents an increase of $67.6 million, as compared to the share of losses of
$10.8 million for the nine months ended September 30, 1995. The increase in the
share of losses is attributed primarily to general and administrative costs
associated with the start-up of operations and the PCS Ventures' share of
losses in American PCS L.P. The PCS Ventures are in the development start of
operations and generated no revenue during 1995.
V-144
<PAGE> 295
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
The share of losses from the Telephony Group's investment in TCG was
$31.6 million for the nine months ended September 30, 1996 which represents an
increase of $11.7 million, as compared to the share of losses of $19.9 million
for the nine months ended September 30, 1995. The increase in the share of
losses is largely attributed to costs incurred by TCG in the expansion of their
local telecommunications networks, increased depreciation expense and increased
interest expense partially offset by an increase in telecommunications services
revenue attributed to increased sales of services in existing and new markets
and the growth of TCG's customer base.
Interest income decreased to $3.5 million from $4.3 million for the
nine months ended September 30, 1996 and 1995, respectively. The decrease is
largely attributable to the absence of interest for the three months ended
September 30, 1996 associated with the conversion of a portion of the note
receivable from TCG.
TCG conducted an initial public offering on July 2, 1996 in which it
sold 27 million shares of Class A common stock with net proceeds of
approximately $410 million. As a result of the initial public offering,
Telephony Group's ownership interest in TCG was reduced from approximately 35%
to 31%. Accordingly, Telephony Group recognized a gain amounting to $12 million
(before deducting deferred income tax expense of approximately $5 million).
Telephony Group's net loss of $63.5 million for the nine months ended
September 30, 1996 represents an increase of $45.2 million, as compared to
Telephony Group's net loss of $18.3 million for the nine months ended September
30, 1995. Such increase is principally the result of the aforementioned
increase in share of losses from affiliates.
V-145
<PAGE> 296
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
Assets amounts in thousands
<S> <C> <C>
Investments in Sprint Spectrum Holding Company,
L.P. and MinorCo, L.P. (and their respective
predecessor) and PhillieCo (collectively, the
"PCS Ventures"), accounted for under the equity
method (note 3) $ 816,355 689,062
Investments in Teleport Communications Group, Inc.,
TCG Partners and certain local market partnerships
(collectively, "TCG"), accounted for under the
equity method, and related receivables (note 4) 294,148 244,012
Other investments in affiliates, accounted for under
the equity method, and related receivables (note 5) 9,042 5,722
Deferred tax asset -- 4,857
---------- --------
$1,119,545 943,653
========== ========
Deferred Tax Liability and Combined Equity
Deferred tax liability $ 21,251 --
Combined equity (note 6) 1,098,294 943,653
---------- --------
Commitments and contingencies (notes 3 and 7) $1,119,545 $943,653
========== ========
</TABLE>
See accompanying notes to combined financial statements.
V-146
<PAGE> 297
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
-------- --------- --------- ---------
amounts in thousands
<S> <C> <C> <C> <C>
Operating costs and expenses:
Charges from TCI Group (note 6) $ 183 84 548 211
Compensation relating to stock appreciation rights
(note 6) -- 12 -- 22
Adjustment to compensation relating to stock
appreciation rights (note 6) (69) -- (84) --
-------- -------- --------- ---------
114 96 464 233
-------- -------- --------- ---------
Operating loss (114) (96) (464) (233)
Other income (expense):
Share of losses of the PCS Ventures (note 3) (31,154) (8,039) (78,358) (10,841)
Share of losses of TCG (note 4) (11,011) (6,833) (31,591) (19,884)
Share of losses of other affiliates (note 5) (362) (412) (1,396) (1,062)
Interest income from affiliates (note 4) 626 1,546 3,527 4,293
Gain on sale of stock by TCG (note 4) 12,410 -- 12,410 --
-------- -------- --------- ---------
(29,491) (13,738) (95,408) (27,494)
-------- -------- --------- ---------
Loss before income taxes (29,605) (13,834) (95,872) (27,727)
Income tax benefit 9,956 4,766 32,338 9,477
-------- --------- --------- ---------
Net loss $(19,649) (9,068) (63,534) (18,250)
========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
V-147
<PAGE> 298
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Combined
equity
--------
amounts in thousands
<S> <C>
Balance at January 1, 1996 $ 943,653
Net loss (63,534)
Cost allocations from TCI Group 548
Adjustment to allocation of compensation relating to stock
appreciation rights (84)
Intergroup tax allocation from TCI Group (45,474)
Transfer of assets from TCI Group, net of
deferred taxes 45,253
Net cash transfers from TCI Group 217,932
----------
Balance at September 30, 1996 $1,098,294
==========
</TABLE>
See accompanying notes to combined financial statements.
V-148
<PAGE> 299
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
1996 1995
----------- -----------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (63,534) (18,250)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Compensation relating to stock appreciation rights -- 22
Adjustment to compensation relating to stock
appreciation rights (84) --
Share of losses of affiliates 111,345 31,787
Gain on sale of stock by TCG (12,410) --
Intergroup tax allocation (45,474) (13,146)
Deferred income tax expense 13,136 3,794
----------- -----------
Net cash provided by operating activities 2,979 4,207
----------- -----------
Cash flows from investing activities:
Additional investments in and loans to affiliates (221,459) (726,698)
Repayments of receivables from affiliates -- 1,642
----------- -----------
Net cash used in investing activities (221,459) (725,056)
----------- -----------
Cash flows from financing activities -
Cash transfers to Telephony Group 218,480 720,849
----------- -----------
Net change in cash -- --
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ -- --
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
V-149
<PAGE> 300
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1996
(unaudited)
(1) Basis of Presentation
On December 4, 1996 the Board of Directors of Tele-Communication, Inc.
(the "Board") authorized, subject to shareholders approval (the
"Telephony Stock Proposal"), a new class of stock ("Telephony Group
Stock") which is intended to reflect the separate performance of the
Telephony Group. The Telephony Group would initially consist of TCI
Group's interest in TCI Telephony Services, Inc., a direct wholly
owned subsidiary of Tele-Communications, Inc. ("TCI" or the
"Company"), its subsidiaries, their respective assets, and all assets
and liabilities of the TCI Group to the extent attributed to any of
the foregoing assets, whether or not such assets or liabilities are
assets and liabilities of TCI Telephony Services, Inc. (together with
its consolidated subsidiaries (unless the context indicates
otherwise), "TCI Telephony"). The principal assets of TCI Telephony
are its non-consolidating investments in a series of partnerships, the
PCS Ventures, formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband
personal communications services ("PCS"), to residences and businesses
nationwide under the "Sprint" brand, and its investment in TCG. The PCS
Ventures include Sprint Spectrum Holding Company, L.P. and MinorCo,
L.P. (collectively, the "Sprint PCS Partnerships"), the partners of
each of which are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and
TCI, and PhillieCo, L.P. ("PhillieCo"), the partners of which are
subsidiaries of Sprint, Cox and TCI. TCI, through subsidiaries, has a
30% interest as a partner in the Sprint PCS Partnerships and a 35.3%
interest as a partner in PhillieCo. TCG is a competitive local
exchange carrier that offers a wide range of local telecommunications
services in major metropolitan markets nationwide, primarily to
businesses, long distance carriers and resellers, and wireless
communications companies. The Company has a 31.1% equity interest
(which represents a 36.5% voting interest) in TCG. The Telephony Group
would also include such other assets of the TCI Group as the Board
may in the future determine to attribute to the Telephony
Group and such other businesses, assets and liabilities as TCI may in
the future acquire for the Telephony Group, as determined by the
Board. It is currently the intention of TCI that any businesses,
assets and liabilities so attributed to the Telephony Group in the
future would be businesses, assets and liabilities of, or related to,
the interests of the TCI Group in the domestic wireless and wireline
communications businesses (the "Telephony Business").
(continued)
V-150
<PAGE> 301
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of the date of these financial statements, the only interests of the
TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a
subsidiary of the TCI Group which provides long-distance video, voice,
data and other telecommunications services on a wholesale basis through
its digital broadband microwave network located in the Western United
States (the "Microwave Business"), and the Company's business, which is
in the development stage, of providing wireline residential telephony
services to customers in certain of the geographic areas served by the
Company's cable television systems (the "ResTel Business"). The Company
began offering residential telephony service commercially in October
1996 in Hartford, Connecticut. Telephony Group has the right, but not
the obligation, to acquire the ResTel Business from the Company in
whole or in part (by geographic area) for the appraised fair market
value of the ResTel Business (or the portion of the ResTel Business
being transferred), at any time or from time to time, as applicable,
provided that Telephony Group is at the time a subsidiary of the
Company and the Company is then conducting such business. Payment of
such appraised fair market value may be in funds generated by the
Telephony Group (whether through future operations on sales of assets)
in funds borrowed from the TCI Group or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the
Telephony Group. Whether or not Telephony Group will exercise its
rights to acquire the ResTel Business (in whole or in part) will depend
upon a number of factors, including the penetration rates for the
service in the geographic area or areas in which the service has been
commercially launched (with the penetration rate being the percentage
that the number of subscribers to the service in such geographic area
represent of the homes technically capable of subscribing to the
service), the cost of providing the service at the penetration rate
achieved in that area, and the ability of Telephony Group to fund the
continued development and ongoing operation of the ResTel Business in
that area. With regard to the Microwave Business, the Board of
Directors has not yet determined whether and for what consideration
this business would be transferred to the Telephony Group, other than
that any such transfer would be at fair market value (as determined by
the Board).
The common stockholders' equity value of TCI attributable to the
Telephony Group that, at any relevant time, is attributed to the TCI
Group, and accordingly not represented by outstanding Telephony Group
Stock is referred to as "Inter-Group Interest". Prior to the issuance
of any shares of Telephony Group Stock, the Inter-Group Interest of
the TCI Group in the Telephony Group is 100%. As any shares of
Telephony Group Stock are issued and distributed or sold, the TCI
Group's Inter-Group Interest in the Telephony Group will be reduced
accordingly.
While the Telephony Group Stock constitutes common stock of TCI,
issuance of the Telephony Group Stock will not result in any transfer
of assets or liabilities of TCI or any of its subsidiaries or affect
the rights of holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group
Common Stock (when issued) will be common stockholders of TCI and will
be subject to risks associated with an investment in TCI and all of its
businesses, assets and liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company
currently proposes to offer shares of Series A Telephony Group Stock
for cash in an initial public offering, in which event the proceeds of
such offering would be allocated to the Telephony Group to be used to
fund a portion of its anticipated capital requirements and for general
corporate purposes. The timing and the size of any such public offering
and the price at which such shares would be sold will be determined by
the Board, without further approval of stockholders, prior to such
offering based upon then prevailing market and other conditions.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the Groups for the purpose of
preparing the combined financial statements of the TCI Group, the
Liberty Media Group and the Telephony Group, the change in the capital
structure of the Company contemplated by the Telephony Group Stock
Proposal will not affect legal title to such assets or responsibility
for such liabilities of the Company or any of its subsidiaries.
Holders of TCI Group Common Stock, Liberty Media Group Common Stock
and Telephony Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in
the Company and all of its businesses, assets and liabilities.
(continued)
V-151
<PAGE> 302
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect
the combined results of operations or financial condition of the other
Groups and the market price of the TCI Group Common Stock, the Liberty
Media Group Common Stock and the Telephony Group Common Stock. In
addition, any net losses of any Group, dividends or distributions on,
or repurchases of, the TCI Group Common Stock, the Liberty Media Group
Common Stock or the Telephony Group Common Stock, and dividends on, or
certain repurchases of, Preferred Stock, will reduce funds of the
Company legally available for the payment of dividends on the TCI
Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the
TCI Group, the Liberty Media Group and the Telephony Group should be
read in conjunction with the consolidated financial statements of the
Company.
Dividends on the Telephony Group Stock will be payable at the sole
discretion of the Board out of the lesser of assets of TCI legally
available for dividends and the available dividend amount with respect
to Telephony Group, as defined. Determinations to pay dividends on
Telephony Group Stock are based primarily upon the financial
condition, results of operations and business requirements of
Telephony Group and TCI as a whole.
The accompanying interim combined financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of Telephony Group for the
year ended December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(2) Supplemental Disclosures to Combined Statements of Cash Flows
There was no cash paid for interest for the nine months ended
September 30, 1996 and 1995, respectively. Cash paid for income taxes
was not material for the periods presented.
Noncash transfers of assets to the Telephony Group aggregated
$58,225,000 with associated deferred taxes of $12,972,000 for the nine
months ended September 30, 1996.
(continued)
V-152
<PAGE> 303
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Investments in the PCS Ventures
Summarized unaudited results of operations for the PCS Ventures
accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
----------------------
1996 1995
--------- -------
amounts in thousands
<S> <C> <C>
Revenue $ 71 --
Operating expenses (164,028) (19,930)
Depreciation and amortization (1,847) (161)
--------- -------
Operating loss (165,804) (20,091)
Interest expense (297) --
Other, net (94,644) (15,892)
--------- -------
Net loss $(260,745) (35,983)
========= =======
</TABLE>
Subsidiaries of Telephony Group, Comcast, Cox (together with the
Company and Comcast, the "Cable Partners") and Sprint are partners
in Sprint Spectrum which was formed to engage in the business of
providing wireless communications services on a nationwide basis.
Telephony Group owns an indirect 30% interest in Sprint Spectrum.
Sprint Spectrum was the successful bidder for PCS licenses for 29
markets in an auction conducted by the Federal Communications
Commission that ended in March 1995. The aggregate license cost for
these licenses was approximately $2.1 billion, all of which has been
paid. Sprint Spectrum may elect to bid in subsequent auctions of PCS
licenses and/or acquire PCS licenses from other holders, has invested
in American PSC, L.P. ("APC") which holds the PCS license for the
Washington-Baltimore market, has agreed to invest in the entity that
will hold the PCS license for the Los Angeles-San Diego market, and
may invest in other entities that hold PCS licenses. Subsidiaries of
Cox, Sprint and Telephony Group are also partners in a partnership
("PhillieCo") that holds a PCS license for the Philadelphia market
which was acquired at a license cost of $85 million. Telephony Group
has an indirect 35.3% interest in PhillieCo.
The capital that Sprint Spectrum will require to fund the construction
of the PCS systems, in addition to the license costs and investments
described above, will be substantial. Pursuant to the business plan
adopted by the partners in Sprint Spectrum for the build out of Sprint
Spectrum's nationwide network, the partners are obligated to make
additional cash capital contributions to Sprint Spectrum in the
aggregate amount of approximately $1.9 billion during the two-year
period that commenced January 1, 1996. Telephony Group has agreed to
contribute approximately $0.6 billion of such aggregate amount, $0.2
billion of which was contributed during the nine months ended
September 30, 1996. The business plan contemplates that Sprint
Spectrum will require additional equity thereafter.
(continued)
V-153
<PAGE> 304
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investment in TCG
TCG is a competitive local exchange carrier which provides integrated
local telecommunications services in major metropolitan markets
nationwide. TCG's customers are principally telecommunications
intensive businesses, long distance carriers and resellers of wireless
communications companies.
TCG, a competitive local exchange carrier, conducted an initial public
offering (the "TCG IPO") on July 2, 1996 in which it sold 27,025,000
shares of Class A common stock at $16.00 per share to the public for
aggregate net proceeds of approximately $410,000,000. As a result of
the TCG IPO, Telephony Group's ownership interest in TCG was reduced
from approximately 35% to approximately 31%. Accordingly, Telephony
Group recognized a gain amounting to $12.4 million (before deducting
deferred income tax expense of approximately $5 million).
During 1992, the Telephony Group acquired a 30% ownership interest in
Teleport Communications Group, Inc., ("TCGI"). Subsequent to the
acquisition, the Telephony Group advanced funds to TCGI in the form of
notes receivable. Such notes receivable bore interest at a variable
rate (which approximated 7.0% at December 31, 1995). In conjunction
with the Reorganization (as defined below), $57.8 million of such
receivables were converted to equity of TCGI. The remaining note
receivable of $26 million was exchanged for a new note which bears
interest at 7.5% and is due in 2001. At September 30, 1996, the amount
outstanding (including accrued interest) was 26.3 million.
Also during 1992, TCGI, with COX, Comcast and Continental Cablevision
("Continental"), (collectively the "Cable Stockholders"), formed TCG
Partners to invest, with TCGI, the Cable Stockholders and other cable
operators, in 14 partnerships (the "Local Market Partnership") to
develop and operate local telecommunications networks.
Summarized unaudited combined results of operations for TCG as of and
for the period ended September 30, 1996 and TCGI and TCG Partners as
of and for the period ended September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
Combined Operations 1996 1995
---------- --------
amounts in thousands
<S> <C> <C>
Revenue $ 180,271 150,498
Operating expenses (161,403) (150,550)
Depreciation and amortization (51,984) (37,520)
---------- --------
Operating loss (33,116) (37,572)
Interest expense (44,451) (22,223)
Other, net 5,428 (8,803)
---------- --------
Net loss $ (72,139) (68,598)
========== ========
</TABLE>
(continued)
V-154
<PAGE> 305
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In June 1996, TCGI and the Cable Stockholders agreed to simplify the
TCG capital structure by consolidating the ownership of TCG Partners
and the Local Market Partnerships as wholly owned subsidiaries of
TCGI. As part of this process, certain of the other cable operators
agreed to exchange their interests in the Local Market Partnerships
with TCGI directly or through a Cable Stockholder for TCGI common
stock.
TCGI and the Cable Stockholders entered into a reorganization
agreement pursuant to which TCGI, TCG Partners and the Local Market
Partnerships were reorganized (the "Reorganization"). The principal
transactions comprising the Reorganization include:
The acquisition by TCGI of TCG Partners in exchange for TCGI
Class B Common Stock issued to the Cable Stockholders.
The acquisition by TCGI of all interests in 12 of the 14
Local Market Partnerships in exchange for TCGI Class B Common
Stock issued to the Cable Stockholders and Class A Common
Stock issued to the cable operators.
The contribution to TCGI of $269 million in aggregate
principal amount of indebtedness, plus accrued interest from
May 1995, owed by TCGI to the Cable Stockholders in exchange
for Class B Common Stock issued to the Cable Stockholders.
Also in July, 1996, TCGI issued approximately 27 million shares
representing approximately 15.4% of Class A Common Stock and $300
million of Senior Notes and $1,073 million of Senior Discount Notes as
part of an initial public offering (the "Offering").
In consideration of the transfer by each of the Cable Stockholders of
its respective interests in TCG Partners and the Local Market
Partnerships and the contribution to TCGI of the indebtedness
described above, the Company issued immediately prior to the Offerings
approximately 69 million additional shares of Class B Common Stock to
the Cable Stockholders.
In connection with Continental's announced merger with U S WEST, Inc.,
TCGI purchased approximately 8 million shares (out of approximately
25.8 million shares) of Class B Common Stock owned by Continental for
$121 million. On November 5, 1996, the U.S. Department of Justice
announced a settlement with U S WEST, Inc., and Continental pursuant
to which Continental will be required to reduce its ownership
percentage in TCGI to below 10% by June 30, 1997 and to eliminate such
ownership entirely by December 31, 1998.
(continued)
V-155
<PAGE> 306
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local
Market Partnerships have become wholly owned subsidiaries of TCGI.
Subsequent to the Reorganization, the remaining minority interests
related to another cable operator's interests in TCG San Francisco and
TCG Seattle were acquired by the Company. Subsequent to this
acquisition, the ownership interest in these entities were acquired by
the Telephony Group. The issuance of shares received by the Telephony
Group in the Offering assumes that subsequent to the Offerings, the
Telephony Group will contribute its current and acquired partnership
interests in TCG San Francisco and TCG Seattle to TCG. The transfer of
such interests are expected to occur in the fourth quarter of 1996.
Additionally, the Telephony Group will be issued 638,862 shares of
TCGI Class A Common Stock in consideration for the transfer to TCGI of
the partnership interest which the Telephony Group acquired from
MicroNet, Inc. in TCG San Francisco. The Telephony Group also has
acquired a 4.2% interest in TCG San Francisco from InterMedia
Partners. The Telephony Group will be issued 372,666 shares of Class A
Common Stock for the transfer to TCGI of such acquired partnership
interest. These transfers are also expected to occur in the fourth
quarter of 1996.
(5) Investment in Other Affiliates
Summarized unaudited results of operations for other affiliates
accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
Combined Operations 1996 1995
------------- ------------
amounts in thousands
<S> <C> <C>
Revenue $ 4,534 2,165
Operating expenses (3,807) (3,230)
Depreciation and amortization (2,494) (1,070)
-------- ---------
Operating loss (1,767) (2,135)
Interest expense (1,156) (275)
Other, net (85) (53)
-------- ---------
Net loss $ (3,008) (2,463)
======== =========
</TABLE>
(continued)
V-156
<PAGE> 307
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Combined Equity
General
If the Telephony Group Stock Proposal is approved by stockholders, the
Series A Telephony Group Common Stock will have one vote per share and
the Series B Telephony Group Common Stock will have ten votes per
share.
Shares of Series B Telephony Group Common Stock will be convertible at
any time at the option of the holder only into the same number of
shares of Series A Telephony Group Common Stock.
The rights of holders of the Telephony Group Stock upon liquidation of
TCI will be based upon the ratio of the aggregate market
capitalization, as defined, of the Telephony Group Stock to the
aggregate market capitalization, as defined, of the TCI Group Stock,
the Telephony Group Stock and the Liberty Group Stock.
Stock Options and Stock Appreciation Rights
Certain key employees of TCI involved with Telephony Group matters hold
options with tandem stock appreciation rights to acquire Series A TCI
Group Stock and Series A Liberty Group Stock as well as restricted
stock awards of Series A TCI Group Stock. Estimates of the compensation
relating to the options and/or stock appreciation rights as well as
restricted stock awards granted to such employees have been recorded in
the accompanying combined financial statements, but are subject to
future adjustment based upon the market value of Series A TCI Group
Stock and Series A Liberty Group Stock (see note 1) and, ultimately, on
the final determination of market value when the rights are exercised
or the restricted shares are vested.
On December 1, 1996, two executive officers of TCI Communications,
Inc., a subsidiary of TCI, were each granted options representing 1.0%
of the equity value of the Telephony Group. Upon the approval of the
Telephony Group Stock Proposal, each of such options will convert to
options to purchase shares of Series A Telephony Group Stock
representing 1.0% of the number of shares of Series A Telephony Group
Stock issuable with respect to the Telephony Group Inter-Group
Interest. The aggregate exercise price for each option is equal to 1.0%
of TCI's cumulative investment in the Telephony Group as of December 1,
1996 less $500 million representing preferred stock of the Telephony
Group due to the TCI Group and further reduced by tax benefits
generated by the Telephony Group (up to $500 million) as and when used
by the TCI Group. Such exercise price shall be adjusted to reflect an
assumed interest cost of 6% per annum on TCI's cumulative investment
reduced by the foregoing amounts through the date of exercise. Such
executive officers were also granted options representing 1.0% of the
equity value of the ResTel Business. The exercise of the Telephony
Group options is inseparable from the ResTel Business options. Such
options vest 20% per annum, first become exercisable on February 1,
1997 and expire February 1, 2006.
(continued)
V-157
<PAGE> 308
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Transactions with TCI Group and Other Related Parties
Certain TCI corporate general and administrative costs are charged to
Telephony Group at rates set at the beginning of the year based on
projected utilization for that year. The utilization-based charges are
set at levels that management believes to be reasonable and that
approximate the costs Telephony Group would incur for comparable
services on a stand alone basis. During the nine months ended
September 30, 1996 and 1995, Telephony Group was allocated $548,000
and $211,000, respectively, in corporate general and administrative
costs by TCI Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by
TCI on a daily basis. Prior to the implementation of the Liberty Group
Stock Proposal the net amounts of such cash activities are included in
combined equity in the accompanying combined financial statements.
Subsequent to the implementation of the Liberty Group Stock Proposal,
such cash activities will be included in borrowings from or loans to
TCI Group or, if determined by the Board of Directors, as an equity
contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its
subsidiaries following the issuance and sale of Telephony Group Stock
would (unless the Board otherwise provides) be specifically attributed
to and reflected on the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred
stock or, in case the entity incurring the debt or issuing the
preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or
preferred stock issued by entities included in a Group should be
specifically attributed to and reflected on the combined financial
statement of one of the other Groups to the extent that the debt is
incurred or the preferred stock is issued for the benefit of such other
Group.
(continued)
V-158
<PAGE> 309
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The
TCI Group has provided and will continue to provide centralized cash
management functions under which cash receipts of certain entities
included in the other Groups are remitted to the TCI Group and certain
cash disbursements of the other Groups will be funded by the TCI Group
on a daily basis. Such transfers of funds between the Groups will be
reflected as borrowings or, if determined by the Board of Directors, in
the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase
in, the TCI Group's Inter-Group Interest in such Group or, in the case
of a transfer from either the Liberty Media Group or the Telephony
Group to the TCI Group, reflected as a reduction in the TCI Group's
Inter-Group Interest in such Group. There are no specific criteria for
determining when a transfer will be reflected as a borrowing or as an
increase or reduction in an Inter-Group Interest. The Board of
Directors expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to
time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the
Liberty Media Group will seek their own long-term debt financing,
whereas the Telephony Group is expected to require additional advances
from the TCI Group for some period of time. To satisfy this need, TCI
Group expects to provide as of January 1, 1997 a revolving loan
facility to Telephony Group that would permit borrowings of up to $150
million to $200 million over a five-year period. The interest rate on
such revolving loans and the terms and conditions of borrowings have
not yet been determined.
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established
from time to time by, or pursuant to procedures established by, the
Board. The Board expects to make such determinations, either in
specific instances or by setting generally applicable polices from time
to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the use of
proceeds by and creditworthiness of the recipient Group, the capital
expenditure plans and investment opportunities available to each Group
and the availability, cost and time associated with alternative
financing sources.
The combined balance sheets of a Group would reflect its net loans to
or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings
and the respective combined statements of cash flows of the Groups
would reflect changes in the amounts of loans or borrowings deemed
outstanding. In the historical financial statements, net borrowings of
the Telephony Group have been included as a component of the Telephony
Group's combined equity. Subsequent to the date of such financial
statements, a portion of such net borrowings was converted into a $500
million investment in Telephony preferred stock as described below. The
balance of such net borrowings through January 1, 1997 will continue to
be reflected as a component of the Telephony Group's combined equity.
Amounts borrowed by the Telephony Group from another Group subsequent
to January 1, 1997, will be reflected on the Telephony Group's
financial statements as indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of it's
interest in the Telephony Group into a 6% cumulative compounding
redeemable preferred stock due from the Telephony Group. Such
preferred stock is due December 1, 2011.
V-159
<PAGE> 310
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert
a portion of the amount invested by the Company in the investments
attributed to the Telephony Group into the aforementioned $500 million
preferred stock and a contractual right to use up to $500 million of
tax benefits generated by Telephony Group (principally arising from its
partnership interest in the PCS Ventures) without charge to the TCI
Group. Such right can be satisfied only through and to the extent of
future income tax benefits generated by Telephony Group.
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group
to the Telephony Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the Telephony Group to the TCI
Group would be determined by reference to the Market Value of the
Series A Telephony Group Common Stock as of the date of such transfer,
such an increase could occur at a time when such shares could be
considered undervalued and such a decrease could occur at a time when
such shares could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial
impacts of equity offerings are and will be attributed entirely to the
TCI Group. After the Distribution, all financial impacts of issuances
of additional shares of TCI Group Common Stock are and will be
attributed entirely to the TCI Group, all financial impacts of
issuances of additional shares of Liberty Media Group Common Stock the
proceeds of which are attributed to the Liberty Media Group are and
will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of
which are attributed to the TCI Group in respect of a reduction in any
Inter-Group Interest in the Liberty Media Group are and will be to
such extend reflected in the combined financial statements of the TCI
Group. All financial impacts of issuances of shares of Telephony Group
Common Stock the proceeds of which are attributed to the Telephony
Group will be to such extent reflected in the combined financial
statements of the Telephony Group, and all financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of
which are attributed to the TCI Group in respect of a reduction in the
TCI Group's Inter-Group Interest in the Telephony Group will be to
such extent reflected in the combined financial statements of the TCI
Group. Financial impacts of dividends or other distributions on, and
purchases of, TCI Group Common Stock will be attributed entirely to
the TCI Group, and financial impacts of dividends or other
distributions on Telephony Group Common Stock will be attributed
entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time
there is an Inter-Group Interest in the Telephony Group) result in the
TCI Group being credited, and the Telephony Group being charged (in
addition to the charge for the dividend or other distribution paid),
with an amount equal to the product of the aggregate amount of such
dividend or other distribution paid or distributed in respect of
outstanding shares of Telephony Group Common Stock and a fraction the
numerator of which is the Telephony Group Inter-Group Interest
Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of
Telephony Group Common Stock the consideration for which is charged to
the Telephony Group will be to such extent reflected in the combined
financial statements of the Telephony Group, and financial impacts of
repurchases of Telephony Group Common Stock the consideration for
which is charged to the TCI Group will be to such extend reflected in
the combined financial statements of the TCI Group and will result in
an increase in the TCI Group's Inter-Group Interest in the Telephony
Group.
V-160
<PAGE> 311
"TELEPHONY GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Federal income taxes and certain state and local taxes would be paid on
a consolidated basis. However, pursuant to a tax sharing agreement,
federal income taxes are calculated, with certain adjustments, on a
separate return basis for each Group (applying provisions of the
Internal Revenue Code of 1986, as amended, and related regulations as
if such Group filed a separate consolidated return for federal income
tax purposes). Based upon these separate calculations, an allocation of
tax liabilities is made such that each separate Group is responsible to
the Company for its gross share of the Company's consolidated federal
income tax liabilities, such gross share being determined without
regard to (a) tax benefits that are attributable to the Company or the
other Groups or (b) certain tax benefits that are attributable to a
Group but that are taken into account in determining the Company's
consolidated federal income tax benefit carryovers. Similarly, the
Company is responsible to each Group for tax benefits attributable to
such Group and actually used by the Company in determining its
consolidated federal income tax liability. Notwithstanding the
foregoing, the Company and Telephony Group have agreed that the Company
may use up to $500 million of tax benefits generated by the Telephony
Group in determining its consolidated federal income tax liability
without providing a credit to the Telephony Group in such amount. Tax
attributes, including but not limited to net operating losses,
investment tax credits, alternative minimum tax net operating losses,
alternative minimum tax credits, deferred intercompany gains and tax
basis in assets, would be inventoried and tracked for each Group. In
addition, pursuant to such tax sharing agreement, state and local
income taxes are calculated on a separate return basis for each Group
(applying provisions of state and local tax law and related regulations
as if the Group were a separate unitary or combined group for tax
purposes), and the Company's combined or unitary tax liability is
allocated between the Groups based upon such separate calculation. The
Company has retained the right to file all returns, make all elections
and control all audits and contests. The Company anticipates that the
assets and entities comprising the Telephony Group will be transferred
to a direct subsidiary of TCI. At such time, the Telephony Group will
become party to the Tax Sharing Agreement. Such transfers will be
recorded at carryover basis for financial reporting purposes.
(7) Commitments and Contingencies
As a partner in certain partnerships, from time to time, the Telephony
Group is obligated to make cash payments, either in the form of equity
or loans, the most significant of which is the funding of MajorCo. As
previously described, the Partners are obligated to make cash capital
contributions to MajorCo in the aggregate amount of approximately $1.9
billion during the two-year period that commenced January 1, 1996.
The Telephony Group's commitment to fund partnerships (including the
aforementioned funding obligation to MajorCo) are estimated as follows
(amounts in thousands):
<TABLE>
<S> <C>
1997 $ 371,000
1998 79,000
---------
$ 450,000
=========
</TABLE>
Pursuant to an agreement entered into in connection with certain
financings by MajorCo, under certain circumstances the Partners may be
required to make additional contributions to MajorCo to fund projected
cash shortfalls to the extent that the amount of the Partners'
aggregate contributions to MajorCo (exclusive of certain amounts,
including amounts invested in certain affiliates of MajorCo),
following December 31, 1995 are less than $1.0 billion; however, based
on the currently expected timing and use of the Partners'
contributions to MajorCo, the Company currently believes that such
agreement will not result in the Company's being required to make any
incremental capital contributions in addition to its pro rata portion
of such $1.9 billion amount.
Certain of Telephony Group's affiliates are general partnerships and
any subsidiary of Telephony Group that is a general partner in a
general partnership is, as such, liable as a matter of partnership law
for all debts of that partnership in the event liabilities of that
partnership were to exceed its assets.
V-161
<PAGE> 312
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
As of January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "TCIC") and Liberty Media Corporation ("Liberty")
entered into a definitive merger agreement to combine the two companies. The
transaction was consummated on August 4, 1994. Due to the significant economic
interest held by TCIC through its ownership of Liberty preferred stock and
Liberty common stock and other related party considerations, TCIC accounted for
its investment in Liberty under the equity method prior to the consummation of
the merger (the "TCI/Liberty Combination"). Accordingly, TCIC had recognized
100% of Liberty's earnings or losses before deducting preferred stock
dividends. The TCI/Liberty Combination was accounted for using predecessor cost
due to related party considerations. Accordingly, the accompanying combined
financial statements of TCI Group reflect the combination of the historical
financial information of the assets of Tele-Communications, Inc. ("TCI" or the
"Company") and Liberty which have not been attributed to Liberty Media Group or
the Telephony Group. For periods prior to the TCI/Liberty Combination, the
combined financial statements of TCI Group, the Telephony Group and Liberty
Media Group comprise all the accounts included in the corresponding
consolidated financial statements of TCI and subsidiaries and Liberty and
subsidiaries. For periods subsequent to the TCI/Liberty Combination, the
combined financial statements of TCI Group, the Telephony Group and Liberty
Media Group comprise all the accounts included in the corresponding
consolidated financial statements of TCI and subsidiaries.
On August 3, 1995, the shareholders of TCI authorized the Board of
Directors of TCI (the "Board") to issue a new class of stock which is intended
to reflect the separate performance of Liberty Media Group. While the Liberty
Group Stock constitutes common stock of TCI, the issuance of the Liberty Group
Stock did not result in any transfer of assets or liabilities of TCI or any of
its subsidiaries or affect the rights of holders of TCI's or any of its
subsidiaries' debt. On August 10, 1995, TCI distributed one hundred percent of
the equity value attributable to Liberty Media Group to its security holders of
record on August 4, 1995. Additionally, shareholders of TCI approved the
redesignation of the previously authorized Class A and Class B common stock of
TCI into Series A and Series B TCI Group Stock.
V-162
<PAGE> 313
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
On December 4, 1996, the Board authorized, subject to shareholder
approval (the "Telephony Stock Proposal"), the issuance of a new class of stock
("Telephony Group Stock") which is intended to reflect the separate performance
of the Telephony Group. The Telephony Group would initially consist of TCI
Group's interest in TCI Telephony Services, Inc., a direct wholly owned
subsidiary of TCI, its subsidiaries, their respective assets, and all assets
and liabilities of the TCI Group to the extent attributed to any of the
foregoing assets, whether or not such assets or liabilities are assets and
liabilities of TCI Telephony Services, Inc. (together with its consolidated
subsidiaries (unless the context indicates otherwise), "TCI Telephony"). The
principal assets of TCI Telephony are its non-consolidating investments in a
series of partnerships formed to engage in the business of providing wireless
communications services, using the radio spectrum for broadband personal
communications services ("PCS"), to residences and businesses nationwide under
the "Sprint" brand (the "PCS Ventures"), and its investment in Teleport
Communications Group, Inc., a Delaware corporation ("TCG"). The PCS Ventures
include Sprint Spectrum Holding Company, L.P. and MinorCo, L.P. (collectively,
the "Sprint PCS Partnerships"), the partners of each of which are subsidiaries
of Sprint Corporation ("Sprint"), Comcast Corporation ("Comcast"), Cox
Communications, Inc. ("Cox") and TCI, and PhillieCo, L.P. ("PhilleCo"), the
partners of which are subsidiaries of Sprint, Cox and TCI. TCI, through
subsidiaries, has a 30% interest as a partner in the Sprint PCS Partnerships
and a 35.3% interest as a partner in PhillieCo. TCG is a competitive local
exchange carrier that offers a wide range of local telecommunications services
in major metropolitan markets nationwide, primarily to businesses, long
distance carriers and resellers, and wireless communications companies. The
Company has a 31.1% equity interest (which represents a 36.5% voting interest)
in TCG. The Telephony Group would also include such other assets of the TCI
Group as the Board may in the future determine to attribute to the Telephony
Group and such other businesses, assets and liabilities as TCI may in the future
acquire for the Telephony Group, as determined by the Board. It is currently the
intention of TCI that any businesses, assets and liabilities so attributed to
the Telephony Group in the future would be businesses, assets and liabilities
of, or related to, the interests of the TCI Group in the domestic wireless and
wireline communications businesses (the "Telephony Business").
As of the date of these financial statements, the only interests of
the TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a subsidiary of
the TCI Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital broadband
microwave network located in the Western United States (the "Microwave
Business"), and the Company's business, which is in the development stage, of
providing wireline residential telephony services to customers in certain of
the geographic areas served by the Company's cable television systems (the
"ResTel Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. Telephony Group has the
right, but not the obligation, to acquire the ResTel Business from the Company
in whole or in part (by geographic area) for the appraised fair market value of
the ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that Telephony Group
is at the time a subsidiary of the Company and the Company is then conducting
such business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or sales of
assets), in funds borrowed from the TCI Group or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony
Group. Whether or not Telephony Group will exercise its rights to acquire the
ResTel Business (in whole or in part) will depend upon a number of factors,
including the penetration rates for the service in the geographic area or areas
in which the service has been commercially launched (with the penetration rate
being the percentage that the number of subscribers to the service in such
geographic area represent of the homes technically capable of subscribing to
the service), the cost of providing the service at the penetration rate
achieved in that area, and the ability of Telephony Group to fund the continued
development and ongoing operation of the ResTel Business in that area. With
regard to the Microwave Business, the Board has not yet determined whether and
for what consideration this business would be transferred to the Telephony
Group, other than that any such transfer would be at fair market value (as
determined by the Board).
V-163
<PAGE> 314
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
The common stockholders' equity value of TCI attributable to the
Telephony Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred
to as "Inter-Group Interest." Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group
is 100%. As any shares of Telephony Group Stock are issued and distributed or
sold, the TCI Group's Inter-Group Interest in the Telephony Group will be
reduced accordingly.
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group
Stock (when issued) will be common stockholders of TCI and will be subject to
risks associated with an investment in TCI and all of its businesses, assets
and liabilities.
Following the approval by shareholders of the Telephony Stock
Proposal, subject to prevailing market and other conditions, the Company
currently proposes to offer shares of Series A Telephony Group Stock for cash
in an initial public offering, in which event the proceeds of such offering
would be allocated to the Telephony Group to be used to fund a portion of its
anticipated capital requirements and for general corporate purposes. The timing
and the size of any such public offering and the price at which such shares
would be sold will be determined by the Board, without further approval of
stockholders, prior to such offering based upon then prevailing market and
other conditions.
The TCI Group Stock is intended to reflect the separate performance of
TCI Group, which is generally comprised of the subsidiaries and assets not
attributed to Liberty Media Group or Telephony Group, including (i) TCI's Cable
and Communications unit, (ii) TINTA and (iii) TCI's Technology/Venture Capital
unit. The businesses of TCI not attributed to Liberty Media Group or the
Telephony Group are referred to as "TCI Group".
Summary of Operations
TCI Group operates principally in the cable and communications
industry. The Technology/Venture Capital and the International Cable and
Programming portions of TCI Group's business have been included with cable and
communications services due to their relative insignificance. The table below
sets forth for the periods presented, the percentage relationship that certain
items bear to revenue. This summary provides trend data relating to the normal
recurring operations of TCI Group. Other items of significance are discussed
separately under separate captions below.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------
1995 1994 1993
------------------- ------------------ -------------------
amounts in millions, except for percentages
<S> <C> <C> <C> <C> <C> <C>
Revenue 100% $ 5,384 100% $ 4,269 100% $ 4,090
Operating costs and expenses before
depreciation and amortization 64 3,457 58 2,480 55 2,251
Depreciation and amortization 24 1,274 23 1,001 22 920
------ --------- ------- -------- ------ ---------
Operating income 12% $ 653 19% $ 788 23% $ 919
===== ========= ====== ======== ===== =========
</TABLE>
On October 5, 1992, Congress enacted the 1992 Cable Act. In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, TCI Group's Regulated Services are subject to the jurisdiction of
local franchising authorities and the FCC. The regulations established
benchmark rates in 1993, which were further reduced in 1994, to which the rates
charged by cable operators for Regulated Services were required to conform.
The FCC also allowed cable operators to justify rates under "cost of
service" rules, which allow "high cost" systems to establish rates in excess of
the benchmark level. The FCC's interim cost of service rules allowed a cable
operator to recover through rates for regulated cable services its normal
operating expenses plus a rate of return equal to 11.25 percent on the rate
base. However, the FCC significantly limited the inclusion in the rate base of
acquisition costs in excess of the book value of tangible assets. As a result,
the Company pursued cost of service justifications in only a few cases. On
December 15, 1995, the FCC adopted slightly more favorable cost of service
rules.
V-164
<PAGE> 315
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
The regulations also provide mechanisms for adjusting rates when
regulated tiers are affected by channel additions or deletions. Additional
programming costs resulting from channel additions can be accorded the same
external treatment as other program costs increases, and cable operators
presently are permitted to recover a mark-up on their programming expenses.
Under one option, operators are allowed a flat ($.20) fee increase per channel
added to an existing CPST, with an aggregate cap on such increases ($1.20) plus
a license fee reserve ($.30) through 1996. In 1997, an additional flat ($.20)
fee increase will be available, and the license fees for additional channels
and for increases in existing channels will no longer be subject to the
aggregate cap. This optional approach for adding services is scheduled to
expire on December 31, 1997.
TCI Group reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 in response to FCC regulations. TCI Group believes that it
has complied, in all material respects, with the provisions of the 1992 Cable
Act, including its rate setting provisions. However, TCI Group's rates for
Regulated Services are subject to adjustment upon review, as described above.
If, as a result of the review process, a system cannot substantiate its rates,
it could be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated Service
rates would be retroactive to one year prior to the implementation of the rate
reductions.
On October 30, 1995, the FCC accepted for comment a proposed
resolution of all complaints against the cable programming services tier
currently pending against cable systems owned by TCI Group. If the proposed
resolution is accepted by the FCC, TCI Group will settle all pending complaints
by a one-time credit to each subscriber in CPST regulated franchises. The
aggregate amount of such credits is approximately $9 million and had previously
been accrued by TCI Group. In addition, the FCC will find that the CPST rates
in CPST regulated franchises on September 15, 1995 comply with federal
regulations. TCI Group has committed not to file any additional cost-of-service
filings until May 15, 1996 in franchises that were subject to CPST regulation
prior to September 15, 1995. However, TCI Group will be able to avail itself of
the other mechanisms under FCC rules to recover costs, including abbreviated
cost-of-service filings covering system rebuilds and upgrades. In the proposed
resolution, TCI Group does not admit any violation of, or any failure to
conform to, the 1992 Cable Act or the rules promulgated thereunder. The comment
period has ended and TCI Group is awaiting final action by the FCC.
Because the 1996 Telecom Act does not deregulate CPST rates until 1999
(and basic service tier rates will remain regulated thereafter), TCI Group
believes that the 1993 and 1994 rate regulations have had and will continue to
have a material adverse effect on its results of operations.
V-165
<PAGE> 316
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Revenue increased 26% from 1994 to 1995. Such increase is the result
of the effect of certain acquisitions (13%), growth in TCI Group's Primestar
subscribers (4%), increases in the rates charged to TCI Group's subscribers
from inflation increases, the provision of new channels and increases in
equipment costs (4%), growth in subscriber levels within TCI Group's cable
television systems (4%) and an increase in the Company's long distance voice
and data service revenue (1%). Revenue increased by approximately 4% from 1993
to 1994. Such increase was the result of growth in subscriber levels within TCI
Group's cable television systems (5%), the effect of certain other acquisitions
(2%) and certain new services (1%), net of a decrease in revenue (4%) due to
rate reductions required by rate regulation implemented pursuant to the 1992
Cable Act. In the second half of 1994, as a result of the FCC's revision of its
rate regulations which reduced benchmark rates, TCI Group experienced an
additional decrease, in excess of that which was incurred in 1993, in the price
charged for those services that are subject to rate regulation under the 1992
Cable Act.
Operating costs and expenses before depreciation and amortization
increased 40% for the year ended December 31, 1995. Exclusive of the effects of
acquisitions (13%) and Primestar (7%) (see discussion below), such expenses
increased 20%. Programming expenses accounted for the majority of such
increase. TCI Group cannot determine whether and to what extent increases in
the cost of programming will affect its future operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue from Regulated Services. TCI Group will experience an increase in
programming costs in the first five months of 1996 without increasing its rates
charged to its customers at that time. In June of 1996, TCI Group will be
entitled to an increase in its service rates for increased programming costs
and inflation. FCC regulations provide for TCI Group to further increase its
rates by an additional amount intended to recover increased programming costs
incurred during the first five months of 1996 and not previously recovered, as
well as interest on said amounts.
During 1995, TCI Group changed its approach to how it ordered and
stored excess cable distribution equipment. TCI Group created material support
centers and consolidated all of its excess inventory. In conjunction with this
change, TCI Group incurred $5 million of costs. Additionally, during 1995, TCI
Group incurred approximately $22 million in expenses related to initiatives to
improve its customer service, to begin the redesign of its computer and
accounting systems and promote and market TCI Group's products. During the
fourth quarter of 1995, TCI Group incurred $25 million in expenses related to
payment of bonuses to the majority of its employees.
During 1995, TCI Group's revenue and expenses related to its satellite
service operations have increased significantly as the number of TCI Group's
Primestar subscribers increased from approximately 100,000 subscribers at
January 1, 1995 to approximately 550,000 subscribers at December 31, 1995.
During the year ended December 31, 1995, revenue increased from $30 million to
$207 million and operating, selling, general and administrative expenses
increased from $18 million to $197 million, as compared to the year ended
December 31, 1994. TCI Group incurs significant sales commission and
installation costs when customers initially subscribe. Therefore, as long as
TCI Group continues to launch this new service and increase its Primestar
subscriber base at such a rapid pace, management expects that operating costs
and expenses will increase as well.
V-166
<PAGE> 317
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Operating costs and expenses before depreciation and amortization
increased 10% for the year ended December 31, 1994 compared to the
corresponding period of 1993. The consolidation of Liberty resulted in an
increase of $18 million in operating, selling, general and administrative
expenses from Liberty's cable television systems. In 1993, TCI Group incurred
certain one-time direct charges relating to the implementation of the FCC rate
regulations.
The increase in TCI Group's depreciation expense in 1995 is due to
acquisitions as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in TCI Group's cable systems. The
systems, which facilitate digital transmission of voice, video and data
signals, will have optical fiber to neighborhood nodes with coaxial cable
distribution downstream from that point. The increase in TCI Group's
amortization expense in 1995 is due to acquisitions.
Certain corporate general and administrative costs are charged to the
Telephony Group and the Liberty Media Group at rates set at the beginning of
the year based on projected utilization for that year. The utilization-based
charges are set at levels that management believes to be reasonable and that
would approximate the costs either Group would incur for comparable services on
a stand alone basis. The accompanying combined statements of operations do not
reflect the allocation of corporate general and administrative costs through
the date of the TCI/Liberty Combination in the aforementioned manner because
the majority of the entities attributable to Liberty Media Group were owned,
directly or indirectly, by Liberty Media Corporation for the majority of the
periods presented herein. During 1995, Liberty Media Group was allocated $3
million in corporate general and administrative costs by TCI Group. During all
the periods presented, Telephony Group was allocated less than $1 million in
corporate general and administrative costs by TCI Group.
TCI Group records compensation relating to stock appreciation rights
and restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
Other Income and Expenses
TCI Group's interest expense increased $207 million or 26% from 1994
to 1995 and $51 million or 7% from 1993 to 1994. Such increases are the result
of higher interest rates and debt balances. TCI Group's weighted average
interest rate on borrowings was 8.1%, 7.6% and 7.3% during 1995, 1994 and 1993,
respectively.
TCI Group is a shareholder of TeleWest, a company that is currently
operating and constructing cable television and telephone systems in the UK.
TeleWest, which is accounted for under the equity method, had a carrying value
at December 31, 1995 of $550 million and comprised $70 million, $43 million and
$28 million of TCI Group's share of its affiliates' losses in 1995, 1994, and
1993, respectively. In addition, TCI Group has other less significant equity
method investments in video distribution and programming businesses located in
the UK, other parts of Europe, Asia, Latin America and certain other foreign
countries. In the aggregate, such other equity method investments had a
carrying value of $354 million at December 31, 1995 and accounted for $62
million and $50 million of TCI Group's share of its affiliates' losses in 1995
and 1994, respectively.
V-167
<PAGE> 318
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
TeleWest was formed during the fourth quarter of 1995 upon the merger
of TeleWest Communications with SBC (CableComms)(UK). Prior to the TeleWest
Merger, TCI Group had an effective ownership interest of approximately 36% in
TeleWest Communications, and subsequent to the TeleWest Merger, TCI Group has
an effective ownership interest of approximately 27% in TeleWest. As a result
of the TeleWest Merger, TCI Group recognized a gain of $165 million (before
deducting the related tax expense of $58 million). Such gain represents the
difference between TCI Group's recorded cost for TeleWest Communications and
TCI Group's effective proportionate share of TeleWest's net assets. There is no
assurance that TCI Group will realize similar gains in future periods.
As a result of the TeleWest Communications November 1994 initial
public offering and the associated dilution of TCI Group's ownership interest
of TeleWest Communications, TCI Group recognized a gain amounting to $161
million (before deducting the related tax expense of $57 million) in 1994.
TeleWest, which is currently constructing broadband cable television
and telephony networks in the UK, has incurred net losses since its inception.
Although there is no assurance, TCI Group believes (i) that the continued
expansion of TeleWest's networks ultimately will provide TeleWest with a
revenue base that will exceed its expenses and (ii) that TeleWest's present and
future sources of liquidity (including the net proceeds from the TeleWest IPO
and certain bank credit facilities) will be sufficient to meet TeleWest's
liquidity requirements for the foreseeable future. TCI Group has no present
intention to make significant loans to or investments in TeleWest.
As a result of the TINTA IPO and TYC Acquisition, TCI Group recognized
a gain amounting to $123 million during 1995. There is no assurance that TCI
Group will realize similar gains in future periods.
During the first quarter of 1995, Liberty Media Group acquired an
additional interest in an investment previously accounted for under the cost
method. Upon consummation of such transaction, Liberty Media Group is deemed to
exercise significant influence over such entity and, as such, adopted the
equity method of accounting. The restatement resulted in an increase in
earnings from Liberty Media Group of $5 million for the year ended December 31,
1994.
Net Earnings (Loss)
TCI Group's net loss (before loss of Telephony Group and Liberty Media
Group and preferred stock dividend requirements) of $76 million for the year
ended December 31, 1995 represents an increase of $66 million, as compared to
TCI Group's net loss of $10 million for 1994. Such increase is the result of
increases in interest expense and share of losses of affiliates combined with a
decrease in operating income which were partially offset by the aforementioned
gain recognized as a result of the TINTA IPO and the TYC Acquisition and a
decrease in tax expense.
TCI Group's net loss (before loss of Telephony Group, earnings of
Liberty Media Group and preferred stock dividend requirements) of $10 million
for 1994 represents a decrease of $18 million, as compared to TCI Group's net
loss of $28 million for 1993. Such decrease is the result of the recognition of
a gain resulting from TeleWest Communications' initial public offering and a
decrease in tax expense offset by a decrease in operating income and an
increase in share of losses of affiliates.
Inflation has not had a significant impact on TCI Group's results of
operations during the three-year period ended December 31, 1995.
V-168
<PAGE> 319
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Recent Accounting Pronouncements
In March of 1995, the FASB issued Statement No. 121, effective for
fiscal years beginning after December 15, 1995. Statement No. 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. TCI Group will adopt Statement No. 121 effective
January 1, 1996. The effect of such adoption is not expected to be significant.
Statement No. 123 was issued by the FASB in October 1995. Statement
No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans as well as transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. TCI Group will include the disclosures required by Statement No.
123 in the notes to future financial statements.
Liquidity and Capital Resources
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group and
the Telephony Group (collectively, the "Groups") for the purpose of preparing
the combined financial statements of the TCI Group, the Liberty Media Group and
the Telephony Group, the change in the capital structure of the Company
contemplated by the Telephony Group Stock Proposal will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group Common
Stock and Telephony Group Common Stock will be common stockholders of the
Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, any net losses of any
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common
Stock, and dividends on, or certain repurchases of, Preferred Stock, will
reduce funds of the Company legally available for the payment of dividends on
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group should be read in
conjunction with the consolidated financial statements of the Company.
Dividends on the TCI Group Stock are payable at the sole discretion of
the Board out of the lesser of assets of TCI legally available for dividends
and the available dividend amount with respect to TCI Group, as defined.
Determinations to pay dividends on TCI Group Stock would be based primarily
upon the financial condition, results of operations and business requirements
of TCI Group and TCI as a whole.
V-169
<PAGE> 320
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Following the TCI/Liberty Combination, TCI Group has managed certain
treasury activities for Liberty Media Group on a centralized basis. Cash
receipts of certain businesses attributed to Liberty Media Group are remitted
to TCI Group and certain cash disbursements of Liberty Media Group are funded
by TCI Group on a daily basis. Prior to the Distribution, but subsequent to the
TCI/Liberty Combination, the net amounts of such cash activities are included
in investment in Liberty Media Group in the accompanying combined financial
statements. Prior to the TCI/Liberty Combination, Liberty separately managed
the treasury activities of its subsidiaries. Subsequent to the Distribution,
such cash activities are included in borrowings from or loans to TCI Group or,
if determined by the Board, as an equity contribution to be reflected as an
Inter-Group Interest to Liberty Media Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on a
daily basis. Prior to the implementation of the Liberty Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation of
the Liberty Group Stock Proposal, such cash activities will be included in
borrowings from the loans to TCI Group or, if determined by the Board of
Directors, as an equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its subsidiaries
following the issuance and sale of Telephony Group Stock would (unless the
Board otherwise provides) be specifically attributed to and reflected on the
combined financial statements of the Group that includes the entity which
incurred the debt or issued the preferred stock or, in case the entity
incurring the debt or issuing the preferred stock is Tele-Communications, Inc.,
the TCI Group. The Board could, however, determine from time to time that debt
incurred or preferred stock issued by entities included in a Group should be
specifically attributed to and reflected on the combined financial statement of
one of the other Groups to the extent that the debt is incurred or the
preferred stock is issued for the benefit of such other Group.
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<PAGE> 321
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
To the extent cash needs of one Group exceed cash provided by such
Group, one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and
time associated with alternative financing sources, prevailing interest rates
and general economic conditions. Generally, it is expected that entities
included in the Liberty Media Group will seek their own long-term debt
financing, whereas the Telephony Group is expected to require additional
advances from the TCI Group for some period of time. To satisfy this need, TCI
Group expects to provide as of January 1, 1997 a revolving loan facility to
Telephony Group that would permit borrowings of up to $150 million to $200
million over a five-year period. The interest rate on such revolving loans and
the terms and conditions of borrowings have not yet been determined.
Loans from one Group to another Group would bear interest at such
rates and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board of
Directors. The Board of Directors expects to make such determinations, either
in specific instances or by setting generally applicable polices from time to
time, after consideration of such factors as it deems relevant, including,
without limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
The combined balance sheets of a Group would reflect its net loans to
or borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings and the
respective combined statements of cash flows of the Groups would reflect
changes in the amounts of loans or borrowings deemed outstanding. In the
historical financial statements, net borrowings of the Telephony Group have
been included as a component of the Telephony Group's combined equity.
Subsequent to the date of such financial statements, a portion of such net
borrowings was converted into a $500 million investment in Telephony preferred
stock as described below. The balance of such net borrowings through January
1, 1997 will continue to be reflected as a component of the Telephony Group's
combined equity. Amounts borrowed by the Telephony Group from another Group
subsequent to January 1, 1997, will be reflected on the Telephony Group's
financial statements as indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its
interest in the Telephony Group into a 6% cumulative compounding redeemable
preferred stock due from the Telephony Group. Such preferred stock is due
December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
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<PAGE> 322
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at
a time when such shares could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial impacts of
equity offerings are and will be attributed entirely to the TCI Group. After
the Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock are and will be attributed entirely to the TCI Group,
all financial impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the Liberty Media Group
are and will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of which are
attributed to the TCI Group in respect of a reduction in any Inter-Group
Interest in the Liberty Media Group are and will be to such extend reflected in
the combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which are
attributed to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and all financial impacts
of issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the TCI Group in respect of a reduction in the TCI Group's
Inter-Group Interest in the Telephony Group will be to such extent reflected in
the combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on, and purchases of, TCI Group Common Stock
will be attributed entirely to the TCI Group, and financial impacts of
dividends or other distributions on Telephony Group Common Stock will be
attributed entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time there is
an Inter-Group Interest in the Telephony Group) result in the TCI Group being
credited, and the Telephony Group being charged (in addition to the charge for
the dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common Stock
and a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of Telephony
Group Common Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Common Stock the consideration for which is charged to the TCI Group will be to
such extend reflected in the combined financial statements of the TCI Group and
will result in an increase in the TCI Group's Inter-Group Interest in the
Telephony Group.
As of January 26, 1995, TCI Group and TeleCable consummated the
TeleCable Merger. The aggregate $1.6 billion purchase price was satisfied by
TCI Group's assumption of approximately $300 million of TeleCable's net
liabilities and the issuance to TeleCable's shareholders of approximately 42
million shares of TCI Class A common stock and 1 million shares of Series D
Preferred Stock with an aggregate initial liquidation value of $300 million.
The Series D Preferred Stock, which accrues dividends at a rate of 5.5% per
annum, is convertible into 10 million shares of Series A TCI Group Stock and
2.5 million shares of Series A Liberty Group Stock. The Series D Preferred
Stock is redeemable for cash at the option of TCI after five years and at the
option of either TCI or the holder after ten years.
V-172
<PAGE> 323
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
On April 25, 1995, TINTA acquired a 51% ownership interest in
Cablevision for a purchase price of $282 million, before liabilities assumed.
The purchase price was paid with cash consideration of $195 million and TINTA's
issuance of $87 million principal amount of secured negotiable promissory notes
payable to the selling shareholders. TINTA has an option during the two-year
period ended April 25, 1997 to increase its ownership interest in Cablevision
up to 80% at a cost per subscriber similar to the initial purchase price,
adjusted however for certain fluctuations in applicable foreign currency
exchange rates.
In July 1995, TCI Group entered into certain agreements with Viacom
and certain subsidiaries of Viacom regarding the purchase by TCI Group of all
of the common stock of Cable Sub which, at the time of purchase, will own
Viacom's cable systems and related assets.
The transaction has been structured as a tax-free reorganization in
which Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to New Viacom Sub. Cable
Sub will also transfer to New Viacom Sub the Loan Proceeds of a $1.7 billion
loan facility to be arranged by TCI Group and Cable Sub. Following these
transfers, Cable Sub will retain cable assets with an estimated value at
closing of approximately $2.2 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Repayment of the Loan Proceeds will
be non-recourse to Viacom and New Viacom Sub.
Viacom will offer to the holders of shares of Viacom Common Stock the
opportunity to exchange a portion of their shares of Viacom Common Stock for
shares Cable Sub Class A Stock. The Exchange Offer will be subject to a number
of conditions, including a condition that sufficient tenders are made of Viacom
Common Stock that permit the number of shares of Cable Sub Class A Stock issued
pursuant to the Exchange Offer to equal the total number of shares of Cable Sub
Class A Stock issuable in the Exchange Offer.
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<PAGE> 324
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Immediately following the completion of the Exchange Offer, TCI Group
will acquire from Cable Sub shares of Cable Sub Class B common stock for $350
million (which will be used to reduce Cable Sub's obligations under the Loan
Facility). At the time of such acquisition, the Cable Sub Class A Stock
received by Viacom stockholders pursuant to the Exchange Offer will
automatically convert into the Exchangeable Preferred Stock of Cable Sub with a
stated value of $100 per share. The terms of the Exchangeable Preferred Stock,
including its dividend, redemption and exchange features, will be designed to
cause the Exchangeable Preferred Stock, in the opinion of two investment banks,
to initially trade at the Stated Value. The Exchangeable Preferred Stock will
be exchangeable, at the option of the holder commencing after the fifth
anniversary of the date of issuance, for shares of Series A TCI Group Stock.
The Exchangeable Preferred Stock will also be redeemable, at the option of
Cable Sub, after the fifth anniversary of the date of issuance, and will be
subject to mandatory redemption on the tenth anniversary of the date of
issuance at a price equal to the Stated Value per share plus accrued and unpaid
dividends, payable in cash or, at the election of Cable Sub, in shares of
Series A TCI Group Stock or in any combination of the foregoing. If
insufficient tenders are made by Viacom stockholders in the Exchange Offer to
permit the Minimum Condition to be satisfied, Viacom will extend the Exchange
Offer for up to 15 business days and, during such extension, TCI Group and
Viacom are to negotiate in good faith to determine mutually acceptable changes
to the terms and conditions for the Exchangeable Preferred Stock and the
Exchange Offer that each believes in good faith will cause the Minimum
Condition to be fulfilled and that would cause the Exchangeable Preferred Stock
to trade at a price equal to the Stated Value immediately following the
expiration of the Exchange Offer. In the event the Minimum Condition is not
thereafter met, TCI and Viacom will each have the right to terminate the
transaction. In addition, either party may terminate the transaction of the
Exchange Offer has not commenced by June 24, 1996 or been consummated by July
24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue
Service that the transaction qualifies as a tax-free transaction and the
satisfaction or waiver of all of the conditions of the Exchange Offer. A
request for a letter ruling from the Internal Revenue Service has been filed by
Viacom. TCI Group believes that, based upon the unique and complex structure of
the transaction, there exists significant uncertainty as to whether a favorable
ruling will be obtained. In light of the foregoing, management of TCI Group has
concluded that consummation of the transaction is not yet probable.
Accordingly, no assurance can be given that the transaction will be
consummated.
V-174
<PAGE> 325
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
At December 31, 1995, Cable Sub provided service to approximately 1.2
million basic subscribers and had total assets of $1,067 million. For the year
ended December 31, 1995, Cable Sub had revenue of $442 million and net earnings
of $34 million. It is expected that if the transaction is consummated, TCI
Group would account for such acquisition under the purchase method of
accounting. Accordingly, the cost to acquire Cable Sub estimated at
approximately $2.2 billion (reflecting the Loan Proceeds of $1.7 billion and
the estimated aggregate Stated Value of the Exchangeable Preferred Stock of
$500 million) would be allocated to the assets and liabilities acquired
according to their respective fair values, with any excess being treated as
intangible assets. As such, TCI Group will, if such transaction is consummated,
reflect additional interest expense, depreciation, amortization and minority
share of losses of consolidated subsidiaries. On a pro forma basis, if the
transaction had been consummated under its current terms on or before January
1, 1995, Cable Sub would have reflected loss before taxes of approximately $51
million for the year ended December 31, 1995. On a pro forma basis, Cable Sub
would reflect an approximate $21 million of preferred stock dividend
requirements on an annual basis assuming, solely for the purpose of this
presentation, a dividend rate of 4.25% per annum on the Exchangeable Preferred
Stock. On a pro forma basis, TCI Group would reflect the foregoing financial
impacts of Cable Sub in its combined results of operations except that the
preferred stock dividend requirement of Cable Sub would be reflected as
minority interest in TCI Group's statement of operations and TCI Group would
incur an additional approximately $28 million of interest expense per year
arising from the assumed borrowing by TCI Group for its $350 million capital
contribution to Cable Sub.
Pursuant to an underwritten public offering, TCI sold 19,550,000
shares of TCI Class A common stock in February of 1995. TCI Group received net
proceeds of approximately $401 million. Such proceeds were immediately used to
reduce outstanding indebtedness under credit facilities.
On July 18, 1995, TINTA completed the IPO in which it sold 20 million
shares of TINTA Series A common stock to the public for aggregate consideration
of $320 million, before deducting related expenses (approximately $19 million).
TINTA used the IPO proceeds to repay debt of the Company ($177 million) and
fund acquisitions, operations and capital contributions.
During the year ended December 31, 1995, TCI Group sold approximately
$1.5 billion of publicly-placed fixed-rate senior and medium term notes with
interest rates ranging from 6.8% to 8.8% and maturity dates ranging through
2015. The proceeds from the sale of these notes were used primarily to repay
variable-rate bank debt.
Subsequent to December 31, 1995, TINTA issued $345 million (before
deducting offering costs of $9 million) of 4.5% convertible subordinated
debentures. TINTA anticipates that it will use the net proceeds to fund capital
contributions to certain of its equity investees.
Also, subsequent to December 31, 1995, TCIC issued (i) 4.6 million
shares of Cumulative Exchangeable Preferred Stock for net cash proceeds of $223
million, (ii) 20 million preferred securities of 8.72% Trust Originated
Preferred Securities for net cash proceeds of $486 million (through a special
purpose entity formed as a Delaware business trust) and (iii) $1.0 billion of
publicly-placed fixed rate senior and medium term notes with interest rates
ranging from 6.9% and 7.9% and maturity dates ranging through 2026. TCIC used
the proceeds from the aforementioned debt and equity securities to retire
overnight commercial paper and to repay variable rate indebtedness.
V-175
<PAGE> 326
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
TCI Group has a credit facility which matures in September of 1996.
The outstanding balance of such facility was $602 million at December 31, 1995.
TCI Group currently anticipates that it will refinance such borrowings but
there can be no assurance that it can do so on terms acceptable to TCI Group.
TCI Group had approximately $2.2 billion in unused lines of credit at
December 31, 1995, excluding amounts related to lines of credit which provide
availability to support commercial paper. Although TCI Group was in compliance
with the restrictive covenants contained in its credit facilities at said date,
additional borrowings under the credit facilities are subject to TCI Group's
continuing compliance with the restrictive covenants (which relate primarily to
the maintenance of certain ratios of cash flow to total debt and cash flow to
debt service, as defined in the credit facilities) after giving effect to such
additional borrowings. See note 7 to the accompanying TCI Group combined
financial statements for additional information regarding the material terms of
the lines of credit.
One measure of liquidity is commonly referred to as "interest
coverage." Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges) $1,972 million, $1,784 million and $1,870 million
for the years ended December 31, 1995, 1994 and 1993, respectively) to interest
expense ($ 993 million, $786 million and $735 million in 1995, 1994 and 1993,
respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 199%, 227% and 254% for
1995, 1994 and 1993, respectively. The decrease in TCI Group's interest
coverage in 1995 is caused by an increase in interest expense due to higher
debt balances. Management of TCI Group believes that the foregoing interest
coverage ratio is adequate in light of the consistency and nonseasonal nature
of its cable television operations and the relative predictability of TCI
Group's interest expense, almost half of which results from fixed rate
indebtedness. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense,
and should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying combined statements of cash flows.
Net cash provided by operating activities ($950 million, $999 million and
$1,257 million in 1995, 1994 and 1993, respectively) reflects net cash from the
operations of TCI Group available for TCI Group's liquidity needs after taking
into consideration the aforementioned additional substantial costs of doing
business not reflected in Operating Cash Flow. Amounts expended by TCI Group
for its investing activities exceed net cash provided by operating activities.
However, management believes that net cash provided by operating activities,
the ability of TCI Group to obtain additional financing (including the
available lines of credit and access to public debt markets), issuances and
sales of TCI's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.
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<PAGE> 327
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
In order to achieve the desired balance between variable and fixed
rate indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements. At December 31, 1995, after considering the net effect of various
interest rate exchange agreements (see note 7 to the consolidated financial
statements) with notional amounts aggregating $1,918 million, TCI Group had
$5,990 million (or 46%) of fixed-rate debt with a weighted average interest
rate of 8.8% and $6,970 million (or 54%) of variable-rate debt with a weighted
average interest rate of 6.3%.
Pursuant to the interest rate exchange agreements, TCI Group pays (i)
fixed interest rates ranging from 6.1% to 9.9% on notional amounts of $602
million at December 31, 1995 and (ii) variable interest rates on notional
amounts of $2,520 million at December 31, 1995. During the years ended December
31, 1995, 1994 and 1993, TCI Group's net payments pursuant to the fixed rate
agreements were $13 million, $26 million and $38 million, respectively. During
the years ended December 31, 1995, 1994 and 1993, TCI Group's net receipts
(payments) pursuant to the variable rate agreements were (less than $1
million), $36 million and $31 million, respectively. TCI Group is exposed to
credit losses for the periodic settlements of amounts due under the interest
rate exchange agreements in the event of nonperformance by the other parties to
the agreements. However, TCI Group does not anticipate that it will incur any
material credit losses because it does not anticipate nonperformance by the
counterparties.
In connection with its investments in the above-described foreign
entities, TCI Group is exposed to unfavorable and potentially volatile
fluctuations of the U.S. dollar against the UK pound sterling ("(pound)"), the
Japanese yen ("(Y)"), and various other foreign currencies that are the
functional currencies of TCI Group's foreign subsidiaries and affiliates. Any
increase (decrease) in the value of the U.S. dollar against any foreign
currency that is the functional currency of an operating subsidiary or
affiliate of TINTA will cause TCI Group to experience unrealized foreign
currency translation losses (gains) with respect to amounts already invested in
such foreign currencies. TCI Group is also exposed to foreign currency risk to
the extent that TCI Group or its foreign subsidiaries and affiliates enter into
transactions denominated in currencies other than their respective functional
currencies. Because TCI Group generally views its foreign operating
subsidiaries and affiliates as long-term investments, TCI Group generally does
not attempt to hedge existing investments in its foreign affiliates and
subsidiaries. With respect to funding commitments that are denominated in
currencies other than the U.S. dollar, TCI Group historically has sought to
reduce its exposure to short-term (generally no more than 90 days) movements in
the applicable exchange rates once the timing and amount of such funding
commitments becomes fixed. Although TCI Group monitors foreign currency
exchange rates with the objective of mitigating its exposure to unfavorable
fluctuations in such rates, TCI Group believes that it is not possible or
practical to completely eliminate TCI Group's exposure to unfavorable
fluctuations in foreign currency exchange rates.
Approximately twenty-five percent of the franchises held by TCI Group,
involving approximately 4.4 million basic subscribers, expire within five
years. There can be no assurance that the franchises for TCI Group's systems
will be renewed as they expire, although TCI Group believes that its cable
television systems generally have been operated in a manner which satisfies the
standards established by the 1984 Cable Act, as supplemented by the renewal
provisions of the 1992 Cable Act, for franchise renewal. However, in the event
they are renewed, TCI Group cannot predict the impact of any new or different
conditions that might be imposed by the franchising authorities in connection
with the renewals. To date they have not varied significantly from the original
terms.
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<PAGE> 328
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
A significant competitive impact is expected from medium power and
higher power direct broadcast satellites that use high frequencies to transmit
signals that can be received by dish antennas much smaller in size than
traditional HSDs. Primestar distributes a multi-channel programming service via
a medium power communications satellite to HSDs of approximately 3 feet in
diameter. At December 31, 1995, Primestar, through its partners, served an
estimated 940,000 HSDs in the United States. Two other DBS operators, DirecTV,
a subsidiary of GM Hughes Electronics, and United States Satellite
Broadcasting, a subsidiary of Hubbard Broadcasting, Inc., offer video services
that can be received by HSDs that measure approximately eighteen inches in
diameter. Such DBS operators have the right to distribute substantially all of
the significant cable television programming services currently carried by
cable television systems. The competition from DBS will likely continue to
grow. One DBS operator is preparing to launch a new DBS satellite. AT&T Corp.
recently made a large investment in DirecTV and several other major companies
are preparing to develop and operate high-power DBS systems, including MCI and
News Corp. MCI recently acquired rights to satellite frequencies for DBS in an
FCC auction.
The 1996 Telecom Act eliminated the statutory and regulatory
restrictions that prevented telephone companies from competing with cable
operators for the provision of video services by any means. The 1996 Telecom
Act allows local telephone companies, including the regional bell operating
companies, to compete with cable television operators both inside and outside
their telephone service areas. TCI Group expects that it will face substantial
competition from telephone companies for the provision of video services. TCI
Group assumes that all major telephone companies have already entered or soon
will enter the business of providing video services. Most major telephone
companies have greater financial resources than TCI Group, and the 1992 Cable
Act ensures that telephone company providers of video services will have access
to acquiring all of the significant cable television programming services.
Additionally, the 1996 Telecom Act eliminates certain federal restrictions on
utility holding companies and thus frees all utility companies to provide cable
television services. TCI Group expects this could result in another source of
significant competition in the delivery of video services.
TCI Group is upgrading and installing optical fiber technology in its
cable systems at a rate such that in approximately two years TCI Group
anticipates that it will be serving the majority of its customers with this
technology. The systems, which facilitate digital transmission of voice, video
and data signals, will have optical fiber to neighborhood nodes with coaxial
cable distribution downstream from that point. TCI Group made capital
expenditures of $1,733 million in 1995 and TCI Group expects to expend similar
amounts in 1995, among other things, to provide for the continued rebuilding of
its cable systems. However, such proposed expenditures are subject to
reevaluation based upon changes in TCI Group's liquidity, including those
resulting from rate regulation.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately $212
million at December 31, 1995. Although there can be no assurance, management of
TCI Group believes that it will not be required to meet its obligations under
such guarantees or if it is required to meet any of such guarantees, that they
will not be material to TCI Group.
V-178
<PAGE> 329
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
TCI Group is obligated to pay fees for the license to exhibit certain
films that are released theatrically by various motion picture studios through
February 28, 2009. As of December 31, 1995, these agreements require minimum
payments aggregating approximately $251 million. The aggregate amount of the
Film Licensing Obligations is not currently estimable because such amount is
dependent upon certain variable factors. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant. Additionally, TCI Group has guaranteed up to $67 million of
similar fee obligations of another affiliate.
TCI Group has committed to provide additional debt or equity funding
to certain of its affiliates. At December 31, 1995, such commitments aggregated
$95 million.
TCI Group's various partnerships and other affiliates accounted for
under the equity method generally fund their acquisitions, required debt
repayments and capital expenditures through borrowings under and refinancing of
their own credit facilities (which are generally not guaranteed by TCI Group)
and through net cash provided by their own operating activities.
V-179
<PAGE> 330
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Tele-Communications, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries as of December 31,
1995 and for each of the years in the three-year period ended December 31,
1995.
We have also audited the accompanying combined balance sheets of TCI Group (a
combination of certain assets of Tele-Communications, Inc., as defined in note
1) as of December 31, 1995 and 1994, and the related combined statements of
operations, equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The combined financial statements of TCI Group are presented for purposes of
additional analysis of the consolidated financial statements of
Tele-Communications, Inc. and subsidiaries. As more fully described in note 1,
the combined financial statements of TCI Group are intended to reflect the
performance of the remaining businesses of Tele-Communications, Inc., which
have not been attributed to the Liberty Media Group or the Telephony Group.
Liberty Media Group includes the businesses of Tele-Communications, Inc. which
produce and distribute cable television programming services. Telephony Group
includes the businesses of Tele-Communications, Inc. which are intended to
reflect the performance of the assets of Tele-Communications, Inc. consisting
of certain entities engaged in the domestic wireline and wireless telephony
distribution and communications businesses. The combined financial statements
of TCI Group should be read in conjunction with the consolidated financial
statements of Tele-Communications, Inc. and subsidiaries.
As more fully described in Note 1 to the combined financial statements, TCI
Group has accounted for its interest in the Liberty Media Group for the periods
subsequent to the mergers of TCI Communications, Inc. and Liberty Media
Corporation on August 4, 1994 and its interest in the Telephony Group for all
periods in a manner similar to the equity method of accounting that, in our
opinion, should be consolidated with TCI Group to conform to generally accepted
accounting principles. The Liberty Media Group and the Telephony Group are
under the sole control of Tele-Communications, Inc. If TCI Group's interest in
the Liberty Media Group subsequent to the mergers and its interest in the
Telephony Group were consolidated with the TCI Group, the combined financial
position, combined results of operations, and combined cash flows of the TCI
Group would equal the consolidated financial position, consolidated results of
operations, and consolidated cash flows of Tele-Communications, Inc. and
subsidiaries, which financial statements are included separately herein.
In our opinion, except for the effects of not consolidating TCI Group's
interest in Liberty Media Group and the Telephony Group as discussed in the
preceding paragraph, the combined financial statements referred to in the
second paragraph above present fairly, in all material respects, the financial
position of TCI Group as of December 31, 1995 and 1994, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Denver, Colorado
March 18, 1996
V-180
<PAGE> 331
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- -----------
Assets amounts in millions
<S> <C> <C>
Cash $ 77 11
Trade and other receivables, net 300 206
Prepaid expenses 51 22
Prepaid program rights 19 13
Committed film inventory 92 36
Investments in affiliates, accounted for under
the equity method, and related receivables (note 5) 1,134 782
Property and equipment, at cost:
Land 67 69
Distribution systems 9,536 7,705
Support equipment and buildings 1,213 935
---------- -----------
10,816 8,709
Less accumulated depreciation 3,611 3,027
---------- -----------
7,205 5,682
---------- -----------
Franchise costs 14,322 11,152
Less accumulated amortization 2,092 1,708
---------- -----------
12,230 9,444
---------- -----------
Other assets, net of amortization 1,012 688
---------- -----------
$ 22,120 16,884
========== ===========
</TABLE>
(continued)
V-181
<PAGE> 332
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
Liabilities and Combined Equity amounts in millions
<S> <C> <C>
Accounts payable $ 148 90
Accrued interest 228 183
Accrued programming expense 272 207
Other accrued expenses 911 435
Debt (note 7) 12,960 11,068
Deferred income taxes (note 12) 4,387 3,381
Other liabilities 181 142
----------- ------------
Total liabilities 19,087 15,506
----------- ------------
Minority interests in equity of consolidated
subsidiaries 563 314
Redeemable preferred stock (note 8) 478 168
Combined equity (note 9):
Combined equity, including preferred stocks 2,883 2,564
Cumulative foreign currency translation
adjustment (9) (4)
TCI Group unrealized holding gains (losses) for
available-for-sale securities, net of taxes 68 (4)
Due from Liberty Media Group (7) (29)
Liberty Media Group unrealized holding gains for
available-for-sale securities, net of taxes -- 98
Interest in Liberty Media Group -- (1,489)
Interest in Telephony Group (943) (240)
----------- ------------
Combined equity 1,992 896
----------- ------------
Commitments and contingencies (note 14)
$ 22,120 16,884
=========== ============
</TABLE>
See accompanying notes to combined financial statements.
V-182
<PAGE> 333
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ------------
amounts in millions,
except per share amounts
<S> <C> <C> <C>
Revenue $ 5,384 4,269 4,090
Operating costs and expenses:
Operating 1,677 1,232 1,341
Programming charges from Liberty Media Group (note 13) 73 60 47
Selling, general and administrative 1,686 1,207 838
Charges to Telephony Group -- -- --
Charges to Liberty Media Group (note 13) (24) (14) (6)
Compensation relating to stock appreciation rights 45 -- 31
Adjustment to compensation relating to stock
appreciation rights -- (5) --
Depreciation 874 694 628
Amortization 400 307 292
---------- ----------- ------------
4,731 3,481 3,171
---------- ----------- ------------
Operating income 653 788 919
Other income (expense):
Interest expense (993) (786) (735)
Interest and dividend income 35 19 18
Interest income from Liberty Media Group (note 13) 2 2 2
Gain on sale of subsidiary stock (note 11) 123 -- --
Gain on sale of stock by equity investee (note 5) 165 161 --
Share of losses of affiliates, net (note 5) (112) (96) (58)
Gain (loss) on disposition of assets 51 (13) 42
Other, net (45) (18) (57)
---------- ----------- ------------
(774) (731) (788)
---------- ----------- ------------
Earnings (loss) before income taxes (121) 57 131
Income tax benefit (expense) (note 12) 45 (67) (159)
---------- ----------- ------------
Loss before earnings (loss) of Liberty Media Group
through the date of Distribution and Telephony
Group (note 1) (76) (10) (28)
Earnings (loss) of Liberty Media Group through the date of
Distribution (note 1) (29) 135 30
Loss of Telephony Group (39) (12) (5)
---------- ----------- ------------
Net earnings (loss) (144) 113 (3)
Dividend requirements on preferred stocks (34) (14) (12)
---------- ----------- ------------
Net earnings (loss) attributable to common
stockholders $ (178) 99 (15)
========== =========== ============
Loss attributable to common stockholders per common share
(note 3) $ (.16)
==========
</TABLE>
See accompanying notes to combined financial statements.
V-183
<PAGE> 334
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
TCI
Group
unrealized
holding
Combined Cumulative Note gains
equity, foreign receivable (losses) for Interest
including currency from available- in
preferred translation related for-sale Telephony
stocks adjustment party securities Group
--------- ----------- --------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C> (104)
Balance at January 1, 1993 $ 1,659 (19) (15) --
Net loss (3) -- -- -- 5
Purchase of programming from Liberty Media
Group -- -- -- -- --
Cost allocations to Liberty Media Group -- -- -- -- --
Cost allocations to Telephony Group -- -- -- -- --
Allocation to Liberty Media Group of
compensation related to stock
appreciation rights -- -- -- -- --
Payments of compensation related to stock
appreciation rights -- -- -- -- --
Allocation to Telephony Group of
compensation related to stock
appreciation rights -- -- -- -- --
Interest income from Liberty Media Group -- -- -- -- --
Intergroup tax allocation -- -- -- -- --
Net cash transfers to Liberty Media Group -- -- -- -- --
Net cash transfers to Telephony Group -- -- -- -- (19)
Foreign currency translation adjustment -- (10) -- -- --
Payment of TCI and Liberty preferred stock
dividends (11) -- -- -- --
Issuance of Liberty Class A common stock
for acquisition by Liberty Media Group 123 -- -- -- --
Issuance of TCI Class A common stock upon
conversion of notes 403 -- -- -- --
Issuance of TCI Class A common stock upon
exercise of stock options 7 -- -- -- --
Acquisition and retirement of TCI common
stock (5) -- -- -- --
--------- ----------- --------- --------- ----------
Balance at December 31, 1993 $ 2,173 (29) (15) -- (118)
--------- ----------- --------- --------- ----------
<CAPTION>
Liberty
Media
Group
unrealized
Due holding Interest
from gains for in
Liberty available- Liberty
Media for-sale Media Combined
Group securities Group equity
-------- ---------- --------- ----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 1993 -- -- (894) 627
Net loss -- -- (30) (28)
Purchase of programming from Liberty Media
Group -- -- 47 47
Cost allocations to Liberty Media Group -- -- (6) (6)
Cost allocations to Telephony Group -- -- -- --
Allocation to Liberty Media Group of
compensation related to stock
appreciation rights -- -- (40) (40)
Payments of compensation related to stock
appreciation rights -- -- 22 22
Allocation to Telephony Group of
compensation related to stock
appreciation rights -- -- -- --
Interest income from Liberty Media Group -- -- (2) (2)
Intergroup tax allocation -- -- (25) (25)
Net cash transfers to Liberty Media Group (3) -- (134) (137)
Net cash transfers to Telephony Group -- -- -- (19)
Foreign currency translation adjustment -- -- -- (10)
Payment of TCI and Liberty preferred stock
dividends -- -- -- (11)
Issuance of Liberty Class A common stock
for acquisition by Liberty Media Group -- -- (123) --
Issuance of TCI Class A common stock upon
conversion of notes -- -- -- 403
Issuance of TCI Class A common stock upon
exercise of stock options -- -- -- 7
Acquisition and retirement of TCI common
stock -- -- -- (5)
-------- --------- --------- ----------
Balance at December 31, 1993 (3) -- (1,185) 823
-------- --------- --------- ----------
</TABLE>
V-184
<PAGE> 335
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity (continued)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
TCI
Group
unrealized
holding
Combined Cumulative Note gains
equity, foreign receivable (losses) for Interest
including currency from available- in
preferred translation related for-sale Telephony
stocks adjustment party securities Group
--------- ----------- --------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $2,173 (29) (15) -- (118)
Unrealized holding gains for
available-for-sale securities as of January
1, 1994 -- -- -- 22 --
Net earnings (loss) 113 -- -- -- 12
Purchase of programming from Liberty Media
Group -- -- -- -- --
Cost allocations to Liberty Media Group -- -- -- -- --
Cost allocations to Telephony Group -- -- -- -- --
Accrued cable distribution fees to TCI from
Home Shopping Network, Inc. ('HSN") -- -- -- -- --
Allocation to Liberty Media Group of
compensation related to stock appreciation
rights -- -- -- -- --
Allocation to Telephony Group of compensation
related to stock appreciation rights -- -- -- -- --
Interest income from Liberty Media Group -- -- -- -- --
Intergroup tax allocation -- -- -- -- 3
Net cash transfers from Liberty Media Group -- -- -- -- --
Net cash transfers to Telephony Group -- -- -- -- (129)
Transfers of assets to Telephony Group, net
of deferred taxes -- -- -- -- (8)
Change in unrealized holding gains for
available-for-sale securities -- -- -- (26) --
Foreign currency translation adjustment -- 25 -- -- --
Payment of TCI and Liberty preferred stock
dividends (14) -- -- -- --
Issuance of TCI common stock for investments 130 -- -- -- --
Fees incurred in TCI/Liberty Combination (13) -- -- -- --
Issuance of TCI preferred stock for
acquisition by Liberty Media Group 168 -- -- -- --
Acquisition by Liberty Media Group -- -- -- -- --
Conversion of redeemable preferred stock 18 -- -- -- --
Issuance of TCI Class A common stock upon
conversion of notes 3 -- -- -- --
Issuance of TCI Class A common stock upon
exercise of stock options 3 -- -- -- --
Acquisition and retirement of TCI common stock (2) -- -- -- --
Repayment of note receivable from related
party with TCI common stock (15) -- 15 -- --
------ ----------- --------- --------- ----------
Balance at December 31, 1994 $2,564 (4) -- (4) (240)
------ ----------- --------- --------- ----------
<CAPTION>
Liberty
Media
Group
unrealized
Due holding Interest
from gains for in
Liberty available- Liberty
Media for-sale Media Combined
Group securities Group equity
-------- ---------- --------- ----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at December 31, 1993 (3) -- (1,185) 823
Unrealized holding gains for
available-for-sale securities as of January
1, 1994 -- 293 (293) 22
Net earnings (loss) -- -- (135) (10)
Purchase of programming from Liberty Media
Group -- -- 60 60
Cost allocations to Liberty Media Group -- -- (14) (14)
Cost allocations to Telephony Group -- -- -- --
Accrued cable distribution fees to TCI from
Home Shopping Network, Inc. ('HSN") (28) -- -- (28)
Allocation to Liberty Media Group of
compensation related to stock appreciation
rights -- -- 8 8
Allocation to Telephony Group of compensation
related to stock appreciation rights -- -- -- --
Interest income from Liberty Media Group -- -- (2) (2)
Intergroup tax allocation -- -- (78) (75)
Net cash transfers from Liberty Media Group 2 -- 166 168
Net cash transfers to Telephony Group -- -- -- (129)
Transfers of assets to Telephony Group,
net of deferred taxes -- -- -- (8)
Change in unrealized holding gains for
available-for-sale securities -- (195) 195 (26)
Foreign currency translation adjustment -- -- -- 25
Payment of TCI and Liberty preferred stock
dividends -- -- -- (14)
Issuance of TCI common stock for investments -- -- -- 130
Fees incurred in TCI/Liberty Combination -- -- -- (13)
Issuance of TCI preferred stock for
acquisition by Liberty Media Group -- -- (168) --
Acquisition by Liberty Media Group -- -- (43) (43)
Conversion of redeemable preferred stock -- -- -- 18
Issuance of TCI Class A common stock upon
conversion of notes -- -- -- 3
Issuance of TCI Class A common stock upon
exercise of stock options -- -- -- 3
Acquisition and retirement of TCI common stock -- -- -- (2)
Repayment of note receivable from related
party with TCI common stock -- -- -- --
-------- --------- --------- ----------
Balance at December 31, 1994 (29) 98 (1,489) 896
-------- --------- --------- ----------
</TABLE>
V-185
<PAGE> 336
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Equity (continued)
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
TCI
Group
unrealized
holding
Combined Cumulative Note gains
equity, foreign receivable (losses) for Interest
including currency from available- in
preferred translation related for-sale Telephony
stocks adjustment party securities Group
---------- ------------ --------- ---------- ----------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 2,564 (4) -- (4) (240)
Net loss (144) -- -- -- 39
Purchase of programming from Liberty Media
Group -- -- -- -- --
Cost allocations to Liberty Media Group -- -- -- -- --
Cost allocations to Telephony Group -- -- -- -- --
Cable distribution fees received from HSN -- -- -- -- --
Allocation to Liberty Media Group of
compensation relating to stock appreciation
rights -- -- -- -- --
Intergroup tax allocation -- -- -- -- 17
Allocation to Telephony Group of compensation
relating to stock appreciation rights -- -- -- -- --
Interest income from Liberty Media Group -- -- -- -- --
Deferred tax assets transferred from Liberty
Media Group -- -- -- -- --
Turner Broadcasting System, Inc. ("TBS")
stock received in acquisition transferred to
Liberty Media Group -- -- -- -- --
Net cash transfers to Liberty Media Group -- -- -- -- --
Net cash transfers to Telephony Group -- -- -- -- (743)
Transfers of assets to Telephony Group, net
of deferred tax -- -- -- -- (16)
Change in unrealized gains for
available-for-sale securities -- -- -- 72 --
Foreign currency translation adjustment -- (5) -- -- --
Accreted dividends on TCI preferred stock
subject to mandatory redemption requirements (24) -- -- -- --
Payment of TCI preferred stock dividends (10) -- -- -- --
Issuance of TCI Class A common stock for
acquisitions and investments 1,378 -- -- -- --
Issuance of TCI Class A common stock for
acquisition by Liberty Media Group 10 -- -- -- --
Cash paid by TCI Group for investment by
Liberty Media Group contributed to Liberty
Media Group combined equity -- -- -- -- --
Proceeds from issuances of TCI Class A common
stock in public and private offerings 431 -- -- -- --
Distribution of TCI Series A and Series B
Liberty Media Group common stock to TCI
common stockholders (1,364) -- -- -- --
Costs associated with Distribution to
stockholders (8) -- -- -- --
Adjustment to reflect elimination of reporting
delay with respect to certain foreign
subsidiaries (note 2) (1) -- -- -- --
Deferred tax assets transferred from Liberty
Media Group upon implement-ation of tax
sharing agreement -- -- -- -- --
Issuance of common stock by subsidiary (note 11) 51 -- -- -- --
---------- ------------ --------- --------- ----------
Balance at December 31, 1995 $2,883 (9) -- 68 (943)
========== ============ ========= ========= ==========
<CAPTION>
Liberty
Media
Group
unrealized
Due holding Interest
from gains for in
Liberty available- Liberty
Media for-sale Media Combined
Group securities Group equity
--------- ---------- -------- ----------
amounts in millions
<S> <C> <C> <C> <C>
Balance at December 31, 1994 (29) 98 (1,489) 896
Net loss -- -- 29 (76)
Purchase of programming from Liberty Media
Group 33 -- 40 73
Cost allocations to Liberty Media Group (9) -- (15) (24)
Cost allocations to Telephony Group -- -- -- --
Cable distribution fees received from HSN 27 -- -- 27
Allocation to Liberty Media Group of
compensation relating to stock appreciation
rights (3) -- (7) (10)
Allocation to Telephony Group of compensation
relating to stock appreciation rights -- -- -- --
Intergroup tax allocation -- -- -- 17
Interest income from Liberty Media Group -- -- (2) (2)
Deferred tax assets transferred from Liberty
Media Group -- -- 14 14
Turner Broadcasting System, Inc. ("TBS")
stock received in acquisition transferred to
Liberty Media Group -- -- (7) (7)
Net cash transfers to Liberty Media Group (26) -- (15) (41)
Net cash transfers to Telephony Group -- -- -- (743)
Transfers of assets to Telephony Group,
net of deferred tax -- -- -- (16)
Change in unrealized gains for
available- for-sale securities -- 108 (108) 72
Foreign currency translation adjustment -- -- -- (5)
Accreted dividends on TCI preferred stock
subject to mandatory redemption requirements -- -- -- (24)
Payment of TCI preferred stock dividends -- -- -- (10)
Issuance of TCI Class A common stock for
acquisitions and investments -- -- -- 1,378
Issuance of TCI Class A common stock for
acquisition by Liberty Media Group -- -- (10) --
Cash paid by TCI Group for investment by
Liberty Media Group contributed to Liberty
Media Group combined equity -- -- (2) (2)
Proceeds from issuances of TCI Class A common
stock in public and private offerings -- -- -- 431
Distribution of TCI Series A and Series B
Liberty Media Group common stock to TCI
common stockholders -- (206) 1,570 --
Costs associated with Distribution to
stockholders -- -- -- (8)
Adjustment to reflect elimination of reporting
delay with respect to certain foreign
subsidiaries (note 2) -- -- -- (1)
Deferred tax assets transferred from Liberty
Media Group upon implementation of tax
sharing agreement -- -- 2 2
Issuance of common stock by subsidiary (note 11) -- -- -- 51
--------- --------- -------- ----------
Balance at December 31, 1995 (7) -- -- 1,992
========= ========= ======== ==========
</TABLE>
See accompanying notes to combined financial statements.
V-186
<PAGE> 337
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------- -----------
amounts in millions
(see note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss before earnings or loss of Telephony Group and Liberty Media Group* $ (76) (10) (28)
Adjustments to reconcile loss before earnings or loss of Telephony Group
and Liberty Media Group to net cash provided by operating activities:
Depreciation and amortization 1,274 1,001 920
Compensation relating to stock appreciation rights 45 -- 31
Adjustment to compensation relating to stock appreciation rights -- (5) --
Share of losses of affiliates 112 96 58
Gain on sale of subsidiary stock (123) -- --
Gain on sale of stock by equity investee (165) (161) --
Inter-group tax allocation 17 3 1
Deferred income tax expense (benefit) (96) 4 130
Loss (gain) on disposition of assets (51) 13 (42)
Other noncash charges (credits) 13 1 84
Changes in operating assets and liabilities, net of the effect of
acquisitions:
Change in receivables (58) 4 (12)
Change in prepaids (56) (50) (4)
Change in accruals and payables 76 77 56
Change in accrued interest 40 26 63
Net cash used in Flextech plc's operating activities during the month
ended September 30, 1995 (note 2) (2) -- --
--------- ----------- -----------
Net cash provided by operating activities 950 999 1,257
--------- ----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions (440) (541) (262)
Capital expended for property and equipment (1,733) (1,249) (954)
Proceeds from disposition of assets 148 41 146
Additional investments in and loans to affiliates and others (313) (301) (235)
Change in interest in Telephony Group (744) (129) (20)
Change in due from Liberty Media Group 22 2 (3)
Change in interest in Liberty Media Group 13 148 (119)
Repayment of loans by affiliates and others 16 31 22
Return of capital from affiliates 2 21 81
Payment received on preferred stock investment redemption -- -- 287
Other investing activities (62) (47) (101)
Net cash used in Flextech plc's investing activities during the month
ended September 30, 1995 (note 2) (51) -- --
--------- ----------- -----------
Net cash used in investing activities (3,142) (2,024) (1,158)
--------- ----------- -----------
Cash flows from financing activities:
Borrowings of debt 7,929 4,648 6,399
Repayments of debt (6,517) (3,612) (6,426)
Proceeds from sale of subsidiary stock 445 -- --
Preferred stock dividends of subsidiaries (6) (6) (6)
Preferred stock dividends (24) (4) (2)
Issuances of common stock 431 1 6
Costs associated with Distribution to stockholders (8) -- --
Repurchases of preferred stock -- -- (92)
Repurchases of common stock -- -- (4)
Net cash provided by Flextech plc's financing activities during the month
ended September 30, 1995 (note 2) 8 -- --
--------- ----------- -----------
Net cash provided (used) by financing activities 2,258 1,027 (125)
--------- ----------- -----------
Net increase (decrease) in cash 66 2 (26)
Cash at beginning of year 11 9 35
--------- ----------- -----------
Cash at end of year $ 77 11 9
========= =========== ===========
</TABLE>
* Net earnings or loss of Telephony Group and Liberty Media Group do not
provide or use funds.
See accompanying notes to combined financial statements.
V-187
<PAGE> 338
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
December 31, 1995, 1994 and 1993
(1) Basis of Presentation
On December 4, 1996 the Board of Directors of Tele-Communications, Inc.
(the "Board") authorized, subject to shareholder approval (the "Telephony
Stock Proposal"), the issuance of a new class of stock ("Telephony Group
Stock") which is intended to reflect the separate performance of the
Telephony Group. The Telephony Group would initially consist of TCI
Group's interest in TCI Telephony Services, Inc., a direct wholly owned
subsidiary of Tele-Communications, Inc. ("TCI" or the "Company"), its
subsidiaries, their respective assets, and all assets and liabilities of
the TCI Group to the extent attributed to any of the foregoing assets,
whether or not such assets or liabilities are assets and liabilities of
TCI Telephony Services, Inc. (together with its consolidated subsidiaries
(unless the context indicates otherwise), "TCI Telephony"). The principal
assets of TCI Telephony are its non-consolidating investments in a series
of partnerships, the PCS Ventures, formed to engage in the business of
providing wireless communications services, using the radio spectrum for
broadband personal communications services ("PCS"), to residences and
businesses nationwide under the "Sprint" brand, and its investment in TCG.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the partners
of each of which are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI,
and PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries
of Sprint, Cox and TCI. TCI, through subsidiaries, has a 30% interest as a
partner in the Sprint PCS Partnerships and a 35.3% interest as a partner
in PhillieCo. TCG is a competitive local exchange carrier that offers a
wide range of local telecommunications services in major metropolitan
markets nationwide, primarily to businesses, long distance carriers and
resellers, and wireless communications companies. The Company has a
31.1% equity interest (which represents a 36.5% voting interest) in TCG.
The Telephony Group would also include such other assets of the TCI Group
as the Board may in the future determine to attribute to the Telephony
Group and such other businesses, assets and liabilities as TCI may in the
future acquire for the Telephony Group, as determined by the Board. It is
currently the intention of TCI that any businesses, assets and liabilities
so attributed to the Telephony Group in the future would be businesses,
assets and liabilities of, or related to, the interests of the TCI Group
in the domestic wireless and wireline communications businesses (the
"Telephony Business").
(continued)
V-188
<PAGE> 339
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of the date of these financial statements, the only interests of the
TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a subsidiary
of the TCI Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital
broadband microwave network located in the Western United States (the
"Microwave Business"), and the Company's business, which is in the
development stage, of providing wireline residential telephony services to
customers in certain of the geographic areas served by the Company's cable
television systems (the "ResTel Business"). The Company began offering
residential Telephony Group service commercially in October 1996 in
Hartford, Connecticut. Telephony Group has the right, but not the
obligation, to acquire the ResTel Business from the Company in whole or in
part (by geographic area) for the appraised fair market value of the
ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that Telephony
Group is at the time a subsidiary of the Company and the Company is then
conducting such business. Payment of such appraised fair market value may
be in funds generated by the Telephony Group (whether through future
operations or sales of assets), in funds borrowed from the TCI Group or
through an increase in the Inter-Group Interest (as defined below) of the
TCI Group in the Telephony Group. Whether or not Telephony Group will
exercise its rights to acquire the ResTel Business (in whole or in part)
will depend upon a number of factors, including the penetration rates for
the service in the geographic area or areas in which the service has been
commercially launched (with the penetration rate being the percentage that
the number of subscribers to the service in such geographic area represent
of the homes technically capable of subscribing to the service), the cost
of providing the service at the penetration rate achieved in that area,
and the ability of Telephony Group to fund the continued development and
ongoing operation of the ResTel Business in that area. With regard to the
Microwave Business, the Board has not yet determined whether and for what
consideration this business would be transferred to the Telephony Group,
other than that any such transfer would be at fair market value (as
determined by the Board).
While the Telephony Group Stock constitutes common stock of TCI, issuance
of the Telephony Group Stock will not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group Stock
(when issued) will be common stockholders of TCI and will be subject to
risks associated with an investment in TCI and all of its businesses,
assets and liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company currently
proposes to offer shares of Series A Telephony Group Stock for cash in an
initial public offering, in which event the proceeds of such offering
would be allocated to the Telephony Group to be used to fund a portion of
its anticipated capital requirements and for general corporate purposes.
The timing and the size of any such public offering and the price at which
such shares would be sold will be determined by the Board, without further
approval of stockholders, prior to such offering based upon then
prevailing market and other conditions.
On August 3, 1995, the stockholders of TCI authorized the Board to issue
a new class of stock ("Liberty Group Stock") which is intended to reflect
the separate performance of TCI's business which produces and distributes
cable television programming services ("Liberty Media Group"). While the
Liberty Group Stock constitutes common stock of TCI, issuance of the
Liberty Group Stock did not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to the
Liberty Media Group (the "Distribution") to its security holders of record
on August 4, 1995. Additionally, the stockholders, of TCI approved the
redesignation of the previously authorized Class A and Class B common
stock into Series A TCI Group and Series B TCI Group common stock ("TCI
Group Stock").
(continued)
V-189
<PAGE> 340
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group stock is
referred to as "Inter-Group Interest". Prior to the issuance of any shares
of Telephony Group stock, the Inter-Group Interest of the TCI Group in the
Telephony Group is 100%. As any shares of Telephony Group Stock are issued
and distributed or sold, the TCI Group's Inter-Group Interest in the
Telephony Group will be reduced accordingly.
The TCI Group Stock is intended to reflect the separate performance of the
subsidiaries and assets not attributed to Liberty Media Group or Telephony
Group, including (i) TCI's Cable and Communication unit, (ii) TCI's
International Cable and Programming unit ("TINTA") and (iii) TCI's
Technology/Venture Capital unit. Such subsidiaries and assets are
collectively referred to as "TCI Group".
On January 27, 1994, TCI Communications, Inc. (formerly
Tele-Communications, Inc. or "TCIC") and Liberty Media Corporation
("Liberty") entered into a definitive merger agreement to combine the two
companies (the "TCI/Liberty Combination"). The transaction was consummated
on August 4, 1994. Due to the significant economic interest held by TCIC
through its ownership of Liberty preferred stock and Liberty common stock
and other related party considerations, TCIC accounted for its investment
in Liberty under the equity method prior to the consummation of the
TCI/Liberty Combination. Accordingly, TCIC had recognized 100% of
Liberty's earnings or losses before deducting preferred stock dividends.
The TCI/Liberty Combination was accounted for using predecessor cost due
to related party considerations. Accordingly, the accompanying combined
financial statements of TCI Group reflect the combination of the
historical financial information of the assets of TCI and Liberty which
have not been attributed to Liberty Media Group or the Telephony Group.
For periods prior to the TCI/Liberty Combination, the combined financial
statements of TCI Group, Liberty Media Group and Telephony Group comprise
all the accounts included in the consolidated financial statements of TCI
and subsidiaries and the separate consolidated financial statements of
Liberty and subsidiaries. For periods subsequent to the TCI/Liberty
Combination, the combined financial statements of TCI Group, Liberty Media
Group and Telephony Group comprise all the accounts included in the
corresponding consolidated financial statements of TCI and subsidiaries.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group
and the Telephony Group (collectively, the "Groups") for the purpose of
preparing the combined financial statements of the TCI Group, the Liberty
Media Group and the Telephony Group, the change in the capital structure
of the Company contemplated by the Telephony Group Stock Proposal will not
affect legal title to such assets or responsibility for such liabilities
of the Company or any of its subsidiaries. Holders of TCI Group Common
Stock, Liberty Media Group Common Stock and Telephony Group Common Stock
will be common stockholders of the Company and will be subject to risks
associated with an investment in the Company and all of its businesses,
assets and liabilities.
(continued)
V-190
<PAGE> 341
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups
and the market price of the TCI Group Common Stock, the Liberty Media
Group Common Stock and the Telephony Group Common Stock. In addition, any
net losses of any Group, dividends or distributions on, or repurchases of,
the TCI Group Common Stock, the Liberty Media Group Common Stock or the
Telephony Group Common Stock, and dividends on, or certain repurchases of,
Preferred Stock, will reduce funds of the Company legally available for
the payment of dividends on the TCI Group Common Stock, the Liberty Media
Group Common Stock and the Telephony Group Common Stock. The combined
financial statements of the TCI Group, the Liberty Media Group and the
Telephony Group should be read in conjunction with the consolidated
financial statements of the Company.
Dividends on the TCI Group Stock are payable at the sole discretion of the
Board out of the lesser of assets of TCI legally available for dividends
and the available dividend amount with respect to TCI Group, as defined.
Determinations to pay dividends on TCI Group Stock are based primarily
upon the financial condition, results of operations and business
requirements of TCI Group and TCI as a whole.
After the Distribution, existing preferred stock and debt securities of
TCI that were convertible into or exchangeable for shares of TCI Class A
common stock were, as a result of the operation of antidilution
provisions, adjusted so that there will be delivered upon their conversion
or exchange (in addition to the same number of shares of redesignated
Series A TCI Group Stock as were theretofore issuable thereunder) the
number of shares of Series A Liberty Group Stock that would have been
issuable in the Distribution with respect to the TCI Class A common stock
issuable upon conversion or exchange had such conversion or exchange
occurred prior to the record date for the Distribution. Options to
purchase TCI Class A common stock outstanding at the time of the
Distribution were adjusted by issuing to the holders of such options
separate options to purchase that number of shares of Series A Liberty
Group Stock which the holder would have been entitled to receive had the
holder exercised such option to purchase TCI Class A common stock prior to
the record date for the Distribution and reallocating a portion of the
aggregate exercise price of the previously outstanding options to the
newly issued options to purchase Series A Liberty Group Stock. The
issuance of shares of Series A Liberty Group Stock upon such conversion,
exchange or exercise of such convertible securities will not result in any
transfer of funds or other assets from TCI Group to Liberty Media Group or
a reduction in any Inter-Group Interest that then may exist, in
consideration of such issuance. In the case of the exercise of such
options to purchase Series A Liberty Group Stock, the proceeds received
upon the exercise of such options will be attributed to Liberty Media
Group.
(continued)
V-191
<PAGE> 342
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
A number of wholly-owned subsidiaries which are part of TCI Group owned
shares of TCI Class A common stock and TCI preferred stock ("Subsidiary
Shares"). Because the distribution of the Liberty Group Stock was made as
a dividend to all holders of TCI's Class A common stock and Class B common
stock and, pursuant to the anti-dilution provisions set forth therein, to
the holders of securities convertible into TCI Class A common stock and
TCI Class B common stock upon the conversion thereof, shares of Liberty
Group Stock would otherwise have been issued and become issuable in
respect of the Subsidiary Shares held by these subsidiaries and would be
attributed to TCI Group. The Liberty Group Stock issued in connection with
the Distribution is intended to constitute 100% of the equity value
thereof to the holders of TCI Class A common stock and TCI Class B common
stock, and TCI Group does not initially have any interest in Liberty Media
Group represented by any outstanding shares of Liberty Group Stock (an
"Inter-Group Interest"). Therefore, TCI determined to exchange all of the
outstanding Subsidiary Shares for shares of a new series of Series
Preferred Stock designated Convertible Redeemable Participating Preferred
Stock, Series F (the "Series F Preferred Stock"). See note 8. The rights,
privileges and preferences of the Series F Preferred Stock did not entitle
its holders to receive Liberty Group Stock in the Distribution or upon
conversion of the Series F Preferred Stock.
Prior to the Distribution, TCI Group had a 100% Inter-Group Interest in
Liberty Media Group. Following the Distribution of Liberty Group Stock, TCI
Group has no Inter-Group Interest in Liberty Media Group. TCI Group has a
100% Inter-Group Interest in Telephony Group. For periods in which an
Inter-Group Interest exists, TCI Group would account for its Inter-Group
Interest in a manner similar to the equity method of accounting. Management
of TCI believes that generally accepted accounting principles require that
Liberty Media Group and Telephony Group be consolidated with TCI Group. If
Liberty Media Group and Telephony Group were consolidated with TCI Group,
the combined financial position, combined results of operations, and
combined cash flows of TCI Group would equal the consolidated financial
position, consolidated results of operations and consolidated cash flows of
TCI and subsidiaries, which financial statements are included separately
herein. Management of TCI has elected to present the accompanying combined
financial statements in a manner that does not comply with generally
accepted accounting principles.
During the fourth quarter of 1994, TCI was reorganized (the
"Reorganization") based upon four lines of business: Domestic Cable and
Communications; Programming; TINTA and Technology/Venture Capital. Upon
Reorganization, certain of the assets of TCIC and Liberty were transferred
to the other operating units. In the first quarter of 1995, TCIC
transferred additional assets to TINTA.
(continued)
V-192
<PAGE> 343
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Summary of Significant Accounting Policies
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1995 and 1994 was not material.
Investments
All marketable equity securities held by TCI Group are classified as
available-for-sale and are carried at fair value. Unrealized holding gains
and losses on securities classified as available-for-sale are carried net
of taxes as a separate component of combined equity.
Other investments in which the ownership interest is less than 20% but
are not considered marketable securities are generally carried at cost.
For those investments in affiliates in which TCI Group's voting interest
is 20% to 50%, the equity method of accounting is generally used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize TCI Group's share of the net earnings or losses of the
affiliates as they occur rather than as dividends or other distributions
are received, limited to the extent of TCI Group's investment in,
advances to and commitments for the investee. TCI Group's share of net
earnings or losses of affiliates includes the amortization of the
difference between TCI Group's investment and its share of the net assets
of the investee. Recognition of gains on sales of properties to
affiliates accounted for under the equity method is deferred in
proportion to TCI Group's ownership interest in such affiliates.
Changes in TCI Group's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee,
generally are recognized as gains or losses in TCI Group's combined
statements of operations.
Long-Lived Assets
(a) Property and Equipment
Property and equipment is stated at cost, including acquisition
costs allocated to tangible assets acquired. Construction costs,
including interest during construction and applicable overhead, are
capitalized. During 1995, 1994 and 1993, interest capitalized was
not material.
Depreciation is computed on a straight-line basis using estimated
useful lives of 3 to 15 years for distribution systems and 3 to 40
years for support equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements,
sales or other dispositions of property, the original cost and cost
of removal of such property are charged to accumulated
depreciation, and salvage, if any, is credited thereto. Gains or
losses are only recognized in connection with the sales of
properties in their entirety.
(continued)
V-193
<PAGE> 344
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(b) Franchise Costs
Franchise costs include the difference between the cost of
acquiring cable television systems and amounts allocated to their
tangible assets. Such amounts are generally amortized on a
straight-line basis over 40 years. Costs incurred by TCI Group in
obtaining franchises are being amortized on a straight-line basis
over the life of the franchise, generally 10 to 20 years.
In March of 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("Statement No. 121"), effective for fiscal years beginning
after December 15, 1995. Statement No. 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. TCI Group will adopt Statement No.
121 effective January 1, 1996. The effect of such adoption is not
expected to be significant.
Interest Rate Derivatives
Amounts receivable or payable under derivative financial instruments used
to manage interest rate risks arising from TCI Group's financial
liabilities are recognized as interest expense. Gains and losses on
early terminations of derivatives are included in the carrying amount of
the related debt and amortized as yield adjustments over the remaining
terms of the debt. TCI Group does not use such instruments for trading
purposes.
Minority Interests
Recognition of minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated
subsidiaries. Further, the minority interests' share of losses is not
recognized if the minority holders of common equity of consolidated
subsidiaries have the right to cause TCI Group to repurchase such
holders' common equity.
Included in minority interests in equity of consolidated subsidiaries is
$49 million and $50 million in 1995 and 1994, respectively, of preferred
stocks (and accumulated dividends thereon) of certain subsidiaries. The
current dividend requirements on these preferred stocks aggregate $6
million per annum and such dividend requirements are reflected as
minority interests in the accompanying combined statements of operations.
Subsequent to December 31, 1995, TCIC issued to the public 4.6 million
shares of Cumulative Exchangeable Preferred Stock with an initial
liquidation value of $230 million. Such issuance will be reflected as an
increase in TCI Group's minority interest in equity of consolidated
subsidiaries.
(continued)
V-194
<PAGE> 345
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Trust Originated Preferred SecuritiesSM
Subsequent to December 31, 1995, TCI Communications Financing I (the
"Trust"), an indirect wholly-owned subsidiary of TCI Group, issued $16
million in common securities and issued $500 million of 8.72% Trust
Originated Preferred SecuritiesSM (the "Preferred Securities" and
together with the common securities, the "Trust Securities"). The Trust
exists for the exclusive purpose of issuing Trust Securities and
investing the proceeds thereof into an aggregate principal amount of $516
million of 8.72% Subordinated Deferrable Interest Notes due January 31,
2045 (the "Subordinated Debt Securities") of TCI Group. The Subordinated
Debt Securities are unsecured obligations of TCI Group and are
subordinate and junior in right of payment to certain other indebtedness
of TCI Group. Upon redemption of such Subordinated Debt Securities, the
Preferred Securities will be mandatorily redeemable. TCI Group
effectively provides a full and unconditional guarantee of the Trust's
obligations under the Preferred Securities. TCI Group will present the
Preferred Securities as a separate line item in its balance sheet
captioned "Company-obligated mandatorily redeemable preferred securities
of subsidiary trust."
Foreign Currency Translation
All balance sheet accounts of foreign investments are translated at the
current exchange rate as of the end of the accounting period. Statement
of operations items are translated at average currency exchange rates.
The resulting translation adjustment is recorded as a separate component
of combined equity.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") was issued by the FASB in
October 1995. Statement No. 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans as well
as transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. TCI Group will include the
disclosures required by Statement No. 123 in the notes to future
financial statements.
(continued)
V-195
<PAGE> 346
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Accounting for Foreign Subsidiaries
Through the third quarter of 1995, TCI Group included certain of its
foreign subsidiaries (Flextech plc ("Flextech") and Cablevision S.A.
("Cablevision")) in its financial statements on a one-month time delay.
TCI Group eliminated such time delay from its December 31, 1995 financial
statements. As a result, TCI Group's combined statements of operations
for the year ended December 31, 1995 include (i) Cablevision's result of
operations for the period from April 25, 1995 (the date Cablevision was
acquired - see note 6) through December 31, 1995 and (ii) Flextech's
results of operations for the period from December 1, 1994 through
December 31, 1995 (exclusive of the one-month period ended September 30,
1995). TCI Group's combined statement of cash flows for the year ended
December 31, 1995 includes the cash flows of Cablevision and Flextech for
the same periods except that Flextech's cash flows for the one-month
period ended September 30, 1995 are included therein on a summarized
basis. In connection with the elimination of the above-described
reporting delays, TCI Group (i) restated certain of its quarterly
financial information in order to present Cablevision's 1995 results of
operations on a current basis and (ii) charged Flextech's net loss for
the one-month ended September 30, 1995 ($1 million) directly to TCI
Group's accumulated deficit so that TCI Group's combined statement of
operations for the year ended December 31, 1995 would not include more
than 12 months of Flextech's operating results.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassification
Certain amounts have been reclassified for comparability with the 1995
presentation.
(3) Loss Per Common Share
The loss attributable to common stockholders per common share for the
period from the Distribution to December 31, 1995 was computed by
dividing net loss attributable to TCI Group Series A and Series B common
stockholders by the weighted average number of common shares outstanding
of TCI Group Series A and Series B Stock during the period (656.4
million). Common stock equivalents were not included in the computation
of weighted average shares outstanding because their inclusion would be
anti-dilutive. Earnings or loss per common and common equivalent share
are omitted from the combined statements of operations for the period
from January 1, 1995 through the Distribution and for the years ended
December 31, 1994 and 1993 as TCI Group Stock was not part of the capital
structure of TCI until August 10, 1995, the date of the Distribution.
(continued)
V-196
<PAGE> 347
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $953 million, $758 million and $646 million
for the years ended December 31, 1995, 1994 and 1993, respectively. Cash
paid for income taxes was $63 million in 1995 and was not material in
1994 or 1993.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 3,540 694 318
Liabilities assumed, net of
current assets (457) (10) (8)
Deferred tax liability recorded
in acquisitions (1,083) (34) (7)
Minority interests in equity of
acquired entities 43 (35) (8)
Common stock issued in
acquisitions (1,305) (298) --
Contribution to combined equity
of Liberty Media Group from
TCI Group for acquisition 2 211 --
Noncash contribution for
acquisition -- -- (33)
Redeemable preferred stock
issued in acquisition (300)
Fees incurred in the TCI/Liberty
Combination -- 13 --
-------- -------- --------
Cash paid for acquisitions $ 440 541 262
======== ======== ========
Issuance of subsidiary stock for
equity investment $ 11 -- --
======== ======== ========
Noncash exchange of equity
investment for consolidated
subsidiary and equity investment $ -- -- 22
======== ======== ========
Noncash capital contribution
to equity investee $ -- -- 22
======== ======== ========
</TABLE>
(continued)
V-197
<PAGE> 348
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(5) Investments in Affiliates
TCI Group has various investments accounted for under the equity method.
The most significant investment held by TCI Group at December 31, 1995
was TeleWest plc ("New TeleWest") (carrying value of $550 million).
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
Combined Financial Position 1995 1994
--------------------------- ------ ------
amounts in millions
<S> <C> <C>
Property and equipment, net $3,112 1,883
Franchise costs, net 1,204 550
Other assets, net 2,736 1,497
------ ------
Total assets $7,052 3,930
====== ======
Debt $3,722 1,924
Due to (from) TCI Group 44 12
Other liabilities 734 490
Owners' equity 2,552 1,504
------ ------
Total liabilities and equity $7,052 3,930
====== ======
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
Combined Operations 1995 1994 1993
------------------- ------- ------ ------
amounts in millions
<S> <C> <C> <C>
Revenue $ 1,755 886 962
Operating expenses (1,493) (869) (640)
Depreciation and amortization (371) (199) (260)
------- ------ ------
Operating income (loss) (109) (182) 62
Interest expense (221) (91) (123)
Other, net 12 144 94
------- ------ ------
Net earnings (loss) $ (318) (129) 33
======= ====== ======
</TABLE>
(continued)
V-198
<PAGE> 349
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1995, TCI Group had an effective ownership interest of
approximately 27% in New TeleWest, a company that is currently operating
and constructing cable television and telephone systems in the United
Kingdom ("UK"). New TeleWest was formed on October 3, 1995 upon the
merger (the "TeleWest Merger") of TeleWest Communications plc ("TeleWest
Communications") with SBC (CableComms) (UK). Prior to the TeleWest
Merger, TCI Group had an effective ownership interest of approximately
36% in TeleWest Communications. As a result of the TeleWest Merger, TCI
Group recognized a gain of $165 million (before deducting the related tax
expense of $58 million), which gain represents the difference between TCI
Group's recorded cost for TeleWest Communications and TCI Group's 27%
effective proportionate share of New TeleWest's net assets.
New TeleWest contributed $70 million, $43 million and $28 million of TCI
Group's share of its affiliates' losses during the years ended December
31, 1995, 1994 and 1993, respectively. In addition, TCI Group has other
less significant equity method investments in video distribution and
programming businesses located in the UK, other parts of Europe, Asia,
Latin America and certain other foreign countries. In the aggregate,
such other equity method investments had a carrying value of $354 million
at December 31, 1995 and accounted for $62 million of TCI Group's share
of its affiliates' losses in 1995.
As a result of the TeleWest Communications' November 23, 1994 initial
public offering and the associated dilution of TCI Group's ownership
interest of TeleWest Communications, TCI Group recognized a gain
amounting to $161 million (before deducting the related tax expense of
$57 million).
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(6) Acquisitions
As of January 26, 1995, TCI Group and TeleCable Corporation ("TeleCable")
consummated a transaction, whereby TeleCable was merged into TCI Group.
The aggregate $1.6 billion purchase price was satisfied by TCIC's
assumption of approximately $300 million of TeleCable's net liabilities
and the issuance to TeleCable's shareholders of approximately 42 million
shares of TCI Class A common stock and 1 million shares of TCI
Convertible Preferred Stock, Series D (the "Series D Preferred Stock")
with an aggregate initial liquidation value of $300 million (see note 8).
On April 25, 1995, TINTA acquired a 51% ownership interest in Cablevision
for a purchase price of $282 million, before liabilities assumed. The
purchase price was paid with cash consideration of $195 million and
TINTA's issuance of $87 million principal amount of secured negotiable
promissory notes payable (the "Cablevision Notes") to the selling
shareholders. TINTA has an option during the two-year period ended April
25, 1997 to increase its ownership interest in Cablevision up to 80% at a
cost per subscriber similar to the initial purchase price, adjusted
however for certain fluctuations in applicable foreign currency exchange
rates.
(continued)
V-199
<PAGE> 350
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The acquisitions of TeleCable and Cablevision were accounted for by the
purchase method. Accordingly, the results of operations of such acquired
entities have been included with those of TCI Group since their
respective dates of acquisition. On a pro forma basis, TCI Group's
revenue would have been increased by $77 million and TCI Group's net loss
and net loss attributable to common stockholders would have been
decreased by $13 million and $12 million, respectively, for the year
ended December 31, 1995; and revenue, net earnings and earnings
attributable to common stockholders would have increased by $441 million,
$17 million and less than $1 million, respectively for 1994 had such
acquired entities been combined with TCI Group on January 1, 1994. The
foregoing unaudited pro forma financial information was based upon
historical results of operations adjusted for acquisition costs and, in
the opinion of management, is not necessarily indicative of the results
had TCI Group operated the acquired entities since January 1, 1994.
Effective January 26, 1995, TCI Group purchased from Comcast the 19.9%
minority interest in Heritage Communications, Inc. owned by Comcast for
an aggregate consideration of approximately $290 million, the majority of
which was paid in shares of TCI Class A common stock.
(7) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
Weighted average December 31,
interest rate at -------------------
December 31, 1995 1995 1994
----------------- -------- --------
amounts in millions
<S> <C> <C> <C>
Senior notes 8.5% $ 6,713 5,412
Bank credit facilities 6.8% 3,473 3,986
Commercial paper 6.4% 1,469 445
Notes payable 10.2% 934 1,024
Convertible notes (a) 9.5% 45 45
Cablevision Notes (b) 10.0% 65 --
Other debt 261 156
-------- --------
$ 12,960 11,068
======== ========
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $186 million at December 31, 1995 and 1994, mature on December 18,
2021. The notes require (so long as conversion of the notes has not
occurred) an annual interest payment through 2003 equal to 1.85% of
the face amount of the notes. At December 31, 1995, the notes were
convertible, at the option of the holders, into an aggregate of
38,707,574 shares of Series A TCI Group Stock and 9,676,893 shares of
Series A Liberty Group Stock. See note 1.
(continued)
V-200
<PAGE> 351
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(b) The Cablevision Notes are secured by TINTA's pledge of stock
representing its 51% interest in Cablevision.
The bank credit facilities and various other debt instruments
attributable to the TCI Group generally contain restrictive covenants
which require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of TCI Group's bank credit
facilities, TCI Group as pledged 100,524,364 shares of Series A TCI Group
Stock held by a subsidiary of TCI Group.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed
Rate Agreements") ranging from 6.1% to 9.9% on notional amounts of $602
million at December 31, 1995 and (ii) variable interest rates (the
"Variable Rate Agreements") on notional amounts of $2,520 million at
December 31, 1995. During the years ended December 31, 1995, 1994 and
1993, TCI Group's net payments pursuant to the Fixed Rate Agreements were
$13 million, $26 million and $38 million, respectively; and TCI Group's
net receipts (payments) pursuant to the Variable Rate Agreements were
(less than $1 million), $36 million and $32 million, respectively. After
giving effect to TCI Group's interest rate exchange agreements,
approximately 46% of TCI Group's indebtedness bears interest at fixed
rates.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (amounts in millions, except percentages):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
-------------------------------------- -----------------------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
------------- ------------- -------- -------------- -------------- ---------
<S> <C> <C> <C> <C> <C>
April 1996 9.9% $ 30 April 1996 6.8% $ 50
May 1996 8.3% 50 July 1996 8.2% 10
June 1996 6.1% 42 August 1996 8.2% 10
July 1996 8.2% 10 September 1996 4.6% 150
August 1996 8.2% 10 April 1997 7.0% 200
November 1996 8.9% 150 September 1998 4.8%-5.2% 300
October 1997 7.2%-9.3% 80 April 1999 7.4% 100
December 1997 8.7% 230 September 1999 7.2%-7.4% 300
---- February 2000 5.8%-6.6% 650
$602 March 2000 5.8%-6.0% 675
==== September 2000 5.1% 75
------
$2,520
======
</TABLE>
(continued)
V-201
<PAGE> 352
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCI
Group does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that TCI Group would pay or receive to terminate the agreements at
December 31, 1995, taking into consideration current interest rates and
assuming the current creditworthiness of the counterparties. TCI Group
would be required to pay an estimated $25 million at December 31, 1995 to
terminate the agreements.
The fair value of the debt attributable to the TCI Group is estimated
based on the quoted market prices for the same or similar issues or on
the current rates offered to the TCI Group for debt of the same remaining
maturities. The fair value of debt, which has a carrying value of
$12,960 million, was $13,553 million at December 31, 1995.
Certain subsidiaries attributed to the TCI Group are required to maintain
unused availability under bank credit facilities to the extent of
outstanding commercial paper. Also, certain of TCI Group's subsidiaries
pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed
portion of the total amount available for borrowings under bank credit
facilities.
Annual maturities of debt for each of the next five years are as follows
(amounts in millions):
<TABLE>
<S> <C>
1996 $3,485*
1997 576
1998 831
1999 784
2000 902
</TABLE>
*Includes $1,469 million of commercial paper.
(8) Redeemable Preferred Stock
Convertible Preferred Stock, Series C ("Series C Preferred Stock"). TCI
has issued 70,575 shares of a series of TCI Series Preferred Stock
designated "Convertible Preferred Stock, Series C," par value $.01 per
share, as partial consideration for an acquisition by TCI .
Each share of Series C Preferred Stock is convertible, at the option of
the holders, into 100 shares of Series A TCI Group Stock and 25 shares of
Series A Liberty Group Stock, subject to anti-dilution adjustments. The
dividend, liquidation and redemption features of the Series C Preferred
Stock will be determined by reference to the liquidation value of the
Series C Preferred Stock, which as of any date of determination is equal,
on a per share basis, to the sum of (i) $2,375, plus (ii) all dividends
accrued on such share through the dividend payment date on or immediately
preceding such date of determination to the extent not paid on or before
such date, plus (iii), for purposes of determining liquidation and
redemption payments, all unpaid dividends accrued on the sum of clauses
(i) and (ii) above, to such date of determination.
(continued)
V-202
<PAGE> 353
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Subject to the prior preferences and other rights of any class or series
of TCI preferred stock ranking pari passu with the Series C Preferred
Stock, the holders of Series C Preferred Stock are entitled to receive
and, subject to any prohibition or restriction contained in any
instrument evidencing indebtedness of TCI, TCI is obligated to pay
preferential cumulative cash dividends out of funds legally available
therefor. Dividends accrue cumulatively at an annual rate of 5-1/2% of
the liquidation value per share, whether or not such dividends are
declared or funds are legally or contractually available for payment of
dividends, except that if TCI fails to redeem shares of Series C
Preferred Stock required to be redeemed on a redemption date, dividends
will thereafter accrue cumulatively at an annual rate of 15% of the
liquidation value per share. Accrued dividends are payable quarterly on
January 1, April 1, July 1 and October 1 of each year, commencing on the
first dividend payment date after the issuance of the Series C Preferred
Stock. Dividends not paid on any dividend payment date will be added to
the liquidation value on such date and remain a part thereof until such
dividends and all dividends accrued thereon are paid in full. Dividends
accrue on unpaid dividends at the rate of 5-1/2% per annum, unless such
dividends remain unpaid for two consecutive quarters in which event such
rate will increase to 15% per annum. The Series C Preferred Stock ranks
prior to the TCI common stock and Class B Preferred Stock and pari passu
with the Series F Preferred Stock with respect to the declaration and
payment of dividends.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series C Preferred Stock will be entitled to receive from the assets of
TCI available for distribution to stockholders an amount in cash, per
share, equal to the liquidation value. The Series C Preferred Stock will
rank prior to the TCI common stock and Class B Preferred Stock and pari
passu with the Series F Preferred Stock as to any such distributions.
The Series C Preferred Stock is subject to optional redemption at any
time after the seventh anniversary of its issuance, in whole or in part,
by TCI at a redemption price, per share, equal to the then liquidation
value of the Series C Preferred Stock. Subject to the rights of any
other class or series of TCI's preferred stock ranking pari passu with
the Series C Preferred Stock, the Series C Preferred Stock is required to
be redeemed by TCI at any time after such seventh anniversary at the
option of the holder, in whole or in part (provided that the aggregate
liquidation value of the shares to be redeemed is in excess of $1
million), in each case at a redemption price, per share, equal to the
liquidation value.
(continued)
V-203
<PAGE> 354
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For so long as any dividends are in arrears on the Series C Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Series C Preferred Stock and until all dividends accrued up to
the immediately preceding dividend payment date on the Series C Preferred
Stock and such parity stock shall have been paid or declared and set
apart so as to be available for payment in full thereof and for no other
purpose, TCI may not redeem or otherwise acquire any shares of Series C
Preferred Stock, any such parity stock or any class or series of its
preferred stock ranking junior (including the TCI common stock and Series
C Preferred Stock) unless all then outstanding shares of Series C
Preferred Stock and such parity stock are redeemed. If TCI fails to
redeem shares of Series C Preferred Stock required to be redeemed on a
redemption date, and until all such shares are redeemed in full, TCI may
not redeem any such parity stock or junior stock, or otherwise acquire
any shares of such stock or Series C Preferred Stock. Nothing contained
in the two immediately preceding sentences shall prevent TCI from
acquiring (i) shares of Series C Preferred Stock and any such parity
stock pursuant to a purchase or exchange offer made to holders of all
outstanding shares of Series C Preferred Stock and such parity stock, if
(a) as to holders of all outstanding shares of Series C Preferred Stock,
the terms of the purchase or exchange offer for all such shares are
identical, (b) as to holders for all outstanding shares of a particular
series or class of parity stock, the terms of the purchase or exchange
offer for all such shares are identical and (c) as among holders of all
outstanding shares of Series C Preferred Stock and parity stock, the
terms of each purchase or exchange offer are substantially identical
relative to the respective liquidation prices of the shares of Series C
Preferred Stock and each series or class of such parity stock, or (ii)
shares of Series C Preferred Stock, parity stock or junior stock in
exchange for, or through the application of the proceeds of the sale of,
shares of junior stock.
The Series C Preferred Stock is subject to restrictions on transfer
although it has certain customary registration rights with respect to the
underlying shares of TCI Group and Liberty Media Group common stock. The
Series C Preferred Stock may vote on all matters submitted to a vote of
the holders of the TCI common stock, has one vote for each share of TCI
Group and Liberty Media Group Stock into which the shares of Series C
Preferred Stock are converted for such purpose, and may vote as a single
class with the TCI common stock. The Series C Preferred Stock has no
other voting rights except as required by the Delaware General
Corporation Law ("DGCL") and except that the consent of the holders of
record of shares representing at least two-thirds of the liquidation
value of the outstanding shares of the Series C Preferred Stock is
necessary to (i) amend the designation, rights, preferences and
limitations of the Series C Preferred Stock as set forth in the TCI
Charter and (ii) to create or designate any class or series of TCI
preferred stock that would rank prior to the Series C Preferred Stock.
Convertible Preferred Stock, Series D. TCI issued 1,000,000 shares of a
series of TCI Series Preferred Stock designated "Convertible Preferred
Stock, Series D", par value $.01 per share, as partial consideration for
the merger between TCIC and TeleCable (see note 6).
(continued)
V-204
<PAGE> 355
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The holders of the Series D Preferred Stock shall be entitled to receive,
when and as declared by the Board out of unrestricted funds legally
available therefor, cumulative dividends, in preference to dividends on
any stock that ranks junior to the Series D Preferred Stock (currently
the TCI Group Stock, the Liberty Group Stock, and the Class B Preferred
Stock), that shall accrue on each share of Series D Preferred stock at
the rate of 5-1/2% per annum of the liquidation value ($300 per share).
Dividends are cumulative, and in the event that dividends are not paid in
full on two consecutive dividend payment dates or in the event that TCI
fails to effect any required redemption of Series D Preferred Stock,
accrue at the rate of 10% per annum of the liquidation value. The Series
D Preferred Stock ranks on parity with the Series F Preferred Stock and
the Series C Preferred Stock.
Prior to the Distribution, 431 shares of Series D Preferred Stock were
converted into 4,310 shares of TCI Class A common stock. Subsequent to
the Distribution, each share of Series D Preferred Stock is convertible
into 10 shares of Series A TCI Group Stock and 2.5 shares of Series A
Liberty Group Stock, subject to adjustment upon certain events specified
in the certificate of designation establishing Series D Preferred Stock.
To the extent any cash dividends are not paid on any dividend payment
date, the amount of such dividends will be deemed converted into shares
of common stock at a conversion rate equal to 95% of the then current
market price of common stock, and upon issuance of common stock to
holders of Series D Preferred Stock in respect of such deemed conversion,
such dividend will be deemed paid for all purposes. See note 1.
Shares of Series D Preferred Stock are redeemable for cash at the option
of the holder at any time after the tenth anniversary of the issue date
at a price equal to the liquidation value in effect as of the date of the
redemption. Shares of Series D Preferred Stock may also be redeemed for
cash at the option of TCI after the fifth anniversary of the issue date
at such redemption price or after the third anniversary of the issue date
if the market value per share exceeds certain defined levels for periods
specified in the certificate of designation.
If TCI fails to effect any required redemption of Series D Preferred
Stock, the holders thereof will have the option to convert their shares
of Series D Preferred Stock into common stock at a conversion rate of 95%
of the then current market value of common stock, provided that such
option may not be exercised unless the failure to redeem continues for
more than a year.
Except as required by law, holders of Series D Preferred Stock are not
entitled to vote on any matters submitted to a vote of the stockholders
of TCI.
(continued)
V-205
<PAGE> 356
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Convertible Redeemable Participating Preferred Stock, Series F.
Immediately prior to the record date for the Distribution, TCI Group
caused each of its subsidiaries holding Subsidiary Shares to exchange
such shares for shares of Series F Preferred Stock having an aggregate
value of not less than that of the Subsidiary Shares so exchanged. TCI
Group is authorized to issue 500,000 shares of Series F Preferred Stock,
par value $.01 per share. Subsidiaries of TCI hold all the issued and
outstanding shares. Subsidiaries of TCI exchanged all of the Subsidiary
Shares for 355,141 shares of Series F Preferred Stock. Subsequent to
such exchange, a holder of 78,077 shares of Series F Preferred Stock
converted its holdings into 100,524,364 shares of Series A TCI Group
Stock. Such shares of Series A TCI Group Stock are reflected as a
reduction in combined equity in the accompanying combined financial
statements.
Each share of Series F Preferred Stock was convertible into 1,000 shares
of Series A TCI Group Stock, subject to antidilution adjustments, at the
option of the holder at any time. The anti-dilution provisions of the
Series F Preferred Stock provide that the conversion rate of the Series F
Preferred Stock will be adjusted by increasing the number of shares of
Series A TCI Group Stock issuable upon conversion in the event of any
non-cash dividend or distribution of the Series A TCI Group Stock to give
effect to the value of the securities, assets or other property so
distributed; however, no such adjustment shall entitle the holder to
receive the actual security, asset or other property so distributed upon
the conversion of shares of Series F Preferred Stock. Therefore, the
Distribution resulted in an adjustment to the conversion rate of the
Series F Preferred Stock such that each holder has the right to receive
upon conversion 1,287.51 shares of Series A TCI Group Stock.
The holders of the Series F Preferred Stock are entitled to participate,
on an as-converted basis, with the holders of the Series A TCI Group
Stock, with respect to any cash dividends or distribution declared and
paid on the Series A TCI Group Stock. Dividends or distribution on the
Series A TCI Group Stock which are not paid in cash would result in the
adjustment of the applicable conversion rate as described above.
Upon the dissolution, liquidation or winding up of TCI, holders of the
Series F Preferred Stock will be entitled to receive from the assets of
TCI available for distribution to stockholders an amount, in cash or
property or a combination thereof, per share of Series F Preferred Stock,
equal to the sum of (x) $.01 and (y) the amount to be distributed per
share of Series A TCI Group Stock in such liquidation, dissolution or
winding up multiplied by the applicable conversion rate of a share of
Series F Preferred Stock.
(continued)
V-206
<PAGE> 357
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Series F Preferred Stock is subject to optional redemption by TCI at
any time after its issuance, in whole or in party, at a redemption price,
per share, equal to the issue price of a share of Series F Preferred
Stock (as adjusted in respect of stock splits, reverse splits and other
events affecting the shares of Series F Preferred Stock), plus any
dividends which have been declared but are unpaid as of the date fixed
for such redemption. TCI may elect to pay the redemption price (or
designated portion thereof) of the shares of Series F Preferred Stock
called for redemption by issuing to the holder thereof, in respect of its
shares to be redeemed, a number of shares of Series A TCI Group Stock
equal to the aggregate redemption price (or designated portion thereof)
of such shares divided by the average of the last sales prices of the
Series A TCI Group Stock for a period specified, and subject to the
adjustments described, in the certificate of designation establishing the
Series F Preferred Stock.
Redeemable Convertible TCI Group Preferred Stock, Series G ("Series G
Preferred Stock") and Redeemable Convertible Liberty Media Group
Preferred Stock, Series H ("Series H Preferred Stock"). Subsequent to
December 31, 1995, TCI issued 7,259,380 shares of a series of TCI Series
Preferred Stock designated "Redeemable Convertible TCI Group Preferred
Stock, Series G" and 7,259,380 shares of a series of TCI Series Preferred
Stock designated "Redeemable Convertible Liberty Media Group Preferred
Stock, Series H" as consideration for an acquisition.
The initial liquidation value for the Series G Preferred Stock and Series
H Preferred Stock is $21.60 per share and $5.40 per share, respectively,
subject in both cases, to increase in an amount equal to aggregate
accrued but unpaid dividends, if any. No dividends will accrue on the
Series G or Series H Preferred Stock if the sum of the last reported sale
price of TCI Group Stock plus one-fourth of the last reported sale price
of the Liberty Group Stock equals or exceeds $27 for any ten consecutive
trading days during the 65 trading days immediately prior to the first
anniversary of issuance of the Series G and Series H Preferred Stock.
If the sum of the amounts specified in the preceding sentence does not
equal or exceed $27 for the specified period, dividends will begin to
accrue on the Series G and Series H Preferred Stock on the first
anniversary of issuance of the Series G and Series H Preferred Stock, and
will thereafter be payable semi-annually commencing August 1, 1997, at
the rate of 4% per annum on the liquidation value. Any dividends paid on
the Series G and Series H Preferred Stock may be paid, at TCI's election,
in cash or shares of TCI Group Stock. Additional dividends will accrue
on unpaid dividends initially at a rate of 4% per annum. The dividend
rate on dividends that remain unpaid for six months will increase to
8.625% per annum.
Each share of Series G Preferred Stock is convertible at the option of
the holder at any time prior to the close of business on the last
business day prior to redemption into 1.05 shares of Series A TCI Group
Stock and each share of Series H Preferred Stock is convertible at any
time prior to the close of business on the last business day prior to
redemption into .2625 shares of Series A Liberty Group Stock. The
conversion rights of Series G and Series H Preferred Stock are subject to
adjustment in certain circumstances.
(continued)
V-207
<PAGE> 358
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Among other such adjustments, if the Liberty Group Stock, or any other
redeemable capital stock of TCI into which either series of Preferred
Stock may be convertible ("Redeemable Capital Stock"), is redeemed in
full by TCI (the "Redemption Event"), then, except as otherwise described
below, the shares of such Series G and Series H Preferred Stock will
thereafter be convertible into the kind and amount of consideration that
would have been received in such Redemption Event by a holder of the
number of shares of Redeemable Capital Stock that would have been
issuable upon conversion of such shares of Series G and Series H
Preferred Stock, if they had been converted in full immediately prior to
such Redemption Event.
However, if any series of Redeemable Capital Stock into which a series of
Series G or Series H Preferred Stock is then convertible is redeemed in
full by TCI in exchange for securities of another issuer ("Redemption
Securities"), TCI may elect to provide the holders of such Series G or
Series H Preferred Stock with the right to exchange such Series G or
Series H Preferred Stock, concurrently with the Redemption Event, for
preferred stock of such other issuer ("Mirror Preferred Stock"). Such
Mirror Preferred Stock shall be convertible into Redemption Securities
and shall otherwise have terms and conditions comparable to the Series G
or Series H Preferred Stock exchanged. If TCI provides such an exchange
right, any holder that does not then choose to participate in such
exchange will continue to hold such Series G or Series H Preferred Stock
but such holder will loose the conversion right with respect to the
Redeemable Capital Stock redeemed in the Redemption Event and will not
have any right to receive Redemption Securities in lieu thereof. A
holder that participates in such exchange will receive Mirror Preferred
Stock convertible into Redemption Securities, but will no longer hold the
Series G or Series H Preferred Stock so exchanged.
An alternative provision will apply if, at the time of exercise of any
such exchange right provided by TCI, the holder of the applicable series
of Series G or Series H Preferred Stock would be entitled to receive on
conversion any property in addition to the Redeemable Capital Stock being
redeemed. In that case, holders that choose to participate in the
exchange will receive both Mirror Preferred Stock issued by the issuer of
the Redemption Securities of the other issuer and a new preferred stock
of TCI convertible into such additional property. In such event, the
Mirror Preferred Stock and such new TCI preferred stock will have a
combined liquidation value equal to the liquidation value of the Series G
or Series H Preferred Stock exchanged and will otherwise have terms and
conditions comparable to such Series G or Series H Preferred Stock.
The Series G and Series H Preferred Stock are redeemable at TCI's option,
in whole or in part, any time on or after February 1, 2001. The Series G
and Series H Preferred Stock will be redeemable in full on February 1,
2016, to the extent then outstanding. In all cases, the redemption price
per share will be the liquidation value thereof, including the amount of
any accrued but unpaid dividends thereon, to and including the
redemption date.
The Series G and Series H Preferred Stock will rank prior to TCI common
stock and the TCI Class B Preferred Stock and pari passu with all other
currently outstanding classes and series of TCI preferred stock with
respect to the declaration and payment of dividends and in liquidation.
(continued)
V-208
<PAGE> 359
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The Series G and Series H Preferred Stock will vote in any general
election of directors of TCI and will have one vote per share for such
purposes and will vote as a single class with the TCI common stock, the
TCI Class B Preferred Stock and any other class or series of TCI
Preferred Stock entitled to vote in any general election of directors.
The Series G and Series H Preferred Stock will have no other voting
rights except as required by the DGCL.
(9) Combined Equity
General
The rights of holders of the TCI Group Stock upon liquidation of TCI are
based upon the ratio of the aggregate market capitalization, as defined,
of the TCI Group Stock to the aggregate market capitalization, as
defined, of the TCI Group Stock, the Telephony Group Stock and the Liberty
Group Stock.
Employee Benefit Plans
TCI has several employee stock purchase plans (the "Plans") to provide
employees an opportunity for ownership in TCI and to create a retirement
fund. Terms of the Plans generally provide for employees to contribute
up to 10% of their compensation to a trust for investment in TCI common
stock. TCI, by annual resolution of the Board, generally contributes up
to 100% of the amount contributed by employees. Certain of TCI's
subsidiaries have their own employee benefit plans. Contributions to all
plans aggregated $28 million, $21 million and $16 million for 1995, 1994
and 1993, respectively.
Preferred Stock
Class A Preferred Stock. TCI is authorized to issue 700,000 shares of
Class A Preferred Stock, par value $.01 per share. Subsidiaries of TCI
held all of the issued and outstanding shares of such stock, amounting to
592,797 shares. Such preferred stock eliminated in consolidation. The
holders of the Class A Preferred Stock exchanged such Subsidiary Shares
for shares of Series F Preferred Stock immediately prior to the record
date of the Distribution.
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock.
TCI is authorized to issue 1,675,096 shares of Class B Preferred Stock
and 1,620,026 of such shares are issued and outstanding.
(continued)
V-209
<PAGE> 360
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Dividends accrue cumulatively (but without compounding) at an annual rate
of 6% of the stated liquidation value of $100 per share (the "Stated
Liquidation Value"), whether or not such dividends are declared or funds
are legally available for payment of dividends. Accrued dividends will
be payable annually on March 1 of each year (or the next succeeding
business day if March 1 does not fall on a business day), and, in the
sole discretion of the Board, may be declared and paid in cash, in shares
Series A TCI Group Stock or in any combination of the foregoing. Accrued
dividends not paid as provided above on any dividend payment date will
accumulate and such accumulated unpaid dividends may be declared and paid
in cash, shares of Series A TCI Group Stock or any combination thereof at
any time (subject to the rights of any senior stock and, if applicable,
to the concurrent satisfaction of any dividend arrearages on any class or
series of TCI preferred stock ranking on a parity with the Class B
Preferred Stock with respect to dividend rights) with reference to any
regular dividend payment date, to holders of record of Class B Preferred
Stock as of a special record date fixed by the Board (which date may not
be more than 45 days nor less than 10 days prior to the date fixed for
the payment of such accumulated unpaid dividends). The Class B Preferred
Stock ranks junior to the Series F Preferred Stock with respect to the
declaration and payment of dividends.
If all or any portion of a dividend payment is to be paid through the
issuance and delivery of shares of Series A TCI Group Stock, the number
of such shares to be issued and delivered will be determined by dividing
the amount of the dividend to be paid in shares of Series A TCI Group
Stock by the Average Market Price of the Series A TCI Group Stock. For
this purpose, "Average Market Price" means the average of the daily last
reported sale prices (or, if no sale price is reported on any day, the
average of the high and low bid prices on such day) of a share of Series
A TCI Group Stock for the period of 20 consecutive trading days ending on
the tenth trading day prior to the regular record date or special record
date, as the case may be, for the applicable dividend payment.
In the event of any liquidation, dissolution or winding up of TCI, the
holders of Class B Preferred Stock will be entitled, after payment of
preferential amounts on any class or series of stock ranking prior to the
Class B Preferred Stock with respect to liquidating distributions, to
receive from the assets of TCI available for distribution to stockholders
an amount in cash or property or a combination thereof, per share, equal
to the stated liquidaton value thereof, plus all accumulated and accrued
but unpaid dividends thereon to and including the redemption date. TCI
does not have any mandatory obligation to redeem the Class B Preferred
Stock as of any fixed date, at the option of the holders or otherwise.
Subject to the prior preferences and other rights of any class or series
of TCI preferred stock, the Class B Preferred Stock will be exchangeable
at the option of TCI in whole but not in part at any time for junior
subordinated debt securities of TCI ("Junior Exchange Notes"). The
Junior Exchange Notes will be issued pursuant to an indenture (the
"Indenture"), to be executed by TCI and a qualified trustee to be chosen
by TCI.
(continued)
V-210
<PAGE> 361
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
If TCI exercises its optional exchange right, each holder of outstanding
shares of Class B Preferred Stock will be entitled to receive in exchange
therefor newly issued Junior Exchange Notes of a series authorized and
established for the purpose of such exchange, the aggregate principal
amount of which will be equal to the aggregate Stated Liquidation Value
of the shares of Class B Preferred Stock so exchanged by such holder,
plus all accumulated and accrued but unpaid dividends thereon to and
including the exchange date. The Junior Exchange Notes will be issuable
only in principal amounts of $100 or any integral multiple thereof and a
cash adjustment will be paid to the holder for any excess principal that
would otherwise be issuable. The Junior Exchange Notes will mature on
the fifteenth anniversary of the date of issuance and will be subject to
earlier redemption at the option of TCI, in whole or in part, for a
redemption price equal to the principal amount thereof plus accrued but
unpaid interest. Interest will accrue, and be payable annually, on the
principal amount of the Junior Exchange Notes at a rate per annum to be
determined prior to issuance by adding a spread of 215 basis points to
the "Fifteen Year Treasury Rate" (as defined in the Indenture). Interest
will accrue on overdue principal at the same rate, but will not accrue on
overdue interest.
The Junior Exchange Notes will represent unsecured general obligations of
TCI and will be subordinated in right of payment to all Senior Debt (as
defined in the Indenture). Accordingly, holders of Class B Preferred
Stock who receive Junior Exchange Notes in exchange therefor may have
difficulty selling such Notes.
(continued)
V-211
<PAGE> 362
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
For so long as any dividends are in arrears on the Class B Preferred
Stock or any class or series of TCI preferred stock ranking pari passu
with the Class B Preferred Stock which is entitled to payment of
cumulative dividends prior to the redemption, exchange, purchase or other
acquisition of the Class B Preferred Stock, and until all dividends
accrued up to the immediately preceding dividend payment date on the
Class B Preferred Stock and such parity stock shall have been paid or
declared and set apart so as to be available for payment in full thereof
and for no other purpose, neither TCI nor any subsidiary thereof may
redeem, exchange, purchase or otherwise acquire any shares of Class B
Preferred Stock, any such parity stock or any class or series of its
capital stock ranking junior to the Class B Preferred Stock (including
the TCI common stock), or set aside any money or assets for such purpose,
unless all of the outstanding shares of Class B Preferred Stock and such
parity stock are redeemed. If TCI fails to redeem or exchange shares of
Class B Preferred Stock on a date fixed for redemption or exchange, and
until such shares are redeemed or exchanged in full, TCI may not redeem
or exchange any parity stock or junior stock, declare or pay any dividend
on or make any distribution with respect to any junior stock or set aside
money or assets for such purpose and neither TCI nor any subsidiary
thereof may purchase or otherwise acquire any Class B Preferred Stock,
parity stock or junior stock or set aside money or assets for any such
purpose. The failure of TCI to pay any dividends on any class or series
of parity stock or to redeem or exchange on any date fixed for redemption
or exchange any shares of Class B Preferred Stock shall not prevent TCI
from (i) paying any dividends on junior stock solely in shares of junior
stock or the redemption purchase or other acquisition of junior stock
solely in exchange for (together with cash adjustment for fractional
shares, if any) or (but only in the case of a failure to pay dividends on
any parity stock) through the application of the proceeds from the sale
of, shares of junior stock; or (ii) the payment of dividends on any
parity stock solely in shares of parity stock and/or junior stock or the
redemption, exchange, purchase or other acquisition of Class B Preferred
Stock or parity stock solely in exchange for (together with a cash
adjustment for fractional shares, if any), or (but only in the case of
failure to pay dividends on any parity stock) through the application of
the proceeds from the sale of, parity stock and/or junior stock.
The Class B Preferred Stock will vote in any general election of
directors, will have one vote per share for such purpose and will vote as
a single class with the TCI common stock, the Class A Preferred Stock and
any other class or series of TCI preferred stock entitled to vote in any
general election of directors. The Class B Preferred Stock will have no
other voting rights except as required by the DGCL.
Series Preferred Stock. The TCI Series Preferred Stock is issuable, from
time to time, in one or more series, with such designations, preferences
and relative participating, option or other special rights,
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in a resolution or resolutions providing for the issue of
such series adopted by the Board.
(continued)
V-212
<PAGE> 363
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
All shares of any one series of the TCI Series Preferred Stock are
required to be alike for every particular and all shares are required to
rank equally and be identical in all respects, except insofar as they may
vary with respect to matters which the Board is expressly authorized by
the TCI Charter to determine in the resolution or resolutions providing
for the issue of any series of the TCI Series Preferred Stock.
Redeemable Convertible Preferred Stock, Series E. In connection with the
Reorganization, the Board created and authorized the issuance of the
Redeemable Convertible Preferred Stock, Series E, par value $.01 per
share. TCI is authorized to issue 400,000 shares. Subsidiaries of TCI
held all of the issued and outstanding shares of such stock, amounting to
246,402 shares. All such preferred stock eliminated in consolidation.
The holders of the Series E Preferred Stock exchanged such Subsidiary
Shares for shares of Series F Preferred Stock immediately prior to the
record date of the Distribution.
Stock Options and Stock Appreciation Rights
Certain key employees of TCI Group hold options with tandem stock
appreciation rights to acquire Series A TCI Group Stock and Series A
Liberty Group Stock as well as restricted stock awards of Series A TCI
Group Stock and Series A Liberty Group Stock. Estimates of the
compensation relating to the options and/or stock appreciation rights as
well as restricted stock awards granted to such employees have been
recorded in the accompanying combined financial statements, but are
subject to future adjustment based upon the market value of Series A TCI
Group Stock and Series A Liberty Group Stock (see note 1) and,
ultimately, on the final determination of market value when the rights
are exercised or the restricted shares are vested.
(10) Transaction with Officers and Directors
Effective January 31, 1996, a director of TCI purchased one-third of TCI
Group's interest in two limited partnerships and obtained two ten-year
options to purchase TCI Group's remaining partnership interests. The
purchase price for the one-third partnership interest was 37.209 shares
of WestMarc Communications, Inc. (a wholly-owned subsidiary of TCI Group)
Series C Cumulative Compounding Preferred Stock owned by such director,
and the purchase price for the ten-year option was $100 for each option.
All options are exercisable for cash in the aggregate amount of
$3,000,000.
(continued)
V-213
<PAGE> 364
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(11) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the "IPO")
in which it sold 20 million shares of TINTA Series A common stock to the
public for consideration of $16.00 per share aggregating $320 million,
before deducting related expenses (approximately $19 million). The
shares sold to the public represented 17% of TINTA's total issued and
outstanding common stock. Also in July 1995, TINTA issued 687,500 Shares
of TINTA Series A common stock as partial consideration for a 35%
ownership interest in Torneos Y Competencias S.A., an Argentine sports
programming company (the "TYC Acquisition"). As a result of the IPO and
the TYC Acquisition, TCI Group has recognized a nonrecurring gain
amounting to $123 million. Subsequent to the IPO and the TYC
Acquisition, TCI owns 82% of the issued and outstanding stock of TINTA,
representing in excess of 90% of the voting power of TINTA.
In June 1995, Flextech issued share capital for cash and preferred shares
of Thomson Directories Limited. In connection with such issuance, TCI
Group recorded a $51 million increase to stockholders' equity and a $93
million increase to minority interest in equity of consolidated
subsidiaries. No gain was recognized in TCI Group's combined statement
of operations due primarily to the existence of TCI Group's contingent
obligations to repurchase certain of the Flextech share capital.
(12) Income Taxes
TCI files a consolidated Federal income tax return with all of its 80% or
more owned subsidiaries. Consolidated subsidiaries in which TCI owns
less than 80% each file a separate income tax return. TCI and such
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying combined financial
statements.
Federal income taxes, and certain state and local taxes would be paid on a
consolidated basis. However, pursuant to a tax sharing agreement, federal
income taxes are calculated, with certain adjustments, on a separate return
basis for each Group (applying provisions of the Internal Revenue Code of
1986, as amended, and related regulations as if such Group filed a separate
consolidated return for federal income tax purposes). Based upon these
separate calculations, an allocation of tax liabilities is made such that
each separate Group is responsible to the Company for its gross share of
the Company's consolidated federal income tax liabilities, such gross share
being determined without regard to (a) tax benefits that are attributable
to the Company or the other Groups or (b) certain tax benefits that are
attributable to a Group but that are taken into account in determining the
Company's consolidated federal income tax benefit carryovers. Similarly,
the Company is responsible to each Group for tax benefits attributable to
such Group and actually used by the Company in determining its consolidated
federal income tax liability. Notwithstanding the foregoing, the Company
and Telephony Group have agreed that the Company may use up to $500
million of tax benefits generated by the Telephony Group in determining its
consolidated federal income tax liability without providing a credit to the
Telephony Group in such amount. Tax attributes, including but not limited
to net operating losses, investment tax credits, alternative minimum tax
net operating losses, alternative minimum tax credits, deferred
intercompany gains and tax basis in assets, would be inventoried and
tracked for each Group. In addition, pursuant to such tax sharing
agreement, state and local income taxes are calculated on a separate
return basis for each Group (applying provisions of state and local tax
law and related regulations as if the Group were a separate unitary or
combined group for tax purposes), and the Company's combined or
unitary tax liability is allocated between the Groups based upon such
separate calculation. The Company has retained the right to file all
returns, make all elections and control all audits and contests. The
Company anticipates that the assets and entities comprising the Telephony
Group will be transferred to a direct subsidiary of TCI. At such time, the
Telephony Group will become a party to the Tax Sharing Agreement. Such
transfers will be recorded at carryover basis for financial reporting
purposes.
(continued)
V-214
<PAGE> 365
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Income tax benefit (expense) for the years ended December 31, 1995, 1994
and 1993 consists of:
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal $ (43) 82 39
State and local (8) 14 6
-------- -------- --------
$ (51) 96 45
======== ======== ========
Year ended December 31, 1994:
Federal $ (52) (8) (60)
State and local (11) 4 (7)
-------- -------- --------
$ (63) (4) (67)
======== ======== ========
Year ended December 31, 1993:
Federal $ (13) (112) (125)
State and local (16) (18) (34)
-------- -------- --------
$ (29) (130) (159)
======== ======== ========
</TABLE>
Income tax benefit (expense) differs from the amounts computed by
applying the Federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
amounts in millions
<S> <C> <C> <C>
Computed "expected" tax benefit
(expense) $ 42 (20) (46)
Adjustment to deferred tax assets
and liabilities for enacted
change in Federal income
tax rate -- -- (76)
Amortization not deductible
for tax purposes (19) (12) (13)
Minority interest in earnings
of consolidated subsidiaries (3) (3) (1)
Gain on sale of subsidiary stock 43 -- --
Gain recognized for tax purposes
on exchange of assets (12) -- --
Recognition of losses of
consolidated partnership -- (10) (8)
State and local income taxes,
net of Federal income tax
benefit (5) (9) (22)
Valuation allowance on foreign
corporation -- (10) --
Other (1) (3) 7
-------- -------- --------
$ 45 (67) (159)
======== ======== ========
</TABLE>
(continued)
V-215
<PAGE> 366
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 544 478
Less-valuation allowance (121) (100)
Investment tax credit carryforwards 118 122
Less-valuation allowance (41) (36)
Alternative minimum tax credit carryforwards 95 88
Investments in affiliates, due principally to
losses of affiliates recognized for financial
statement purposes in excess of losses
recognized for income tax purposes 174 290
Future deductible amounts principally due to
non-deductible accruals 86 35
Other -- 4
------ ------
Net deferred tax assets 855 881
------ ------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 1,153 1,185
Franchise costs, principally due to differences
in amortization 3,566 2,600
Investment in affiliates, due principally to
undistributed earnings of affiliates 263 290
Intangible assets, principally due to
differences in amortization 42 104
Leases capitalized for tax purposes 53 --
Other 165 83
------ ------
Total gross deferred tax liabilities 5,242 4,262
------ ------
Net deferred tax liability $4,387 3,381
====== ======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1995
and 1994 was $162 million and $136 million, respectively.
At December 31, 1995, TCI Group had net operating loss carryforwards for
income tax purposes aggregating approximately $1,079 million of which, if
not utilized to reduce taxable income in future periods, $132 million
expires in 2003, $116 million in 2004, $333 million in 2005, $316 million
in 2006, $138 million in 2009 and $44 million in 2010. Certain
subsidiaries of TCI Group had additional net operating loss carryforwards
for income tax purposes aggregating approximately $245 million and these
net operating losses are subject to certain rules limiting their usage.
(continued)
V-216
<PAGE> 367
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
At December 31, 1995, TCI Group had remaining available investment tax
credits of approximately $63 million which, if not utilized to offset
future Federal income taxes payable, expire at various dates through
2005. Certain subsidiaries of TCI Group had additional investment tax
credit carryforwards aggregating approximately $55 million and these
investment tax credit carryforwards are subject to certain rules limiting
their usage.
Certain of the Federal income tax returns of TCI and its subsidiaries
which filed separate income tax returns are presently under examination
by the Internal Revenue Service for the years 1981 through 1992. A
subsidiary of TCI Group has filed a petition in United States Tax Court
protesting the disallowance of certain Transitional Investment Tax
Credits and such issue will likely be litigated in 1996. In the opinion
of management, any additional tax liability, not previously provided for,
resulting from these examinations, ultimately determined to be payable,
should not have a material adverse effect on the combined financial
position of TCI Group.
New tax legislation was enacted in the third quarter of 1993 which, among
other matters, increased the corporate Federal income tax rate from 34%
to 35%. TCI Group has reflected the tax rate change in its combined
statements of operations. Such tax rate change resulted in an increase
of $76 million to income tax expense and deferred income tax liability.
(13) Transactions with Telephony Group, Liberty Media Group and Other Related
Parties
Certain TCI corporate general and administrative costs are charged to the
Telephony Group and the Liberty Media Group at rates set at the beginning
of the year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs each Group would incur for
comparable services on a stand alone basis. The accompanying combined
statements of operations do not reflect the allocation of corporate
general and administrative costs through the date of the TCI/Liberty
Combination in the aforementioned manner because the majority of the
entities attributable to Liberty Media Group were owned, directly or
indirectly, by Liberty Media Corporation for the majority of the periods
presented herein. During the year ended December 31, 1995, Liberty Media
Group was allocated $3 million in corporate general and administrative
costs by TCI Group. For all the periods presented, Telephony Group was
allocated less than $1 million in corporate general and administrative
costs by TCI Group.
TCI Group has a 50.1% partnership interest in QE+Ltd Limited Partnership
("QE+"), which distributes STARZ!, a first-run movie premium programming
service launched in 1994. Entities attributed to Liberty Media Group
hold the remaining 49.9% partnership interest.
(continued)
V-217
<PAGE> 368
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through July 1,
2005, up to a maximum amount of $350 million, approximately $86 million
of which was paid in 1995. QE+ is obligated to pay TCI Group a preferred
return of 10% per annum on the first $200 million of its special capital
contributions beginning five years from the date of the contribution or
five years from January 1, 1996, whichever is later. Any TCI Group
special capital contributions in excess of $200 million will be entitled
to a preferred return of 10% per annum from the date of the contribution.
QE+ is required to apply 75% of its available cash flow, as defined, to
repay the TCI Group special capital contributions and any preferred
return payable thereon. To the extent such special capital contributions
are insufficient to fund the cash requirements of QE+, TCI Group and
Liberty Media Group will each have the option to fund such cash
requirements in proportion to their respective ownership percentages.
TCI Group has also entered into a long-term affiliation agreement with
QE+ with respect to the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for 1995
aggregated $31 million. The affiliation agreement also provides that QE+
will not grant materially more favorable terms and conditions to other
major cable system operators unless such more favorable terms and
conditions are made available to TCI Group. The affiliation agreement
also requires TCI Group to make payments to QE+ with respect to a
guaranteed minimum number of subscribers totaling approximately $339
million for the years 1996, 1997 and 1998.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of such interest. Such right is exercisable
for a period of ten years beginning January 1, 1999 after QE+ has had
positive cash flow for two consecutive calendar quarters. The right is
exercisable only after all special capital contributions from TCI Group
have been repaid, including any preferred return as discussed above.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. In
addition, effective July 1, 1995, Liberty Media Group started earning a
"Content Fee" for certain services provided to QE+ equal to 4% of the
gross revenue of QE+. Such Content Fees aggregated $1 million for the
six months ended December 31, 1995. The Content Fee agreement expires on
June 30, 2001, subject to renewal on an annual basis thereafter. Payment
of the Content Fee will be subordinated to the repayment of the
contributions made by TCI Group and the preferred return thereon.
Subsidiaries of Liberty Media Group lease satellite transponder
facilities from TCI Group. Charges to Liberty Media Group for such
arrangements for the years ended December 31, 1995, 1994 and 1993,
aggregated $15 million, $8 million and $4 million, respectively.
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
(continued)
V-218
<PAGE> 369
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
HSN pays a commission to TCI Group for merchandise sales to customers who
are subscribers of TCI Group's cable systems. Aggregate commissions and
charges to TCI Group were $6 million, $7 million and $1 million for the
years ended December 31, 1995 1994 and 1993, respectively.
Subsequent to the TCI/Liberty Combination, TCI Group manages certain
treasury activities for Liberty Media Group on a centralized basis. Cash
receipts of certain businesses attributed to Liberty Media Group are
remitted to TCI Group and certain cash disbursements of Liberty Media
Group are funded by TCI Group on a daily basis. Prior to the
Distribution of the Liberty Group Stock, but subsequent to the
TCI/Liberty Combination, the net amounts of such cash activities are
included in investment in Liberty Media Group in the accompanying
combined financial statements. Prior to the TCI/Liberty Combination,
Liberty Media Corporation separately managed the treasury activities of
its subsidiaries. Subsequent to the Distribution, such cash activities
are included in borrowings from or loans to TCI Group or, if determined
by the Board, as an equity contribution to be reflected as an Inter-Group
Interest to Liberty Media Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by
TCI on a daily basis. Prior to the implementation of the Liberty Group
Stock Proposal the net amounts of such cash activities are included in
combined equity in the accompanying combined financial statements.
Subsequent to the implementation of the Liberty Group Stock Proposal,
such cash activities will be included in borrowings from or loans to TCI
Group or, if determined by the Board of Directors, as an equity
contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all
debt incurred or preferred stock issued by the Company and its
subsidiaries following the issuance and sale of Telephony Group Stock
would (unless the Board otherwise provides) be specifically attributed to
and reflected on the combined financial statements of the Group that
includes the entity which incurred the debt or issued the preferred stock
or, in case the entity incurring the debt or issuing the preferred stock
is Tele-Communications, Inc., the TCI Group. The Board could, however,
determine from time to time that debt incurred or preferred stock issued
by entities included in a Group should be specifically attributed to and
reflected on the combined financial statements of one of the other Groups
to the extent that the debt is incurred or the preferred stock is issued
for the benefit of such other Group.
(continued)
V-219
<PAGE> 370
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management
functions under which cash receipts of certain entities included in the
other Groups are remitted to the TCI Group and certain cash disbursements
of the other Groups will be funded by the TCI Group on a daily basis. Such
transfers of funds between the Groups will be reflected as borrowings or,
if determined by the Board, in the case of a transfer from the TCI Group
to either the Liberty Media Group or the Telephony Group, reflected as the
creation of, or increase in, the TCI Group's Inter-Group Interest in such
Group or, in the case of a transfer from either the Liberty Media Group or
the Telephony Group to the TCI Group, reflected as a reduction in the TCI
Group's Inter-Group Interest in such Group. There are no specific
criteria for determining when a transfer will be reflected as a borrowing
or as an increase or reduction in an Inter-Group Interest. The Board
expects to make such determinations, either in specific instances or by
setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives
of the Groups, the investment objectives of the Groups, the availability,
cost and time associated with alternative financing sources, prevailing
interest rates and general economic conditions. Generally, it is expected
that entities included in the Liberty Media Group will seek their own
long-term debt financing, whereas the Telephony Group is expected to
require additional advances from the TCI Group for some period of time. To
satisfy this need, TCI Group expects to provide as of January 1, 1997 a
revolving loan facility to Telephony Group that would permit borrowings of
up to $150 million to $200 million over a five-year period. The interest
rate on such revolving loans and the terms and conditions of borrowings
have not yet been determined.
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board of
Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable polices
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the
use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans and investment opportunities available to each
Group and the availability, cost and time associated with alternative
financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings and
the respective combined statements of cash flows of the Groups would
reflect changes in the amounts of loans or borrowings deemed outstanding.
In the historical financial statements, net borrowings of the Telephony
Group have been included as a component of the Telephony Group's combined
equity. Subsequent to the date of such financial statements, a portion of
such net borrowings was converted into a $500 million investment in
Telephony preferred stock as described below. The balance of such net
borrowings through January 1, 1997 will continue to be reflected as a
component of the Telephony Group's combined equity. Amounts borrowed by
the Telephony Group from another Group subsequent to January 1, 1997, will
be reflected on the Telephony Group's financial statements as
indebtedness to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its interest
in the Telephony Group into a 6% cumulative compounding redeemable
preferred stock due from the Telephony Group. Such preferred stock is due
December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert
a portion of the amount invested by the Company in the investments
attributed to the Telephony Group into the aforementioned $500 million
preferred stock and a contractual right to use up to $500 million of tax
benefits generated by Telephony Group (principally arising from its
partnership interest in the PCS Ventures) without charge to the TCI Group.
Such right can be satisfied only through and to the extent of future
income tax benefits generated by Telephony Group.
(continued)
V-220
<PAGE> 371
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to
the Telephony Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the Telephony Group to the TCI
Group would be determined by reference to the Market Value of the Series
A Telephony Group Common Stock as of the date of such transfer, such an
increase could occur at a time when such shares could be considered
undervalued and such a decrease could occur at a time when such shares
could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial
impacts of equity offerings are and will be attributed entirely to the
TCI Group. After the Distribution, all financial impacts of issuances of
additional shares of TCI Group Common Stock are and will be attributed
entirely to the TCI Group, all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of
which are attributed to the Liberty Media Group are and will be to such
extent reflected in the combined financial statements of the Liberty
Media Group, and all financial impacts of issuances of additional shares
of Liberty Media Group Common Stock the proceeds of which are attributed
to the TCI Group in respect of a reduction in any Inter-Group Interest in
the Liberty Media Group are and will be to such extend reflected in the
combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the Telephony Group will be to such extent reflected in
the combined financial statements of the Telephony Group, and all
financial impacts of issuances of shares of Telephony Group Common Stock
the proceeds of which are attributed to the TCI Group in respect of a
reduction in the TCI Group's Inter-Group Interest in the Telephony Group
will be to such extent reflected in the combined financial statements of
the TCI Group. Financial impacts of dividends or other distributions on,
and purchases of, TCI Group Common Stock will be attributed entirely to
the TCI Group, and financial impacts of dividends or other distributions
on Telephony Group Common Stock will be attributed entirely to the
Telephony Group, except that dividends or other distributions on the
Telephony Group Common Stock will (if at the time there is an Inter-Group
Interest in the Telephony Group) result in the TCI Group being credited,
and the Telephony Group being charged (in addition to the charge for the
dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common
Stock and a fraction the numerator of which is the Telephony Group
Inter-Group Interest Fraction and the denominator of which is the
Telephony Group Outstanding Interest Fraction. Financial impacts of
repurchases of Telephony Group Common Stock the consideration for which
is charged to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and financial
impacts of repurchases of Telephony Group Common Stock the consideration
for which is charged to the TCI Group will be to such extend reflected in
the combined financial statements of the TCI Group and will result in an
increase in the TCI Group's Inter-Group Interest in the Telephony Group.
(continued)
V-221
<PAGE> 372
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
During the first quarter of 1995, Liberty Media Group acquired an
additional interest in an investment previously accounted for under the
cost method. Upon consummation of such transaction, Liberty Media Group
is deemed to exercise significant influence over such entity and, as
such, adopted the equity method of accounting. As a result, TCI Group
restated its interest in Liberty Media Group, its unrealized gain on
available-for-sale securities and accumulated deficit by $122 million,
$127 million and $5 million, respectively, at December 31, 1994. The
restatement resulted in an increase in the earnings from Liberty Media
Group of $5 million for the year ended December 31, 1994.
During 1995, BET Holdings, Inc. ("BET") repurchased a portion of its
common stock. As a result of the repurchase, Liberty Media Group's
ownership of BET was increased from 19% to 22%. Therefore, Liberty Media
Group is deemed to exercise significant influence over BET and,
accordingly, has adopted the equity method of accounting for its
investment in BET. As a result, Liberty Media Group restated its
financial statements, which resulted in a decrease in its investment in
BET, its unrealized holding gains on available-for-sale securities, its
deferred taxes and accumulated deficit of $44 million, $32 million, $18
million and $6 million, respectively, at December 31, 1994. In addition,
TCI Group increased its earnings of Liberty Media Group by $2 million for
each of 1994 and 1993.
(14) Commitments and Contingencies
In July, 1995, TCI Group entered into certain agreements with Viacom Inc.
("Viacom") and certain subsidiaries of Viacom regarding the purchase by
TCI Group of all of the common stock of a subsidiary of Viacom ("Cable
Sub") which, at the time of purchase, will own Viacom's cable systems and
related assets.
The transaction has been structured as a tax-free reorganization in which
Cable Sub will initially transfer all of its non-cable assets, as well as
all of its liabilities other than current liabilities, to a new
subsidiary of Viacom ("New Viacom Sub"). Cable Sub will also transfer to
New Viacom Sub the proceeds (the "Loan Proceeds") of a $1.7 billion loan
facility (the "Loan Facility") to be arranged by TCI Group and Cable Sub.
Following these transfers, Cable Sub will retain cable assets with an
estimated value at closing of approximately $2.2 billion and the
obligation to repay the Loan Proceeds borrowed under the Loan Facility.
Repayment of the Loan Proceeds will be non-recourse to Viacom and New
Viacom Sub.
Viacom will offer to the holders of shares of Viacom Class A Common Stock
and Viacom Class B Common Stock (collectively, "Viacom Common Stock") the
opportunity to exchange (the "Exchange Offer") a portion of their shares
of Viacom Common Stock for shares of Class A Common Stock, par value $100
per share, of Cable Sub ("Cable Sub Class A Stock"). The Exchange Offer
will be subject to a number of conditions, including a condition (the
"Minimum Condition") that sufficient tenders are made of Viacom Common
Stock that permit the number of shares of Cable Sub Class A Stock issued
pursuant to the Exchange Offer to equal the total number of shares of
Cable Sub Class A Stock issuable in the Exchange Offer.
(continued)
V-222
<PAGE> 373
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Immediately following the completion of the Exchange Offer, TCI Group
will acquire from Cable Sub shares of Cable Sub Class B common stock for
$350 million (which will be used to reduce Cable Sub's obligations under
the Loan Facility). At the time of such acquisition, the Cable Sub Class
A Stock received by Viacom stockholders pursuant to the Exchange Offer
will automatically convert into a series of senior cumulative
exchangeable preferred stock (the "Exchangeable Preferred Stock") of
Cable Sub with a stated value of $100 per share (the "Stated Value").
The terms of the Exchangeable Preferred Stock, including its dividend,
redemption and exchange features, will be designed to cause the
Exchangeable Preferred Stock, in the opinion of two investment banks, to
initially trade at the Stated Value. The Exchangeable Preferred Stock
will be exchangeable, at the option of the holder commencing after the
fifth anniversary of the date of issuance, for shares of Series A TCI
Group Stock. The Exchangeable Preferred Stock will also be redeemable,
at the option of Cable Sub, after the fifth anniversary of the date of
issuance, and will be subject to mandatory redemption on the tenth
anniversary of the date of issuance at a price equal to the Stated Value
per share plus accrued and unpaid dividends, payable in cash or, at the
election of Cable Sub, in shares of Series A TCI Group Stock, or in any
combination of the foregoing. If insufficient tenders are made by Viacom
stockholders in the Exchange Offer to permit the Minimum Condition to be
satisfied, Viacom will extend the Exchange Offer for up to 15 business
days and, during such extension, TCI Group and Viacom are to negotiate in
good faith to determine mutually acceptable changes to the terms and
conditions for the Exchangeable Preferred Stock and the Exchange Offer
that each believes in good faith will cause the Minimum Condition to be
fulfilled and that would cause the Exchangeable Preferred Stock to trade
at a price equal to the Stated Value immediately following the expiration
of the Exchange Offer. In the event the Minimum Condition is not
thereafter met, TCI and Viacom will each have the right to terminate the
transaction. In addition, either party may terminate the transaction if
the Exchange Offer has not commenced by June 24, 1996 or been consummated
by July 24, 1996.
Consummation of the transaction is subject to a number of conditions,
including receipt of a favorable letter ruling from the Internal Revenue
Service that the transaction qualifies as a tax-free transaction and the
satisfaction or waiver of all of the conditions of the Exchange Offer. A
request for a letter ruling from the Internal Revenue Service has been
filed by Viacom. TCI Group believes that, based upon the unique and
complex structure of the transaction, there exists significant
uncertainty as to whether a favorable ruling will be obtained. In light
of the foregoing, management of TCI Group has concluded that consummation
of the transaction is not yet probable. No assurance can be given that
the transaction will be consummated.
(continued)
V-223
<PAGE> 374
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993
and 1994, the FCC adopted certain rate regulations required by the 1992
Cable Act and imposed a moratorium on certain rate increases. As a
result of such actions, TCI Group'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 evaluated against competitive benchmark rates
as published by the FCC, and equipment and installation charges are based
on actual costs. Any rates for Regulated Services that exceeded the
benchmarks were reduced as required by the 1993 and 1994 rate
regulations. The rate regulations do not apply to the relatively few
systems which are subject to "effective competition" or to services
offered on an individual service basis, such as premium movie and
pay-per-view services.
TCI Group believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, TCI Group's rates for regulated services are subject to review
by the FCC, if a complaint has been filed, or the appropriate franchise
authority, if such authority has been certified. If, as a result of the
review process, a system cannot substantiate its rates, it could be
required to retroactively reduce its rates to the appropriate benchmark
and refund the excess portion of rates received. Any refunds of the
excess portion of tier service rates would be retroactive to the date of
complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
On October 30, 1995, the FCC accepted for comment a proposed resolution
of all complaints against the cable programming services tier ("CPST")
currently pending against cable systems owned by TCI Group. If the
proposed resolution is accepted by the FCC, TCI Group will settle all
pending complaints by a one-time credit to each subscriber in CPST
regulated franchises. The aggregate amount of such credits is
approximately $9 million and had previously been accrued by TCI Group.
In addition, the FCC will find that the CPST rates in CPST regulated
franchises on September 15, 1995 comply with federal regulations. TCI
Group has committed not to file any additional cost-of-service filings
until May 15, 1996 in franchises that were subject to CPST regulation
prior to September 15, 1995. However, TCI Group will be able to avail
itself of the other mechanisms under FCC rules to recover costs,
including abbreviated cost-of-service filings covering system rebuilds
and upgrades. In the proposed resolution, TCI Group does not admit any
violation of, or any failure to conform to, the 1992 Cable Act or the
rules promulgated thereunder. The comment period has ended and TCI Group
is awaiting action by the FCC.
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$212 million at December 31, 1995. Although there can be no assurance,
management of TCI Group believes that it will not be required to meet its
obligations under such guarantees, or if it is required to meet any of
such obligations, that they will not be material to TCI Group.
(continued)
V-224
<PAGE> 375
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
TCI Group is obligated to pay fees for the license to exhibit certain
films that are released theatrically by various motion picture studios
through December 31, 2005 (the "Film Licensing Obligations"). As of
December 31, 1995, these agreements require minimum payments aggregating
approximately $251 million. The aggregate amount of the Film Licensing
Obligations is not currently estimable because such amount is dependent
upon certain variable factors. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant. Additionally, TCI Group has guaranteed up to $67 million of
similar license fee obligations of another affiliate.
TCI Group has also committed to provide additional debt or equity funding
to certain of its affiliates. At December 31, 1995, such commitments
aggregated $95 million.
TCI Group leases business offices, has entered into pole rental
agreements and transponder lease agreements and uses certain equipment
under lease arrangements. Rental expense under such arrangements
amounted to $114 million, $75 million and $64 million in 1995, 1994 and
1993, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
millions):
1996 $ 66
1997 64
1998 59
1999 57
2000 51
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than
the amount shown for 1995.
Certain key employees of TCI Group hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statement, but are subject to future
adjustment based upon the market value of the respective common stock
and, ultimately, on the final market value when the rights are exercised.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the opinion
of management, it is expected that amounts, if any, which may be required
to satisfy such contingencies will not be material in relation to the
accompanying combined financial statements.
(15) Subsequent Event (Unaudited)
On July 31, 1996, pursuant to certain agreements entered into between TCI
Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI Group
acquired all of the common stock of a subsidiary of Viacom ("Cable Sub")
which owned Viacom's cable systems and related assets (the "Viacom
Acquisition").
(continued)
V-225
<PAGE> 376
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to a new subsidiary of Viacom
("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the
proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan
Facility") arranged by TCI Group and Cable Sub. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom
Sub has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B
Common Stock (collectively, "Viacom Common Stock") the opportunity to
exchange (the "Exchange Offer") a portion of their shares of Viacom
Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following
the completion of the Exchange Offer, TCI Group acquired from Cable Sub
shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350
million (which was used to reduce Cable Sub's obligations under the Loan
Facility). At the time of the Share Issuance, the Cable Sub Class A
Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable
Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a
stated value of $100 per share (the "Stated Value"). The Exchangeable
Preferred Stock is exchangeable, at the option of the holder commencing
after the fifth anniversary of the date of issuance, for shares of Series
A TCI Group Stock at an initial exchange rate of 4.81 shares of Series A
TCI Group Stock for each share of Exchangeable Preferred Stock exchanged.
The Exchangeable Preferred Stock is subject to redemption, at the option
of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 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. The Exchangeable Preferred Stock is
also subject to mandatory redemption on the tenth anniversary of the date
of issuance at a price equal to the Stated Value per share plus accrued
and unpaid dividends. Amounts payable by Cable Sub in satisfaction of
its optional or mandatory redemption obligations with respect to the
Exchangeable Preferred Stock may be made in cash or, at the election of
Cable Sub, in shares of Series A TCI Group Stock, or in any combination
of the foregoing.
V-226
<PAGE> 377
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
TCI Group's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Tele-Communications, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1995. The following discussion
focuses on material changes in trends, risks and uncertainties affecting TCI
Group's results of operations and financial condition.
(1) Material changes in financial condition:
On August 3, 1995, the Tele-Communications, Inc. ("TCI" or the "Company")
stockholders authorized the Board of Directors of TCI (the "Board") to issue the
Liberty Group Stock. While the Liberty Group Stock constitutes common stock of
TCI, the issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt. On August 10, 1995, TCI
distributed one hundred percent of the equity value attributable to Liberty
Media Group to its security holders of record on August 4, 1995. Additionally,
stockholders of TCI approved the redesignation of the previously authorized
Class A and Class B common stock of TCI into Series A and Series B TCI Group
Stock.
On December 4, 1996, the Board authorized, subject to shareholder
approval (the "Telephony Stock Proposal"), the issuance of a new class of stock
("Telephony Group Stock") which is intended to reflect the separate performance
of the Telephony Group. The Telephony Group would initially consist of TCI
Group's interest in TCI Telephony Services, Inc., a direct wholly owned
subsidiary of Tele-Communications, Inc. ("TCI"), its subsidiaries, their
respective assets, and all assets and liabilities of the TCI Group to the
extent attributed to any of the foregoing assets, whether or not such assets or
liabilities are assets and liabilities of TCI Telephony Services, Inc.
(together with its consolidated subsidiaries (unless the context indicates
otherwise), "TCI Telephony"). The principal assets of TCI Telephony are its
non-consolidating investments in a series of partnerships formed to engage in
the business of providing wireless communications services, using the radio
spectrum for broadband personal communications services ("PCS"), to residences
and businesses nationwide under the "Sprint" brand (the "PCS Ventures"), and
its investment in Teleport Communications Group, Inc., a Delaware corporation
("TCG"). The PCS Ventures include Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the partners of
each of which are subsidiaries of Sprint Corporation ("Sprint"), Comcast
Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI, and
PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries of
Sprint, Cox and TCI. TCI, through subsidiaries, has a 30% interest as a
partner in the Sprint PCS Partnerships and a 35.3% interest as a partner in
PhillieCo. TCG is a competitive local exchange carrier that offers a wide
range of local telecommunications services in major metropolitan markets
nationwide, primarily to businesses, long distance carriers and resellers, and
wireless communications companies. The Company has a 31.1% equity interest
(which represents a 36.5% voting interest) in TCG. The Telephony Group would
also include such other assets of the TCI Group as the Board may in the future
determine to attribute to the Telephony Group and such other businesses, assets
and liabilities as TCI may in the future acquire for the Telephony Group, as
determined by the Board. It is currently the intention of TCI that any
businesses, assets and liabilities so attributed to the Telephony Group in the
future would be businesses, assets and liabilities of, or related to, the
interests of the TCI Group in the domestic wireless and wireline communications
businesses (the "Telephony Business").
V-227
<PAGE> 378
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
As of the date of these financial statements, the only interests of the
TCI Group in the Telephony Business that are not attributed to the Telephony
Group are the business currently being conducted by a subsidiary of the TCI
Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital broadband
microwave network located in the Western United States (the "Microwave
Business"), and the Company's business, which is in the development stage, of
providing wireline residential telephony services to customers in certain of
the geographic areas served by the Company's cable television systems (the
"ResTel Business"). The Company began offering residential telephony service
commercially in October 1996 in Hartford, Connecticut. Telephony Group has the
right, but not the obligation, to acquire the ResTel Business from the company
in whole or in part (by geographic area) for the appraised fair market value of
the ResTel Business (or the portion of the ResTel Business being transferred),
at any time or from time to time, as applicable, provided that Telephony Group
is at the time a subsidiary of the company and the company is then conducting
such business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or sales of
assets), in funds borrowed from the Company or through an increase in the
Inter-Group Interest (as defined below) of the TCI Group in the Telephony Group.
Whether or not Telephony Group will exercise its rights to acquire the ResTel
Business (in whole or in part) will depend upon a number of factors, including
the penetration rates for the service in the geographic area or areas in which
the service has been commercially launched (with the penetration rate being the
percentage that the number of subscribers to the service in such geographic area
represent of the homes technically capable of subscribing to the service), the
cost of providing the service at the penetration rate achieved in that area, and
the ability of Telephony Group to fund the continued development and ongoing
operation of the ResTel Business in that area. With regard to the Microwave
Business, the Board has not yet determined whether and for what consideration
this business would be transferred to the Telephony Group, other than that any
such transfer would be at fair market value (as determined by the Board).
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is referred
to as "Inter-Group Interest". Prior to the issuance of any shares of Telephony
Group Stock, the Inter-Group Interest of the TCI Group in the Telephony Group
is 100%. As any shares of Telephony Group Stock are issued and distributed or
sold, the TCI Group's Inter-Group Interest in the Telephony Group will be
reduced accordingly.
While the Telephony Group Stock constitutes common stock of TCI, the
issuance of the Telephony Group Stock will not result in any transfer of assets
or liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
The TCI Group Stock is intended to reflect the separate performance of TCI
Group, which is generally comprised of the subsidiaries and assets not
attributed to Liberty Media Group or the Telephony Group, including (i) TCI's
Domestic Cable and Communications unit, (ii) TCI's International Cable and
Programming unit and (iii) TCI's Technology/Venture Capital unit.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group Stock
(when issued) will be common stockholders of TCI and will be subject to risks
associated with an investment in TCI and all of its businesses, assets and
liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions, the Company currently
proposes to offer shares of Series A Telephony Group Stock for cash in an
initial public offering, in which event the proceeds of such offering would be
allocated to the Telephony Group to be used to fund a portion of its
anticipated capital requirements and for general corporate purposes. The timing
and the size of any such public offering and the price at which such shares
would be sold will be determined by the Board, without further approval of
stockholders, prior to such offering based upon then prevailing market and
other conditions.
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group and
the Telephony Group (collectively, the "Groups") for the purpose of preparing
the combined financial statements of the TCI Group, the Liberty Media Group and
the Telephony Group, the change in the capital structure of the Company
contemplated by the Telephony Group Stock Proposal will not affect legal title
to such assets or responsibility for such liabilities of the Company or any of
its subsidiaries. Holders of TCI Group Common Stock, Liberty Media Group
Common Stock and Telephony Group Common Stock will be common stockholders of
the Company and will be subject to risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
(continued)
V-228
<PAGE> 379
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect the
combined results of operations or financial condition of the other Groups and
the market price of the TCI Group Common Stock, the Liberty Media Group Common
Stock and the Telephony Group Common Stock. In addition, any net losses of any
Group, dividends or distributions on, or repurchases of, the TCI Group Common
Stock, the Liberty Media Group Common Stock or the Telephony Group Common
Stock, and dividends on, or certain repurchases of, Preferred Stock, will
reduce funds of the Company legally available for the payment of dividends on
the TCI Group Common Stock, the Liberty Media Group Common Stock and the
Telephony Group Common Stock. The combined financial statements of the TCI
Group, the Liberty Media Group and the Telephony Group should be read in
conjunction with the consolidated financial statements of the Company.
TCI Group manages certain treasury activities for Liberty Media Group on a
centralized basis. Cash receipts of certain businesses attributed to Liberty
Media Group are remitted to TCI Group and certain cash disbursements of Liberty
Media Group are funded by TCI Group on a daily basis. Such cash activities are
included in borrowings from or loans to TCI Group or, if determined by the
Board, as an equity contribution to be reflected as an Inter-Group Interest to
Liberty Media Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by TCI on
a daily basis. Prior to the implementation of the Liberty Group Stock Proposal
the net amounts of such cash activities are included in combined equity in the
accompanying combined financial statements. Subsequent to the implementation
of the Liberty Group Stock Proposal, such cash activities will be included in
borrowings from or loans to TCI Group or, if determined by the Board of
Directors, as an equity contribution to the Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries following
the issuance and sale of Telephony Group Stock would (unless the Board otherwise
provides) be specifically attributed to and reflected on the combined financial
statements of the Group that includes the entity which incurred the debt or
issued the preferred stock or, in case the entity incurring the debt or issuing
the preferred stock is Tele-Communications, Inc., the TCI Group. The Board
could, however, determine from time to time that debt incurred or preferred
stock issued by entities included in a Group should be specifically attributed
to and reflected on the combined financial statement of one of the other Groups
to the extent that the debt is incurred or the preferred stock is issued for the
benefit of such other Group.
(continued)
V-229
<PAGE> 380
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group has
provided and will continue to provide centralized cash management functions
under which cash receipts of certain entities included in the other Groups are
remitted to the TCI Group and certain cash disbursements of the other Groups
will be funded by the TCI Group on a daily basis. Such transfers of funds
between the Groups will be reflected as borrowings or, if determined by the
Board, in the case of a transfer from the TCI Group to either the Liberty Media
Group or the Telephony Group, reflected as the creation of, or increase in, the
TCI Group's Inter-Group Interest in such Group or, in the case of a transfer
from either the Liberty Media Group or the Telephony Group to the TCI Group,
reflected as a reduction in the TCI Group's Inter-Group Interest in such Group.
There are no specific criteria for determining when a transfer will be
reflected as a borrowing or as an increase or reduction in an Inter-Group
Interest. The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the financing needs and objectives of the
Groups, the investment objectives of the Groups, the availability, cost and
time associated with alternative financing sources, prevailing interest rates
and general economic conditions. Generally, it is expected that entities
included in the Liberty Media Group will seek their own long-term debt
financing, whereas the Telephony Group is expected to require additional
advances from the TCI Group for some period of time. To satisfy this need, TCI
Group expects to provide as of January 1, 1997 a revolving loan facility to
Telephony Group that would permit borrowings of up to $150 million to $200
million over a five-year period. The interest rate on such revolving loans and
the terms and conditions of borrowings have not yet been determined.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings and the
respective combined statements of cash flows of the Groups would reflect
changes in the amounts of loans or borrowings deemed outstanding. In the
historical financial statements, net borrowings of the Telephony Group have
been included as a component of the Telephony Group's combined equity.
Subsequent to the date of such financial statements, a portion of such net
borrowings was converted into a $500 million investment in Telephony preferred
stock as described below. The balance of such net borrowings through January
1, 1997 will continue to be reflected as a component of the Telephony Group's
combined equity. Amounts borrowed by the Telephony Group from another Group
subsequent to January 1, 1997, will be reflected on the Telephony Group's
financial statements as indebtedness to the applicable lender.
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established from time
to time by, or pursuant to procedures established by, the Board of Directors.
The Board of Directors expects to make such determinations, either in specific
instances or by setting generally applicable polices from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Group, the capital expenditure plans and
investment opportunities available to each Group and the availability, cost and
time associated with alternative financing sources.
On December 1, 1996, the TCI Group converted $500 million of it's interest
in the Telephony Group into a 6% cumulative compounding redeemable preferred
stock due from the Telephony Group. Such preferred stock is due December 1,
2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert a
portion of the amount invested by the Company in the investments attributed to
the Telephony Group into the aforementioned $500 million preferred stock and a
contractual right to use up to $500 million of tax benefits generated by
Telephony Group (principally arising from its partnership interest in the PCS
Ventures) without charge to the TCI Group. Such right can be satisfied only
through and to the extent of future income tax benefits generated by Telephony
Group.
(continued)
V-230
<PAGE> 381
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to the
Telephony Group or any decrease in such Inter-Group Interest resulting from a
transfer of funds from the Telephony Group to the TCI Group would be determined
by reference to the Market Value of the Series A Telephony Group Common Stock
as of the date of such transfer, such an increase could occur at a time when
such shares could be considered undervalued and such a decrease could occur at
a time when such shares could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial impacts of
equity offerings are and will be attributed entirely to the TCI Group. After
the Distribution, all financial impacts of issuances of additional shares of
TCI Group Common Stock are and will be attributed entirely to the TCI Group,
all financial impacts of issuances of additional shares of Liberty Media Group
Common Stock the proceeds of which are attributed to the Liberty Media Group
are and will be to such extent reflected in the combined financial statements
of the Liberty Media Group, and all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of which are
attributed to the TCI Group in respect of a reduction in any Inter-Group
Interest in the Liberty Media Group are and will be to such extend reflected in
the combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which are
attributed to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and all financial impacts
of issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the TCI Group in respect of a reduction in the TCI Group's
Inter-Group Interest in the Telephony Group will be to such extent reflected in
the combined financial statements of the TCI Group. Financial impacts of
dividends or other distributions on, and purchases of, TCI Group Common Stock
will be attributed entirely to the TCI Group, and financial impacts of
dividends or other distributions on Telephony Group Common Stock will be
attributed entirely to the Telephony Group, except that dividends or other
distributions on the Telephony Group Common Stock will (if at the time there is
an Inter-Group Interest in the Telephony Group) result in the TCI Group being
credited, and the Telephony Group being charged (in addition to the charge for
the dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common Stock
and a fraction the numerator of which is the Telephony Group Inter-Group
Interest Fraction and the denominator of which is the Telephony Group
Outstanding Interest Fraction. Financial impacts of repurchases of Telephony
Group Common Stock the consideration for which is charged to the Telephony
Group will be to such extent reflected in the combined financial statements of
the Telephony Group, and financial impacts of repurchases of Telephony Group
Common Stock the consideration for which is charged to the TCI Group will be to
such extend reflected in the combined financial statements of the TCI Group and
will result in an increase in the TCI Group's Inter-Group Interest in the
Telephony Group.
On July 31, 1996, TCI Group consummated the Viacom Acquisition whereby TCI
Group acquired all of the common stock of Cable Sub which owned Viacom's cable
systems and related assets.
(continued)
V-231
<PAGE> 382
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
The transaction was structured as a tax-free reorganization in which Cable
Sub initially transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to New Viacom Sub. Cable Sub also
transferred to New Viacom Sub the Loan Proceeds of a $1.7 billion loan
facility. Following these transfers, Cable Sub retained cable assets with a
value at closing of approximately $2.326 billion and the obligation to repay
the Loan Proceeds borrowed under the Loan Facility. Neither Viacom nor New
Viacom Sub has any obligation with respect to repayment of the Loan Proceeds.
Prior to the consummation of the Viacom Acquisition, Viacom offered to the
holders of shares of Viacom Common Stock the opportunity to exchange a portion
of their shares of Viacom Common Stock for shares Cable Sub Class A Stock.
Immediately following the completion of the Exchange Offer, TCI Group acquired
from Cable Sub shares of Cable Sub Class B common stock for $350 million (which
was used to reduce Cable Sub's obligations under the Loan Facility). At the
time of the Share Issuance, the Cable Sub Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer automatically converted into
Exchangeable Preferred Stock. For additional discussion of the Viacom
Acquisition, see note 5 to the accompanying TCI Group combined financial
statements.
In February 1996, TINTA issued $345 million (before deducting offering
costs of $9 million) of 4.5% convertible subordinated debentures. TINTA
anticipates that it will use the net proceeds to fund capital contributions to
certain of its equity investees.
Additionally, during the nine months ended September 30, 1996, TCIC issued
(i) 4.6 million shares of Cumulative Exchangeable Preferred Stock for net cash
proceeds of $223 million, (ii) 20 million preferred securities of 8.72% Trust
Originated Preferred SecuritiesSM for net cash proceeds of $486 million
(through a special purpose entity formed as a Delaware business trust), (iii)
20 million preferred securities of 10% Trust Preferred Securities for net cash
proceeds of $485 million (through a special purpose entity formed as a Delaware
business trust) and (iv) $2.06 billion of publicly-placed senior and medium
term notes with interest rates ranging from 6.2% to 7.9% and maturity dates
ranging through 2026. TCIC used the proceeds from the aforementioned debt and
equity issuances to retire commercial paper and to repay certain variable and
fixed-rate indebtedness. In connection with the prepayment of certain
fixed-rate indebtedness, TCI Group recognized a loss on early extinguishment of
debt of $62 million. Such loss related to prepayment penalties amounting to
$60 million and the retirement of deferred loan costs.
TCI Group has a credit facility which matures in September of 1997. The
outstanding balance of such facility was $387 million at September 30, 1996.
TCI Group currently anticipates that it will refinance such borrowings, but
there can be no assurance that it can do so on terms acceptable to TCI Group.
(continued)
V-232
<PAGE> 383
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
During the second quarter of 1996, certain subsidiaries of TCI Group
terminated, at such subsidiaries' option, certain revolving bank credit
facilities with aggregate commitments of approximately $2 billion. TCI Group
does not believe that such terminations will adversely affect its future
liquidity. At September 30, 1996, TCI Group had approximately $1.7 billion of
availability under lines of credit, excluding amounts related to lines of
credit which provide availability to support commercial paper. Although TCI
Group was in compliance with the restrictive covenants contained in its credit
facilities at said date, additional borrowings under the credit facilities are
subject to the subsidiaries' continuing compliance with the restrictive
covenants (which relate primarily to the maintenance of certain ratios of cash
flow to total debt and cash flow to debt service, as defined in the credit
facilities) after giving effect to such additional borrowings. See note 6 to
the accompanying combined financial statements for additional information
regarding the material terms of the lines of credit.
One measure of liquidity is commonly referred to as "interest coverage."
Interest coverage, which is measured by the ratio of Operating Cash Flow
(operating income before depreciation, amortization and other non-cash
operating credits or charges) ($1,586 million and $1,493 million for the nine
months ended September 30, 1996 and 1995, respectively) to interest expense
($788 million and $736 million for the nine months ended September 30, 1996 and
1995, respectively), is determined by reference to the combined statements of
operations. TCI Group's interest coverage ratio was 201% and 203% for the nine
months ended September 30, 1996 and 1995, respectively. Management of TCI
Group believes that the foregoing interest coverage ratio is adequate in light
of the consistency and nonseasonal nature of its cable television operations
and the relative predictability of TCI Group's interest expense, almost half of
which results from fixed rate indebtedness. Operating Cash Flow is a measure
of value and borrowing capacity within the cable television industry and is not
intended to be a substitute for cash flows provided by operating activities, a
measure of performance prepared in accordance with generally accepted
accounting principles, and should not be relied upon as such. Operating Cash
Flow, as defined, does not take into consideration substantial costs of doing
business, such as interest expense, and should not be considered in isolation
to other measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying combined statements of cash flows. Net cash
provided by operating activities ($729 million and $669 million for the nine
months ended September 30, 1996 and 1995, respectively) reflects net cash from
the operations of TCI Group available for TCI Group's liquidity needs after
taking into consideration the aforementioned additional substantial costs of
doing business not reflected in Operating Cash Flow. Amounts expended by TCI
Group for its investing activities exceed net cash provided by operating
activities. However, management believes that net cash provided by operating
activities, the ability of TCI Group to obtain additional financing (including
the available lines of credit and access to public debt markets), issuances and
sales of TCI's equity or equity of its subsidiaries, and proceeds from
disposition of assets will provide adequate sources of short-term and long-term
liquidity in the future. See TCI Group's combined statements of cash flows
included in the accompanying combined financial statements.
(continued)
V-233
<PAGE> 384
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(1) Material changes in financial condition (continued):
In late April, 1996, TCIC was notified by Moody's Investors Service, Inc.
and Duff & Phelps Credit Rating Co. that those rating agencies had downgraded
by one level their respective ratings of TCIC's senior debt to the first level
below investment grade. Fitch Investors Service, L.P. reaffirmed its rating
for TCIC's senior debt at the last level of investment grade. On October 18,
1996, Standard and Poor's Securities, Inc. ("Standard & Poor's) issued a press
release stating that TCIC's senior debt would be placed on CreditWatch with
negative implications. TCIC's senior debt is currently rated BBB- by Standard
& Poor's (the last level of investment grade). A downgrade by Standard &
Poor's of TCIC's senior debt would lower such debt to the first level below
investment grade. These actions are expected to marginally increase TCIC's
cost of borrowings under certain bank credit facilities, and may adversely
affect TCIC's access to the public debt market and its overall cost of future
borrowings.
In order to achieve the desired balance between variable and fixed rate
indebtedness and to diminish its exposure to extreme increases in variable
interest rates, TCI Group has entered into various interest rate exchange
agreements. Pursuant to the interest rate exchange agreements, TCI Group pays
(i) fixed interest rates ranging from 7.2% to 9.3% on notional amounts of $460
million at September 30, 1996 and (ii) variable interest rates on notional
amounts of $2,450 million at September 30, 1996. During the nine months ended
September 30, 1996 and 1995, TCI Group's net payments pursuant to the Fixed
Rate Agreements were $3 million and $1 million, respectively; and TCI Group's
net receipts pursuant to the Variable Rate Agreements were $11 million and less
than $1 million, respectively. TCI Group is exposed to credit losses for the
periodic settlements of amounts due under the interest rate exchange agreements
in the event of nonperformance by the other parties to the agreements.
However, TCI Group does not anticipate that it will incur any material credit
losses because it does not anticipate nonperformance by the counterparties.
TCI Group has guaranteed notes payable and other obligations of affiliated
and other companies with outstanding balances of approximately $307 million at
September 30, 1996. Although there can be no assurance, management of TCI
Group believes that it will not be required to meet its obligations under such
guarantees, or if it is required to meet any of such obligations, that they
will not be material to TCI Group.
TCI Group is obligated to pay fees for the rights to exhibit certain films
that are released by various producers through December 31, 2005. Based on
subscriber levels at September 30, 1996, these agreements require minimum
payments aggregating approximately $437 million. The aggregate amount of the
Film Licensing Obligations is not currently estimable because such amount is
dependent upon certain variable factors. Nevertheless, TCI Group's required
aggregate payments under the Film Licensing Obligations could prove to be
significant.
TCI Group has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30, 1996, such
commitments aggregated $228 million.
TCI Group's various partnerships and other affiliates accounted for under
the equity method generally fund their acquisitions, required debt repayments
and capital expenditures through borrowings under and refinancing of their own
credit facilities (which are generally not guaranteed by TCI Group) and through
net cash provided by their own operating activities.
(continued)
V-234
<PAGE> 385
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations:
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, TCI Group'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. The regulations established
benchmark rates in 1993 which were further reduced in 1994, to which the rates
charged by cable operators for Regulated Services were required to conform.
TCI Group reduced its rates in 1993 and 1994 and limited its rate
increases in 1995 and 1996 in response to FCC regulations. TCI Group believes
that it has complied, in all material respects, with the provisions of the 1992
Cable Act, including its rate setting provisions. However, TCI Group's rates
for Regulated Services are subject to adjustment upon review, as described
above. If, as a result of the review process, a system cannot substantiate its
rates, it could be required to retroactively reduce its rates to the
appropriate benchmark and refund the excess portion of rates received. Any
refunds of the excess portion of tier service rates would be retroactive to the
date of complaint. Any refunds of the excess portion of all other Regulated
Service rates would be retroactive to one year prior to the implementation of
the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom
Act") was signed into law. Because the 1996 Telecom Act does not deregulate
cable programming service tier rates until 1999 (and basic service tier rates
will remain regulated thereafter), TCI Group believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect
on its results of operations.
Revenue increased 33% and 31% for the three months and nine months ended
September 30, 1996, respectively, as compared to the corresponding periods of
1995. In TCI Group's regulated cable systems, TCI Group implemented rate
increases for its Regulated Services in June 1996. As allowed by FCC
regulations, such rate increases include amounts intended to recover increased
programming costs incurred during the first five months of 1996 and not
previously recovered, as well as interest on said amounts.
The increase in revenue for the three months ended September 30, 1996 is
the result of the effect of certain acquisitions (including the Viacom
Acquisition) (18%), an increase in TCI Group's satellite subscribers (4%),
increases in the rates charged for TCI Group's cable television service due to
inflation, programming cost increases as previously discussed and channel
additions (5%), growth in subscriber levels within TCI Group's cable television
systems (3%), and increases in advertising sales, international programming and
other revenue (3%). The increase in revenue for the nine months ended
September 30, 1996 is the result of the effect of certain acquisitions
(including the Viacom Acquisition) (15%), an increase in TCI Group's satellite
subscribers (5%), increases in the rates charged for TCI Group's cable
television service as noted above (6%), growth in subscriber levels within TCI
Group's cable television systems (2%), and increases in advertising sales,
international programming and other revenue (3%).
(continued)
V-235
<PAGE> 386
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Operating expenses increased 52% and 50% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods of 1995. Exclusive of the effects of acquisitions (27% and 25%) and
Primestar (3% and 4%) (see discussion below), such expenses increased 22% and
21%. Programming and salary expenses accounted for the majority of such
increases. TCI Group cannot determine whether and to what extent increases in
the cost of programming will affect its future operating costs. However, such
programming costs have increased at a greater percentage than increases in
revenue from Regulated Services.
Selling, general and administrative ("SG&A") expenses increased 40% and
43% for the three months and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods of 1995. Exclusive of
the effects of acquisitions (11% and 12%) and Primestar (9% and 12%) (see
discussion below), SG&A expenses increased 20% and 19%. Such increases are due
primarily to salaries, related payroll expenses and those expenses that vary
with revenue and/or subscribers. Additionally, during the nine months ended
September 30, 1996 and 1995, TCI Group incurred $34 million and $14 million,
respectively, of costs related to newly created material support centers,
initiatives to improve its customer service and the continued redesign of its
computer and accounting systems.
TCI Group has an interest in Primestar, which provides programming and
marketing support to its partners who distribute a multi-channel programming
service via a medium power communications satellite to home satellite dish
owners. During the three months and nine months ended September 30, 1996, TCI
Group's revenue and expenses related to its Primestar satellite service
increased significantly over the corresponding periods in 1995 as the number of
TCI Group's Primestar subscribers increased from approximately 370,000
subscribers at September 30, 1995 to approximately 735,000 subscribers at
September 30, 1996. During the three months ended September 30, 1996, revenue
increased from $59 million to $110 million and operating, selling, general and
administrative expenses increased from $54 million to $108 million, as compared
to the three months ended September 30, 1995. During the nine months ended
September 30, 1996, revenue increased from $120 million to $304 million and
operating, selling, general and administrative expenses increased from $111
million to $295 million, as compared to the nine months ended September 30,
1995. TCI Group incurs significant sales commission and installation costs
when customers initially subscribe. Therefore, as long as TCI Group continues
to launch this new service and increase its Primestar subscriber base at such a
rapid pace, management expects that operating costs and expenses will increase
as well.
In June 1996, TCI Group announced its intention to pursue a tax-free
spin-off of SatCo to the holders of TCI Group Stock. At the time of the
Spin-Off, SatCo's assets and operations will include TCI Group's interest in
Primestar and TCI Group's business of distributing Primestar programming.
Although there is no assurance, the Spin-Off is anticipated to be completed in
the fourth quarter of 1996. Upon completion of the Spin-Off, SatCo's
operations will no longer be consolidated with TCI Group's.
The increase in TCI Group's depreciation expense in 1996 is due to
acquisitions as well as increased capital expenditures due to a program to
upgrade and install optical fiber technology in TCI Group's cable systems. The
increase in TCI Group's amortization expense in 1996 is due to acquisitions.
(continued)
V-236
<PAGE> 387
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
Certain corporate general and administrative costs are charged to
Telephony Group and Liberty Media Group at rates set at the beginning of the
year based on projected utilization for that year. The utilization-based
charges are set at levels that management believes to be reasonable and that
would approximate the costs that each Group would incur for comparable services
on a stand alone basis. During each of the nine month periods ended September
30, 1996 and 1995, Liberty Media Group was allocated $2 million in corporate
general and administrative costs by TCI Group. The Telephony Group was
allocated $1 million and less than $1 million in corporate general and
administrative costs by TCI Group during the nine months ended September 30,
1996 and 1995, respectively.
TCI Group records compensation relating to stock appreciation rights and
restricted stock awards granted to certain employees by TCI or TINTA. Such
compensation is subject to future adjustment based upon market value, and
ultimately, on the final determination of market value when the rights are
exercised or the restricted stock awards are vested.
At September 30, 1996, TCI Group had an effective ownership interest of
approximately 27% in TeleWest, a company that is currently operating and
constructing cable television and telephone systems in the United Kingdom
("UK"). TeleWest, which is accounted for under the equity method, had a
carrying value at September 30, 1996 of $459 million and comprised $99 million
and $43 million of TCI Group's share of its affiliates' losses during the nine
months ended September 30, 1996 and 1995, respectively. The increase in TCI
Group's share of losses of TeleWest is due, in part, to an increase in
TeleWest's interest expense and foreign currency translation losses related to
the issuance of dollar denominated debentures by TeleWest. In addition, TCI
Group has other less significant investments accounted for under the equity
method in video distribution and programming businesses located in the UK,
other parts of Europe, Asia, Latin America and certain other foreign countries.
In the aggregate, such other equity method investments had a carrying value of
$407 million at September 30, 1996 and accounted for $55 million and $38
million of TCI Group's share of its affiliates' losses for the nine months
ended September 30, 1996 and 1995, respectively.
TCI Group is reflecting minority interests in earnings of consolidated
subsidiaries of $28 million and $29 million for the three months and nine
months ended September 30, 1996, respectively, as compared to minority
interests in losses of consolidated subsidiaries for the corresponding periods
in 1995. Such changes are due primarily to the accrual of dividends on the
Trust Securities in 1996. See note 7 to the accompanying combined financial
statements.
(continued)
V-237
<PAGE> 388
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
(2) Material changes in results of operations (continued):
TCI Group's net loss (before loss of Telephony Group and preferred stock
dividend requirements) of $133 million for the three months ended September
30, 1996 represents a change of $186 million, as compared to TCI Group's net
earnings (before loss of Telephony Group, loss of Liberty Media Group and
preferred stock dividend requirements) of $53 million for the three months
ended September 30, 1995. TCI Group's net loss (before loss of Telephony Group
and preferred stock dividend requirements) of $410 million for the nine months
ended September 30, 1996 represents an increase of $355 million, as compared to
TCI Group's net loss (before loss of Telephony Group, loss of Liberty Media
Group and preferred stock dividend requirements) of $55 million for the nine
months ended September 30, 1995. Such increases are primarily the result of
the gain recognized in 1995 related to the TINTA IPO, an increase in share of
losses of affiliates, including the aforementioned share of losses from
TeleWest, loss on early extinguishment of debt resulting primarily from the
prepayment of certain fixed-rate indebtedness, and the change in minority
interests in losses (earnings) of consolidated subsidiaries described above.
V-238
<PAGE> 389
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
Assets amounts in millions
- ------
<S> <C> <C>
Cash $ 93 77
Trade and other receivables, net 375 300
Prepaid expenses 89 51
Prepaid program rights 20 19
Committed film inventory 118 92
Investments in affiliates, accounted for under the
equity method, and related receivables (note 4) 1,361 1,134
Property and equipment, at cost:
Land 74 67
Distribution systems 11,277 9,536
Support equipment and buildings 1,597 1,213
------------ ------------
12,948 10,816
Less accumulated depreciation 4,327 3,611
------------ ------------
8,621 7,205
------------ ------------
Franchise costs 17,486 14,322
Less accumulated amortization 2,349 2,092
------------ ------------
15,137 12,230
------------ ------------
Other assets, at cost, net of amortization 1,226 1,012
------------ ------------
$ 27,040 22,120
============ ============
</TABLE>
(continued)
V-239
<PAGE> 390
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Balance Sheets, continued
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
Liabilities and Combined Equity amounts in millions
- -------------------------------
<S> <C> <C>
Accounts payable $ 120 148
Accrued interest 170 228
Accrued programming expense 360 272
Other accrued expenses 1,070 911
Debt (note 6) 15,014 12,960
Deferred income taxes 5,467 4,387
Other liabilities 176 181
------------ ------------
Total liabilities 22,377 19,087
------------ ------------
Minority interests in equity of consolidated
subsidiaries 1,447 563
Redeemable preferred stock 654 478
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts ("Trust
Securities") holding solely subordinated debt
securities of TCI Communications, Inc. ("TCIC")
(note 7) 1,000 --
Combined equity (note 8):
Combined equity, including preferred stocks of
Tele-Communications, Inc. ("TCI") 2,665 2,883
Cumulative foreign currency translation adjustment (12) (9)
Unrealized holding gains for available-for-sale
securities, net of taxes 26 68
Due from Liberty Media Group (19) (7)
Interest in Telephony Group (1,098) (943)
------------ ------------
Combined equity 1,562 1,992
------------ ------------
Commitments and contingencies (note 11)
$ 27,040 22,120
============ ============
</TABLE>
See accompanying notes to combined financial statements.
V-240
<PAGE> 391
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
amounts in millions,
except per share amounts
<S> <C> <C> <C> <C>
Revenue $ 1,862 1,404 5,120 3,911
Operating costs and expenses:
Operating 679 446 1,835 1,226
Programming charges from Liberty Media
Group (note 10) 16 18 63 53
Selling, general and administrative 609 436 1,653 1,157
Charges to Telephony Group -- -- (1) --
Charges to Liberty Media Group (note 10) (6) (6) (17) (18)
Compensation relating to stock
appreciation rights (notes 8 and 11) -- 6 -- 22
Adjustment to compensation relating to
stock appreciation rights (20) -- (31) --
Depreciation 254 222 756 642
Amortization 129 97 351 267
-------- -------- -------- --------
1,661 1,219 4,609 3,349
-------- -------- -------- --------
Operating income 201 185 511 562
Other income (expense):
Interest expense (275) (258) (788) (736)
Interest and dividend income 9 14 26 24
Interest income from Liberty Media Group
(note 10) -- -- -- 2
Share of losses of affiliates, net (note 4) (55) (32) (208) (88)
Loss on early extinguishment of debt
(note 6) (7) -- (73) --
Minority interests in losses (earnings) of
consolidated subsidiaries, net (28) 10 (29) 20
Gain on sale of subsidiary stock (note 9) -- 123 -- 123
Other, net (13) (16) (6) (27)
-------- -------- -------- --------
(369) (159) (1,078) (682)
-------- -------- -------- --------
Earnings (loss) before income taxes (168) 26 (567) (120)
Income tax benefit 35 27 157 65
-------- -------- -------- --------
Earnings (loss) before loss of Liberty
Media Group through the date of
Distribution and Telephony Group (note 1) (133) 53 (410) (55)
Loss of Liberty Media Group through the
date of Distribution (note 1) -- (7) -- (29)
Loss of Telephony Group (20) (9) (64) (18)
-------- -------- -------- --------
Net earnings (loss) (153) 37 (474) (102)
Dividend requirements on preferred stocks (9) (9) (27) (26)
-------- -------- -------- --------
Net earnings (loss) attributable to
common stockholders $ (162) 28 (501) (128)
======== ======== ======== ========
Loss attributable to common stockholders
per common share (note 2) $ (.24) (.09) (.75) (.09)
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
V-241
<PAGE> 392
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statement of Equity
Nine months ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Combined holding
equity, Cumulative gains for Due
including foreign available- Interest from
preferred currency for-sale in Liberty
stocks of translation securities, Telephony Media Combined
TCI adjustment net of taxes Group Group equity
--------- ----------- ------------ --------- ------- --------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,883 (9) 68 (943) (7) 1,992
Net loss (474) -- -- 64 -- (410)
Purchase of programming from Liberty
Media Group -- -- -- -- 63 63
Cost allocations to Liberty Media Group -- -- -- -- (17) (17)
Cost allocations to Telephony Group -- -- -- (1) -- (1)
Cable distribution fees -- -- -- -- (3) (3)
Adjustment to allocation to Liberty
Media Group of compensation relating to
stock appreciation rights -- -- -- -- 3 3
Adjustment to allocation to Telephony
Group relating to stock appreciation
rights -- -- -- -- -- --
Intergroup tax allocation to Liberty
Media Group -- -- -- -- (17) (17)
Intergroup tax allocation to Telephony
Group -- -- -- 45 -- 45
Transfers of assets to Telephony Group,
net of deferred taxes -- -- -- (45) -- (45)
Net cash transfers to Telephony Group -- -- -- (218) -- (218)
Net cash transfers to Liberty Media Group -- -- -- -- (41) (41)
Change in unrealized gains for
available-for-sale securities -- -- (42) -- -- (42)
Foreign currency translation adjustment -- (3) -- -- -- (3)
Accreted dividends on TCI preferred
stock subject to mandatory redemption
requirements (20) -- -- -- -- (20)
Payment of TCI preferred stock dividends (10) -- -- -- -- (10)
Issuance of TCI common stock for
acquisition 269 -- -- -- -- 269
Issuance of TCI common stock upon
conversion of notes 1 -- -- -- -- 1
Issuance of TCI common stock upon
conversion of preferred stock 16 -- -- -- -- 16
------- ------- ------- ------- ------- -------
Balance at September 30, 1996 $ 2,665 (12) 26 (1,098) (19) 1,562
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
V-242
<PAGE> 393
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1996 1995
-------- --------
amounts in millions
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net loss before loss of Telephony Group and Liberty
Media Group* $ (410) (55)
Adjustments to reconcile net loss before loss of
Telephony Group and Liberty Media Group to net cash
provided by operating activities:
Depreciation and amortization 1,107 909
Compensation relating to stock appreciation rights -- 22
Adjustment to compensation relating to stock
appreciation rights (31) --
Share of losses of affiliates 208 88
Loss on early extinguishment of debt 73 --
Minority interests in earnings (losses) 29 (20)
Gain on sale of subsidiary stock -- (123)
Intergroup tax allocation 28 7
Deferred income tax benefit (207) (118)
Other noncash credits (4) (1)
Changes in operating assets and liabilities,
net of the effect of acquisitions:
Change in receivables 6 28
Change in prepaids (40) (60)
Change in accruals and payables 29 14
Change in accrued interest (59) (22)
-------- --------
Net cash provided by operating activities 729 669
-------- --------
Cash flows from investing activities:
Cash paid for acquisitions (7) (213)
Capital expended for property and equipment (1,518) (1,170)
Additional investments in and loans to
affiliates and others (477) (173)
Repayment of loans to affiliates 328 16
Proceeds from dispositions of assets 207 29
Change in interest in Telephony Group (218) (721)
Change in due from Liberty Media Group 2 27
Change in interest in Liberty Media Group -- 16
Other investing activities (98) (195)
-------- --------
Net cash used in investing activities (1,781) (2,384)
-------- --------
Cash flows from financing activities:
Borrowings of debt 7,210 6,926
Repayments of debt (7,186) (5,952)
Prepayment penalties (60) --
Issuance of common stock -- 431
Issuance of Trust Securities 971 --
Issuance of subsidiary preferred stock 223 --
Proceeds from sale of subsidiary stock -- 445
Payment of preferred stock dividends (34) (22)
Payment of dividends on subsidiary preferred
stock and Trust Securities (56) --
-------- --------
Net cash provided by financing activities 1,068 1,828
-------- --------
Net increase in cash 16 113
Cash at beginning of period 77 11
-------- --------
Cash at end of period $ 93 124
======== ========
</TABLE>
* Loss of Telephony Group and Liberty Media Group does not use funds.
See accompanying notes to combined financial statements.
V-243
<PAGE> 394
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
September 30, 1996
(unaudited)
(1) Basis of Presentation
On August 3, 1995, the TCI stockholders authorized the
Tele-Communications, Inc. ("TCI" or the "Company") Board of Directors (the
"Board") to issue a new class of stock ("Liberty Group Stock") which is
intended to reflect the separate performance of TCI's business which
produces and distributes cable television programming services ("Liberty
Media Group"). While the Liberty Group Stock constitutes common stock of
TCI, issuance of the Liberty Group Stock did not result in any transfer of
assets or liabilities of TCI or any of its subsidiaries or affect the
rights of holders of TCI's or any of its subsidiaries' debt. On August
10, 1995, TCI distributed one hundred percent of the equity value
attributable to Liberty Media Group (the "Distribution") to its security
holders of record on August 4, 1995. Additionally, the stockholders, of
TCI approved the redesignation of the previously authorized Class A and
Class B common stock into Series A TCI Group and Series B TCI Group common
stock ("TCI Group Stock").
On December 4, 1996 the Board authorized, subject to shareholder approval
(the "Telephony Stock Proposal"), the issuance of a new class of stock
("Telephony Group Stock") which is intended to reflect the separate
performance of the Telephony Group. The Telephony Group would initially
consist of TCI Group's interest in TCI Telephony Services, Inc., a direct
wholly owned subsidiary of Tele-Communications, Inc. ("TCI"), its
subsidiaries, their respective assets, and all assets and liabilities of
the TCI Group to the extent attributed to any of the foregoing assets,
whether or not such assets or liabilities are assets and liabilities of
TCI Telephony Services, Inc. (together with its consolidated subsidiaries
(unless the context indicates otherwise), "TCI Telephony"). The principal
assets of TCI Telephony are its non-consolidating investments in a series
of partnerships, the PCS Ventures, formed to engage in the business of
providing wireless communications services, using the radio spectrum for
broadband personal communications services ("PCS"), to residences and
businesses nationwide under the "Sprint" brand, and its investment in TCG.
The PCS Ventures include Sprint Spectrum Holding Company, L.P. and
MinorCo, L.P. (collectively, the "Sprint PCS Partnerships"), the partners
of each of which are subsidiaries of Sprint Corporation ("Sprint"),
Comcast Corporation ("Comcast"), Cox Communications, Inc. ("Cox") and TCI,
and PhillieCo, L.P. ("PhillieCo"), the partners of which are subsidiaries
of Sprint, Cox and TCI. TCI, through subsidiaries, has a 30% interest as a
partner in the Sprint PCS Partnerships and a 35.3% interest as a partner
in PhillieCo. TCG is a competitive local exchange carrier that offers a
wide range of local telecommunications services in major metropolitan
markets nationwide, primarily to businesses, long distance carriers and
resellers, and wireless communications companies. The Company has a 31.1%
equity interest (which represents a 36.5% voting interest) in TCG. The
Telephony Group would also include such other assets of the TCI Group as
the Board may in the future determine to attribute to the Telephony Group
and such other businesses, assets and liabilities as TCI may in the future
acquire for the Telephony Group, as determined by the Board. It is
currently the intention of TCI that any businesses, assets and liabilities
so attributed to the Telephony Group in the future would be businesses,
assets and liabilities of, or related to, the interests of the TCI Group
in the domestic wireless and wireline communications businesses (the
"Telephony Business").
V-244
<PAGE> 395
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
As of the date of these financial statements, the only interests of the
TCI Group in the Telephony Business that are not attributed to the
Telephony Group are the business currently being conducted by a subsidiary
of the TCI Group which provides long-distance video, voice, data and other
telecommunications services on a wholesale basis through its digital
broadband microwave network located in the Western United States (the
"Microwave Business"), and the Company's business, which is in the
development stage, of providing wireline residential telephony services to
customers in certain of the geographic areas served by the Company's cable
television systems (the "ResTel Business"). The Company began offering
residential telephony service commercially in October 1996 in Hartford,
Connecticut. Telephony Group has the right, but not the obligation, to
acquire the ResTel Business from the company in whole or in part (by
geographic area) for the appraised fair market value of the ResTel
Business (or the portion of the ResTel Business being transferred), at any
time or from time to time, as applicable, provided that Telephony Group is
at the time a subsidiary of the Company and the Company is then conducting
such business. Payment of such appraised fair market value may be in funds
generated by the Telephony Group (whether through future operations or
sales of assets), in funds borrowed from the Company or through an
increase in the Inter-Group Interest (as defined below) of the TCI Group
in the Telephony Group. Whether or not Telephony Group will exercise its
rights to acquire the ResTel Business (in whole or in part) will depend
upon a number of factors, including the penetration rates for the service
in the geographic area or areas in which the service has been commercially
launched (with the penetration rate being the percentage that the number
of subscribers to the service in such geographic area represent of the
homes technically capable of subscribing to the service), the cost of
providing the service at the penetration rate achieved in that area, and
the ability of Telephony Group to fund the continued development and
ongoing operation of the ResTel Business in that area. With regard to the
Microwave Business, the Board has not yet determined whether and for what
consideration this business would be transferred to the Telephony Group,
other than that any such transfer would be at fair market value (as
determined by the Board).
The common stockholders' equity value of TCI attributable to the Telephony
Group that, at any relevant time, is attributed to the TCI Group, and
accordingly, not represented by outstanding Telephony Group Stock is
referred to as "Inter-Group Interest". Prior to the issuance of any shares
of Telephony Group Stock, the Inter-Group Interest of the TCI Group in the
Telephony Group is 100%. As any shares of Telephony Group Stock are issued
and distributed or sold, the TCI Group's Inter-Group Interest in the
Telephony Group will be reduced accordingly.
While the Telephony Group Stock constitutes common stock of TCI, issuance
of the Telephony Group Stock will not result in any transfer of assets or
liabilities of TCI or any of its subsidiaries or affect the rights of
holders of TCI's or any of its subsidiaries' debt.
Holders of TCI Group Stock, Liberty Group Stock and Telephony Group Stock
(when issued) will be common stockholders of TCI and will be subject to
risks associated with an investment in TCI and all of its businesses,
assets and liabilities.
Following approval by shareholders of the Telephony Stock Proposal,
subject to prevailing market and other conditions the Company currently
proposes to offer shares of Series A Telephony Group Stock for cash in an
initial public offering, in which event the proceeds of such offering
would be allocated to the Telephony Group to be used to fund a portion of
its anticipated capital requirements and for general corporate purposes.
The timing and the size of any such public offering and the price at which
such shares would be sold will be determined by the Board, without further
approval of stockholders, prior to such offering based upon then
prevailing market and other conditions.
The TCI Group Stock is intended to reflect the separate performance of
the subsidiaries and assets not attributed to Liberty Media Group or the
Telephony Group, including (i) TCI's Domestic Cable and Communications
unit, (ii) TCI's International Cable and Programming unit ("TINTA") and
(iii) TCI's Technology/Venture Capital unit. Such subsidiaries and
assets are collectively referred to as "TCI Group".
(continued)
V-245
<PAGE> 396
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Notwithstanding the attribution of assets and liabilities, equity and
items of income and expense among the TCI Group, the Liberty Media Group
and the Telephony Group (collectively, the "Groups") for the purpose of
preparing the combined financial statements of the TCI Group, the Liberty
Media Group and the Telephony Group, the change in the capital structure
of the Company contemplated by the Telephony Group Stock Proposal will
not affect legal title to such assets or responsibility for such
liabilities of the Company or any of its subsidiaries. Holders of TCI
Group Common Stock, Liberty Media Group Common Stock and Telephony Group
Common Stock will be common stockholders of the Company and will be
subject to risks associated with an investment in the Company and all of
its businesses, assets and liabilities.
Financial effects arising from one Group that affect the Company's
consolidated results of operations or financial condition could affect
the combined results of operations or financial condition of the other
Groups and the market price of the TCI Group Common Stock, the Liberty
Media Group Common Stock and the Telephony Group Common Stock. In
addition, any net losses of any Group, dividends or distributions on, or
repurchases of, the TCI Group Common Stock, the Liberty Media Group
Common Stock or the Telephony Group Common Stock, and dividends on, or
certain repurchases of, Preferred Stock, will reduce funds of the Company
legally available for the payment of dividends on the TCI Group Common
Stock, the Liberty Media Group Common Stock and the Telephony Group
Common Stock. The combined financial statements of the TCI Group, the
Liberty Media Group and the Telephony Group should be read in conjunction
with the consolidated financial statements of the Company.
Prior to the Distribution, TCI Group had a 100% Inter-Group Interest in
Liberty Media Group. Following the Distribution, TCI Group has no
Inter-Group Interest in Liberty Media Group. TCI Group has a 100%
Inter-Group Interest in Telephony Group. For periods in which an
Inter-Group Interest exists, TCI Group would account for its Inter-Group
Interest in a manner similar to the equity method of accounting.
Management of TCI believes that generally accepted accounting principles
require that Liberty Media Group and Telephony Group be consolidated with
TCI Group. If Liberty Media Group and Telephony Group were consolidated
with TCI Group, the combined financial position, combined results of
operations, and combined cash flows of TCI Group would equal the
consolidated financial position, consolidated results of operations and
consolidated cash flows of TCI and subsidiaries, which financial statements
are included separately herein. Management of TCI has elected to present
the accompanying combined financial statements in a manner that does not
comply with generally accepted accounting principles.
(continued)
V-246
<PAGE> 397
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The accompanying interim combined financial statements are unaudited but,
in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These combined financial statements should be read in conjunction with
the audited combined financial statements of TCI Group for the year ended
December 31, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
Through the third quarter of 1995, TCI Group included certain of its
foreign subsidiaries (Cablevision S.A. ("Cablevision")) in its financial
statements on a one-month time delay. TCI Group eliminated such time
delay from its December 31, 1995 financial statements. In connection
with the elimination of such reporting delay, TCI Group has restated its
results of operations for the three months and nine months ended
September 30, 1995 to include Cablevision's results of operations for the
period from April 25, 1995 (the date Cablevision was acquired) through
September 30, 1995. Such restatement reduced TCI Group's net earnings by
$1 million for the three months ended September 30, 1996 and increased
TCI Group's net loss by $1 million for the nine months ended September
30, 1995.
Certain amounts have been reclassified for comparability with the 1996
presentation.
In June 1996, TCI Group announced its intention to pursue a tax-free
spin-off (the "Spin-Off") of its direct broadcast satellite subsidiary,
TCI Satellite Entertainment, Inc. ("SatCo"), to the holders of TCI Group
Stock. At the time of the Spin-Off, SatCo's assets and operations will
include TCI Group's interest in PRIMESTAR Partners, L.P., ("Primestar")
and TCI Group's business of distributing Primestar programming. Although
there is no assurance, the Spin-Off is anticipated to be completed in the
fourth quarter of 1996. Upon completion of the Spin-Off, SatCo's
operations will no longer be consolidated with TCI Group's.
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of ("Statement No. 121"), effective for fiscal years beginning after
December 15, 1995. Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. TCI Group adopted Statement No. 121
effective January 1, 1996. Such adoption did not have a significant
effect on the financial position or results of operations of TCI Group.
(continued)
V-247
<PAGE> 398
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pursuant to Statement No. 121, TCI Group periodically reviews the
carrying amount of its long-lived assets, franchise costs and certain
other assets to determine whether current events or circumstances warrant
adjustments to such carrying amounts. TCI Group considers historical and
expected future net operating losses to be its primary indicators of
potential impairment. Assets are grouped and evaluated for impairment at
the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets
("Assets"). TCI Group deems Assets to be impaired if TCI Group is unable
to recover the carrying value of such Assets over their expected
remaining useful life through a forecast of undiscounted future operating
cash flows directly related to the Assets. If Assets are deemed to be
impaired, the loss is measured as the amount by which the carrying amount
of the Assets exceeds their fair value. TCI Group generally measures
fair value by considering sales prices for similar assets or by
discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
(2) Loss Per Common Share
The loss attributable to TCI Group Stock stockholders per common share
for the three months and nine months ended September 30, 1996 and for the
period from the Distribution through September 30, 1995 was computed by
dividing net loss attributable to TCI Group Series A and Series B common
stockholders by the weighted average number of common shares outstanding
of TCI Group Series A and Series B common stock during the period (669.1
million, 665.0 million and 656.4 million, respectively). Common stock
equivalents were not included in the computation of weighted average
shares outstanding because their inclusion would be anti-dilutive.
(continued)
V-248
<PAGE> 399
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(3) Supplemental Disclosures to Combined Statements of Cash Flows
Cash paid for interest was $847 million and $757 million for the nine
months ended September 30, 1996 and 1995, respectively. Cash paid for
income taxes was $7 million and $62 million for the nine months ended
September 30, 1996 and 1995, respectively.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------
1996 1995
-------- --------
amounts in millions
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 4,606 3,365
Liabilities assumed, net of current assets (2,095) (494)
Deferred tax liability recorded in acquisitions (1,310) (1,095)
Minority interests in equity of acquired entities (733) 42
Common stock and preferred stock issued
in acquisitions (461) (1,605)
-------- --------
Cash paid for acquisitions $ 7 213
======== ========
Exchange of consolidated subsidiaries for equity
investment $ 274 --
======== ========
Change in unrealized gains, net of deferred
income taxes, on available-for-sale securities $ 42 192
======== ========
Effect of foreign currency translation adjustment
on book value of foreign equity investments $ 3 1
======== ========
Accrued preferred stock dividends $ 20 4
======== ========
Turner Broadcasting System, Inc. stock received
in acquisition transferred to Liberty Media Group $ -- 7
======== ========
Retirement of Class A common stock previously
held by subsidiary $ -- 29
======== ========
Common stock issued in exchange for cost investment $ -- 73
======== ========
Issuance of TCI Class A common stock for
acquisition by Liberty Media Group $ -- 10
======== ========
Distribution of TCI Series A and Series B
Liberty Group Stock to TCI common stockholders $ -- 1,618
======== ========
Issuance of subsidiary stock for equity investment $ -- 11
======== ========
</TABLE>
(continued)
V-249
<PAGE> 400
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(4) Investments in Affiliates
Summarized unaudited results of operations for affiliates accounted for
under the equity method are as follows:
<TABLE>
<CAPTION>
Nine months ended
Combined Operations September 30,
------------------- --------------------
1996 1995
-------- --------
amounts in millions
<S> <C> <C>
Revenue $ 1,682 1,235
Operating expenses (1,471) (1,035)
Depreciation and amortization (340) (265)
-------- --------
Operating loss (129) (65)
Interest expense (263) (146)
Other, net 10 (2)
-------- --------
Net loss $ (382) (213)
======== ========
</TABLE>
TCI Group has various investments accounted for under the equity method.
Some of the more significant investments held by TCI Group at September
30, 1996 were TeleWest Communications plc ("TeleWest") (carrying value of
$459 million), various other foreign equity investments (cumulative
carrying value of $407 million) and Intermedia Capital Partners IV L.P.
(carrying value of $287 million).
Certain of TCI Group's affiliates are general partnerships and any
subsidiary of TCI Group that is a general partner in a general
partnership is, as such, liable as a matter of partnership law for all
debts of that partnership in the event liabilities of that partnership
were to exceed its assets.
(5) Acquisition
On July 31, 1996, pursuant to certain agreements entered into between TCI
Group, Viacom International, Inc. and Viacom, Inc. ("Viacom"), TCI Group
acquired all of the common stock of a subsidiary of Viacom ("Cable Sub")
which owned Viacom's cable systems and related assets (the "Viacom
Acquisition").
The transaction was structured as a tax-free reorganization in which
Cable Sub transferred all of its non-cable assets, as well as all of its
liabilities other than current liabilities, to a new subsidiary of Viacom
("New Viacom Sub"). Cable Sub also transferred to New Viacom Sub the
proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan
Facility") arranged by TCI Group and Cable Sub. Following these
transfers, Cable Sub retained cable assets with a value at closing of
approximately $2.326 billion and the obligation to repay the Loan
Proceeds borrowed under the Loan Facility. Neither Viacom nor New Viacom
Sub has any obligation with respect to repayment of the Loan Proceeds.
(continued)
V-250
<PAGE> 401
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Prior to the consummation of the Viacom Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B
Common Stock (collectively, "Viacom Common Stock") the opportunity to
exchange (the "Exchange Offer") a portion of their shares of Viacom
Common Stock for shares of Class A Common Stock, par value $100 per
share, of Cable Sub ("Cable Sub Class A Stock"). Immediately following
the completion of the Exchange Offer, TCI Group acquired from Cable Sub
shares of Cable Sub Class B Common Stock (the "Share Issuance") for $350
million (which was used to reduce Cable Sub's obligations under the Loan
Facility). At the time of the Share Issuance, the Cable Sub Class A
Stock received by Viacom stockholders pursuant to the Exchange Offer
automatically converted into 5% Class A Senior Cumulative Exchangeable
Preferred Stock (the "Exchangeable Preferred Stock") of Cable Sub with a
stated value of $100 per share (the "Stated Value"). The Exchangeable
Preferred Stock is exchangeable, at the option of the holder commencing
after the fifth anniversary of the date of issuance, for shares of Series
A TCI Group Stock at an initial exchange rate of 4.81 shares of Series A
TCI Group Stock for each share of Exchangeable Preferred Stock exchanged.
The Exchangeable Preferred Stock is subject to redemption, at the option
of Cable Sub, after the fifth anniversary of the date of issuance,
initially at a redemption price of $102.50 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. The Exchangeable Preferred Stock is
also subject to mandatory redemption on the tenth anniversary of the date
of issuance at a price equal to the Stated Value per share plus accrued
and unpaid dividends. Amounts payable by Cable Sub in satisfaction of
its optional or mandatory redemption obligations with respect to the
Exchangeable Preferred Stock may be made in cash or, at the election of
Cable Sub, in shares of Series A TCI Group Stock, or in any combination
of the foregoing.
The Viacom Acquisition has been accounted for by the purchase method.
Accordingly, the results of operations of Cable Sub have been
consolidated with those of TCI Group since the date of acquisition. On a
pro forma basis, TCI Group's revenue, net loss, and net loss per share of
TCI Group Stock would have been increased by $276 million, $57 million,
and $.09, respectively, for the nine months ended September 30, 1996; and
revenue, net loss, and net loss per share of TCI Group Stock would have
been increased by $327 million, $90 million, and $.03, respectively, for
the nine months ended September 30, 1995 had Cable Sub been consolidated
with TCI Group on January 1, 1995. The foregoing unaudited pro forma
financial information is based upon historical results of operations
adjusted for acquisition costs and, in the opinion of management, is not
necessarily indicative of the results had TCI Group operated Cable Sub
since January 1, 1995.
(continued)
V-251
<PAGE> 402
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(6) Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
amounts in millions
<S> <C> <C>
Notes payable $ 9,307 7,713
Bank credit facilities 4,333 3,617
Commercial paper 1,179 1,469
Convertible notes (a) 43 45
Other debt 152 116
------------ ------------
$ 15,014 12,960
============ ============
</TABLE>
(a) These convertible notes, which are stated net of unamortized discount
of $181 million and $186 million at September 30, 1996 and December
31, 1995, respectively, mature on December 18, 2021. The notes
require (so long as conversion of the notes has not occurred) an
annual interest payment through 2003 equal to 1.85% of the face
amount of the notes. At September 30, 1996, the notes were
convertible, at the option of the holders, into an aggregate of
37,643,774 shares of Series A TCI Group Stock and 9,410,937 shares of
Series A Liberty Group Stock.
During the nine months ended September 30, 1996, TCI Group redeemed
certain notes payable which had an aggregate principle balance of $809
million and fixed interest rates ranging from 8.67% to 10.44% (the
"Redemption"). In connection with the Redemption, TCI Group recognized a
loss on early extinguishment of debt of $62 million. Such loss related
to prepayment penalties amounting to $60 million and the retirement of
deferred loan costs.
During the nine months ended September 30, 1996, certain subsidiaries of
TCI Group terminated, at such subsidiaries' option, certain revolving
bank credit facilities with aggregate commitments of approximately $2
billion and refinanced certain other bank credit facilities. In
connection with such termination and refinancings, TCI Group recognized a
loss on early extinguishment of debt of $11 million related to the
retirement of deferred loan costs.
The bank credit facilities and various other debt instruments
attributable to TCI Group generally contain restrictive covenants which
require, among other things, the maintenance of certain earnings,
specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and
include certain limitations on indebtedness, investments, guarantees,
dispositions, stock repurchases and/or dividend payments.
As security for borrowings under one of TCI Group's bank credit
facilities, TCI Group has pledged 100,524,364 shares of Series A TCI
Group Stock held by a subsidiary of TCI Group. As security for one of
TCI Group's notes payable (with a balance of $26 million at September 30,
1996), TCI Group has pledged the stock of one of its majority-owned
subsidiaries.
(continued)
V-252
<PAGE> 403
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The fair value of the debt attributable to TCI Group is estimated based
on the current market prices for the same or similar issues or on the
current rates offered to TCI Group for debt of the same remaining
maturities. The fair value of debt, which has a carrying value of
$15,014 million, was $15,346 million at September 30, 1996.
In order to achieve the desired balance between variable and fixed rate
indebtedness, TCI Group has entered into various interest rate exchange
agreements pursuant to which it pays (i) fixed interest rates (the "Fixed
Rate Agreements") ranging from 7.2% to 9.3% on notional amounts of $460
million at September 30, 1996 and (ii) variable interest rates (the
"Variable Rate Agreements") on notional amounts of $2,450 million at
September 30, 1996. During the nine months ended September 30, 1996 and
1995, TCI Group's net payments pursuant to the Fixed Rate Agreements were
$3 million and $1 million, respectively; and TCI Group's net receipts
pursuant to the Variable Rate Agreements were $11 million and less than
$1 million, respectively.
TCI Group's Fixed Rate Agreements and Variable Rate Agreements expire as
follows (dollar amounts in millions):
<TABLE>
<CAPTION>
Fixed Rate Agreements Variable Rate Agreements
-------------------------------------- ----------------------------------------
Expiration Interest Rate Notional Expiration Interest Rate Notional
Date To Be Paid Amount Date To Be Received Amount
------------- ------------- -------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
November 1996 8.9% $150 April 1997 7.0% $ 200
October 1997 7.2%-9.3% 80 September 1998 4.8%-5.4% 450
December 1997 8.7% 230 April 1999 7.4% 100
---- September 1999 7.2%-7.4% 300
$460 February 2000 5.8%-6.6% 650
==== March 2000 5.8%-6.0% 675
September 2000 5.1% 75
------
$2,450
======
</TABLE>
TCI Group is exposed to credit losses for the periodic settlements of
amounts due under these interest rate exchange agreements in the event of
nonperformance by the other parties to the agreements. However, TCI
Group does not anticipate that it will incur any material credit losses
because it does not anticipate nonperformance by the counterparties.
The fair value of the interest rate exchange agreements is the estimated
amount that TCI Group would pay or receive to terminate the agreements at
September 30, 1996, taking into consideration current interest rates and
the current creditworthiness of the counterparties. TCI Group would be
required to pay $33 million at September 30, 1996 to terminate the
agreements.
Certain subsidiaries attributed to TCI Group are required to maintain
unused availability under bank credit facilities to the extent of
outstanding commercial paper. Also, certain of TCI Group's subsidiaries
pay fees ranging from 1/4% to 1/2% per annum on the average unborrowed
portion of the total amount available for borrowings under bank credit
facilities.
(continued)
V-253
<PAGE> 404
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(7) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debt Securities of TCIC
In January 1996, TCI Communications Financing I ("Trust I"), an indirect
wholly-owned subsidiary of TCI Group, issued $16 million in common
securities to TCIC, a subsidiary of TCI Group, and issued $500 million of
8.72% Trust Originated Preferred SecuritiesSM (the "Trust I Preferred
Securities" and together with the common securities, the "Trust I
Securities") to the public. Trust I exists for the exclusive purposes of
issuing Trust I Securities and investing the proceeds thereof into an
aggregate principal amount of $516 million of 8.72% Subordinated
Deferrable Interest Notes due January 31, 2045 (the "8.72% Subordinated
Debt Securities") of TCIC. The 8.72% Subordinated Debt Securities are
unsecured obligations of TCIC and are subordinate and junior in right of
payment to certain other indebtedness of TCI Group. Upon redemption of
the 8.72% Subordinated Debt Securities, the Trust I Preferred Securities
will be mandatorily redeemable. TCIC effectively provides a full and
unconditional guarantee of Trust I's obligations under the Trust I
Preferred Securities.
In May 1996, TCI Communications Financing II ("Trust II"), an indirect
wholly-owned subsidiary of TCI Group, issued $16 million in common
securities to TCIC, and issued $500 million of 10% Trust Preferred
Securities (the "Trust II Preferred Securities" and together with the
common securities, the "Trust II Securities") to the public. Trust II
exists for the exclusive purposes of issuing Trust II Securities and
investing the proceeds thereof into an aggregate principal amount of $516
million of 10% Subordinated Deferrable Interest Notes due May 31, 2045
(the "10% Subordinated Debt Securities") of TCIC. The 10% Subordinated
Debt Securities are unsecured obligations of TCIC and are subordinate and
junior in right of payment to certain other indebtedness of TCI Group.
Upon redemption of the 10% Subordinated Debt Securities, the Trust II
Preferred Securities will be mandatorily redeemable. TCIC effectively
provides a full and unconditional guarantee of Trust II's obligations
under the Trust II Preferred Securities.
The Trust I and Trust II Preferred Securities are presented together in a
separate line item in the accompanying combined balance sheet captioned
"Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely subordinated debt securities of TCI
Communications, Inc." Dividends accrued on the Trust I and Trust II
Preferred Securities are included in minority interests in losses
(earnings) of consolidated subsidiaries in the accompanying combined
financial statements.
(8) Combined Equity
General
The rights of holders of the TCI Group Stock upon liquidation of TCI are
based upon the ratio of the aggregate market capitalization, as defined,
of the TCI Group Stock to the aggregate market capitalization, as
defined, of the TCI Group Stock, the Telephony Group Stock and the Liberty
Group Stock.
(continued)
V-254
<PAGE> 405
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Stock Options and Stock Appreciation Rights
Estimates of compensation relating to restricted stock awards, options
and/or stock appreciation rights ("SARs") granted to certain key
employees of TCI Group have been recorded in the accompanying combined
financial statements, but are subject to future adjustment based upon the
market value of Series A TCI Group Stock and Series A Liberty Group Stock
(see note 1) and, ultimately, on the final determination of market value
when the rights are exercised or the restricted shares are vested.
(9) Sale of Subsidiary Stock
On July 18, 1995, TINTA completed an initial public offering (the "TINTA
IPO") in which it sold 20 million shares of TINTA Series A common stock
to the public for consideration of $16.00 per share aggregating $320
million, before deducting related expenses (approximately $19 million).
The shares sold to the public represented 17% of TINTA's total issued and
outstanding common stock and 9% of the aggregate voting interest
represented by such issued and outstanding common stock. Also in July
1995, TINTA issued 687,500 shares of TINTA Series A common stock as
partial consideration for a 35% ownership interest in Torneos Y
Competencias S.A., an Argentine sports programming company (the "TYC
Acquisition"). As a result of the TINTA IPO and the TYC Acquisition, TCI
Group recognized a gain amounting to $123 million.
(10) Transactions with Telephony Group, Liberty Media Group and Other Related
Parties
Certain TCI corporate general and administrative costs are charged to
Telephony Group and Liberty Media Group at rates set at the beginning of
the year based on projected utilization for that year. The
utilization-based charges are set at levels that management believes to
be reasonable and that approximate the costs that each Group would incur
for comparable services on a stand alone basis. During each of the nine
month periods ended September 30, 1996 and 1995, Liberty Media Group was
allocated $2 million in corporate general and administrative costs by TCI
Group. The Telephony Group was allocated $1 million and less than $1
million in corporate general and administrative costs by TCI Group during
the nine months ended September 30, 1996 and 1995, respectively.
TCI Group has a 50.1% partnership interest in QE+Ltd. ("QE+"), which
distributes STARZ!, a first-run movie premium programming service
launched in 1994. Entities attributed to Liberty Media Group hold the
remaining 49.9% partnership interest.
(continued)
V-255
<PAGE> 406
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The QE+ limited partnership agreement provides that TCI Group will be
required to make special capital contributions to QE+ through July 1,
2005, up to a maximum amount of $350 million, approximately $153 million
of which was paid through September 30, 1996. QE+ is obligated to pay
TCI Group a preferred return of 10% per annum on the first $200 million
of its special capital contributions beginning five years from the date
of the contribution or five years from January 1, 1996, whichever is
later. Any TCI Group special capital contributions in excess of $200
million will be entitled to a preferred return of 10% per annum from the
date of the contribution. QE+ is required to apply 75% of its available
cash flow, as defined, to repay the TCI Group special capital
contributions and any preferred return payable thereon. To the extent
such special capital contributions are insufficient to fund the cash
requirements of QE+, TCI Group and Liberty Media Group will each have the
option to fund such cash requirements in proportion to their respective
ownership percentages.
TCI Group has also entered into a long-term affiliation agreement with
QE+ with respect to the distribution of the STARZ! service. Rates per
subscriber specified in the agreement are based upon customary rates
charged to other cable system operators. Payments to QE+ for the nine
months ended September 30, 1996 and 1995 aggregated $38 million and $22
million, respectively. The affiliation agreement also provides that QE+
will not grant materially more favorable terms and conditions to other
major cable system operators unless such more favorable terms and
conditions are made available to TCI Group. The affiliation agreement
also requires TCI Group to make payments to QE+ with respect to a
guaranteed minimum number of subscribers totaling approximately $339
million for the years 1996, 1997 and 1998.
Liberty Media Group also has the right to acquire an additional 10.1%
general partnership interest in QE+ based on a formula designed to
approximate the fair value of such interest. Such right is exercisable
for a period of ten years beginning January 1, 1999 after QE+ has had
positive cash flow for two consecutive calendar quarters. The right is
exercisable only after all special capital contributions from TCI Group
have been repaid, including any preferred return as discussed above.
Encore Media Corporation (90% owned by Liberty Media Group) earns
management fees from QE+ equal to 20% of managed costs, as defined. In
addition, effective July 1, 1995, Liberty Media Group started earning a
"Content Fee" for certain services provided to QE+ equal to 4% of the
gross revenue of QE+. Such Content Fees aggregated $3 million for the
nine months ended September 30, 1996. The Content Fee agreement expires
on June 30, 2001, subject to renewal on an annual basis thereafter.
Payment of the Content Fee will be subordinated to the repayment of the
contributions made by TCI Group and the preferred return thereon.
Entities included in Liberty Media Group lease satellite transponder
facilities from TCI Group. Charges by TCI Group for such arrangements
and other related operating expenses for the nine months ended September
30, 1996 and 1995, aggregated $9 million and $11 million, respectively.
(continued)
V-256
<PAGE> 407
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain subsidiaries attributed to Liberty Media Group produce and/or
distribute sports and other programming to cable television operators
(including TCI Group) and others. Charges to TCI Group are based upon
customary rates charged to others.
HSN pays a commission to TCI Group for merchandise sales to customers who
are subscribers of TCI Group's cable systems. Aggregate commissions and
charges to TCI Group were $5 million for each of the nine month periods
ended September 30, 1996 and 1995.
TCI Group manages certain treasury activities for Liberty Media Group on
a centralized basis. Cash receipts of certain businesses attributed to
Liberty Media Group are remitted to TCI Group and certain cash
disbursements of Liberty Media Group are funded by TCI Group on a daily
basis. Such cash activities are included in borrowings from or loans to
TCI Group or, if determined by the Board, as an equity contribution to be
reflected as an Inter-Group Interest to Liberty Media Group.
TCI manages certain treasury activities for Telephony Group on a
centralized basis. Cash disbursements of Telephony Group are funded by
TCI on a daily basis. Prior to the implementation of the Liberty Group
Stock Proposal the net amounts of such cash activities are included in
combined equity in the accompanying combined financial statements.
Subsequent to the implementation of the Liberty Group Stock Proposal,
such cash activities will be included in borrowings from or loans to TCI
Group or, if determined by the Board, as an equity contribution to the
Telephony Group.
If the Telephony Group Stock Proposal is approved by stockholders, all debt
incurred or preferred stock issued by the Company and its subsidiaries
following the issuance and sale of Telephony Group Stock would (unless the
Board otherwise provides) be specifically attributed to and reflected on
the combined financial statements of the Group that includes the entity
which incurred the debt or issued the preferred stock or, in case the
entity incurring the debt or issuing the preferred stock is
Tele-Communications, Inc., the TCI Group. The Board could, however,
determine from time to time that debt incurred or preferred stock issued by
entities included in a Group should be specifically attributed to and
reflected on the combined financial statements of one of the other Groups
to the extent that the debt is incurred or the preferred stock is issued
for the benefit of such other Group.
(continued)
V-257
<PAGE> 408
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
To the extent cash needs of one Group exceed cash provided by such Group,
one of the other Groups may transfer funds to such Group. The TCI Group
has provided and will continue to provide centralized cash management
functions under which cash receipts of certain entities included in the
other Groups are remitted to the TCI Group and certain cash disbursements
of the other Groups will be funded by the TCI Group on a daily basis. Such
transfers of funds between the Groups will be reflected as borrowings or,
if determined by the Board of Directors, in the case of a transfer from
the TCI Group to either the Liberty Media Group or the Telephony Group,
reflected as the creation of, or increase in, the TCI Group's Inter-Group
Interest in such Group or, in the case of a transfer from either the
Liberty Media Group or the Telephony Group to the TCI Group, reflected as
a reduction in the TCI Group's Inter-Group Interest in such Group. There
are no specific criteria for determining when a transfer will be reflected
as a borrowing or as an increase or reduction in an Inter-Group Interest.
The Board of Directors expects to make such determinations, either in
specific instances or by setting generally applicable policies from time
to time, after consideration of such factors as it deems relevant,
including, without limitation, the needs of the Company, the financing
needs and objectives of the Groups, the investment objectives of the
Groups, the availability, cost and time associated with alternative
financing sources, prevailing interest rates and general economic
conditions. Generally, it is expected that entities included in the
Liberty Media Group will seek their own long-term debt financing, whereas
the Telephony Group is expected to require additional advances from the
TCI Group for some period of time. To satisfy this need, TCI Group expects
to provide as of January 1, 1997 a revolving loan facility to Telephony
Group that would permit borrowings of up to $150 million to $200 million
over a five-year period. The interest rate on such revolving loans and the
terms and conditions of borrowings have not yet been determined.
Loans from one Group to another Group would bear interest at such rates
and have such repayment schedules and other terms as are established from
time to time by, or pursuant to procedures established by, the Board of
Directors. The Board of Directors expects to make such determinations,
either in specific instances or by setting generally applicable polices
from time to time, after consideration of such factors as it deems
relevant, including, without limitation, the needs of the Company, the
use of proceeds by and creditworthiness of the recipient Group, the
capital expenditure plans and investment opportunities available to each
Group and the availability, cost and time associated with alternative
financing sources.
The combined balance sheets of a Group would reflect its net loans to or
borrowings from the other Groups. Similarly, the respective combined
statements of operations of the Groups would reflect interest income or
expense, as the case may be, associated with such loans or borrowings and
the respective combined statements of cash flows of the Groups would
reflect changes in the amounts of loans or borrowings deemed outstanding.
In the historical financial statements, net borrowings of the Telephony
Group have been included as a component of the Telephony Group's combined
equity. Subsequent to the date of such financial statements, a portion of
such net borrowings was converted into a $500 million investment in
Telephony preferred stock as described below. The balance of such net
borrowings through January 1, 1997 will continue to be reflected as a
component of the Telephony Group's combined equity. Amounts borrowed by
the Telephony Group from another Group subsequent to January 1, 1997, will
be reflected on the Telephony Group's financial statements as indebtedness
to the applicable lender.
On December 1, 1996, the TCI Group converted $500 million of its interest
in the Telephony Group into a 6% cumulative compounding redeemable
preferred stock due from the Telephony Group. Such preferred stock is
due December 1, 2011.
In connection with its determination to recommend the Telephony Stock
Proposal to the Company's shareholders, the Board determined to convert
a portion of the amount invested by the Company in the investments
attributed to the Telephony Group into the aforementioned $500 million
preferred stock and a contractual right to use up to $500 million of tax
benefits generated by Telephony Group (principally arising from its
partnership interest in the PCS Ventures) without charge to the TCI Group.
Such right can be satisfied only through and to the extent of future income
tax benefits generated by Telephony Group.
(continued)
V-258
<PAGE> 409
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Although any increase in the TCI Group's Inter-Group Interest in the
Telephony Group resulting from an equity contribution by the TCI Group to
the Telephony Group or any decrease in such Inter-Group Interest
resulting from a transfer of funds from the Telephony Group to the TCI
Group would be determined by reference to the Market Value of the Series
A Telephony Group Common Stock as of the date of such transfer, such an
increase could occur at a time when such shares could be considered
undervalued and such a decrease could occur at a time when such shares
could be considered overvalued.
For all periods prior to the distribution of the Liberty Media Group
Common Stock on August 10, 1995 (the "Distribution"), all financial
impacts of equity offerings are and will be attributed entirely to the
TCI Group. After the Distribution, all financial impacts of issuances of
additional shares of TCI Group Common Stock are and will be attributed
entirely to the TCI Group, all financial impacts of issuances of
additional shares of Liberty Media Group Common Stock the proceeds of
which are attributed to the Liberty Media Group are and will be to such
extent reflected in the combined financial statements of the Liberty
Media Group, and all financial impacts of issuances of additional shares
of Liberty Media Group Common Stock the proceeds of which are attributed
to the TCI Group in respect of a reduction in any Inter-Group Interest in
the Liberty Media Group are and will be to such extend reflected in the
combined financial statements of the TCI Group. All financial impacts of
issuances of shares of Telephony Group Common Stock the proceeds of which
are attributed to the Telephony Group will be to such extent reflected in
the combined financial statements of the Telephony Group, and all
financial impacts of issuances of shares of Telephony Group Common Stock
the proceeds of which are attributed to the TCI Group in respect of a
reduction in the TCI Group's Inter-Group Interest in the Telephony Group
will be to such extent reflected in the combined financial statements of
the TCI Group. Financial impacts of dividends or other distributions on,
and purchases of, TCI Group Common Stock will be attributed entirely to
the TCI Group, and financial impacts of dividends or other distributions
on Telephony Group Common Stock will be attributed entirely to the
Telephony Group, except that dividends or other distributions on the
Telephony Group Common Stock will (if at the time there is an Inter-Group
Interest in the Telephony Group) result in the TCI Group being credited,
and the Telephony Group being charged (in addition to the charge for the
dividend or other distribution paid), with an amount equal to the product
of the aggregate amount of such dividend or other distribution paid or
distributed in respect of outstanding shares of Telephony Group Common
Stock and a fraction the numerator of which is the Telephony Group
Inter-Group Interest Fraction and the denominator of which is the
Telephony Group Outstanding Interest Fraction. Financial impacts of
repurchases of Telephony Group Common Stock the consideration for which
is charged to the Telephony Group will be to such extent reflected in the
combined financial statements of the Telephony Group, and financial
impacts of repurchases of Telephony Group Common Stock the consideration
for which is charged to the TCI Group will be to such extend reflected in
the combined financial statements of the TCI Group and will result in an
increase in the TCI Group's Inter-Group Interest in the Telephony Group.
(continued)
V-259
<PAGE> 410
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Federal income taxes and certain state and local taxes would be paid on a
consolidated basis. However, pursuant to a tax sharing agreement, federal
income taxes are calculated, with certain adjustments, on a separate return
basis for each Group (applying provisions of the Internal Revenue Code of
1986, as amended and related regulations as if such Group filed a separate
consolidated return for federal income tax purposes). Based upon these
separate calculations, an allocation of tax liabilities is made such that
each separate Group is responsible to the Company for its gross share of
the Company's consolidated federal income tax liabilities, such gross share
being determined without regard to (a) tax benefits that are attributable
to the Company or the other Groups or (b) certain tax benefits that are
attributable to a Group but that are taken into account in determining the
Company's consolidated federal income tax benefit carryovers. Similarly,
the Company is responsible to each Group for tax benefits attributable to
such Group and actually used by the Company in determining its consolidated
federal income tax liability. Notwithstanding the foregoing, the Company
and Telephony Group have agreed that the Company may use up to $500 million
of tax benefits generated by the Telephony Group in determining its
consolidated federal income tax liability without providing a credit to the
Telephony Group in such amount. Tax attributes, including but not limited
to net operating losses, investment tax credits, alternative minimum tax
net operating losses, alternative minimum tax credits, deferred
intercompany gains and tax basis in assets, would be inventoried and
tracked for each Group. In addition, pursuant to such tax sharing
agreement, state and local income taxes are calculated on a separate return
basis for each Group (applying provisions of state and local tax law and
related regulations as if the Group were a separate unitary or combined
group for tax purposes), and the Company's combined or unitary tax
liability is allocated between the Groups based upon such separate
calculation. The Company has retained the right to file all returns, make
all elections and control all audits and contests. The Company anticipates
that the assets and entities comprising the Telephony Group will be
transferred to a direct subsidiary of TCI. At such time, the Telephony
Group will become party to the Tax Sharing Agreement. Such transfers will
be recorded at carryover basis for financial reporting purposes.
(11) Commitments and Contingencies
TCI Group has guaranteed notes payable and other obligations of
affiliated and other companies with outstanding balances of approximately
$307 million at September 30, 1996. Although there can be no assurance,
management of TCI Group believes that it will not be required to meet its
obligations under such guarantees, or if it is required to meet any of
such obligations, that they will not be material to TCI Group.
TCI Group is obligated to pay fees for the rights to exhibit certain
films that are released by various producers through December 31, 2005
(the "Film Licensing Obligations"). Based on subscriber levels at
September 30, 1996, these agreements require minimum payments aggregating
$437 million. The aggregate amount of the Film Licensing Obligations is
not currently estimable because such amount is dependent upon certain
variable factors. Nevertheless, TCI Group's required aggregate payments
under the Film Licensing Obligations could prove to be significant.
TCI Group has made certain financial commitments related to the
acquisition of sports program rights through 2004. At September 30,
1996, such commitments aggregated $228 million.
(continued)
V-260
<PAGE> 411
"TCI GROUP"
(a combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Certain key employees of TCI Group hold restricted stock awards and
options with tandem SARs to acquire shares of certain subsidiaries'
common stock. Estimates of the compensation related to the restricted
stock awards and options and/or SARs have been recorded in the
accompanying consolidated financial statement, but are subject to future
adjustment based upon the market value of the respective common stock
and, ultimately, on the final market value when the rights are exercised.
TCI Group has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. In the opinion
of management, it is expected that amounts, if any, which may be required
to satisfy such contingencies will not be material in relation to the
accompanying combined financial statements.
V-261
<PAGE> 412
Preliminary Copy, dated December 19, 1996
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all shares of Tele-Communications, Inc.
Series A TCI Group Common Stock, par value $1.00 per share, held of record by
the undersigned on [record date], at the Special Meeting of stockholders to be
held on [February 21, 1997] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele- Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of
Common Stock, (b) change certain rights and powers of each series of
Common Stock, and the qualifications, limitations or restrictions
thereof, to reflect the authorization of the Telephony Group Common
Stock, and (c) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
------------------------------- Address Change and/or
Series A TCI Group Common Stock Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
Dated: , 1997
-------------------------------------
---------------------------------------------------
Signature
---------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X)In Black or Blue ink.[x]
<PAGE> 413
Preliminary Copy, dated December 19, 1996
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all shares of Tele-Communications, Inc.
Series B TCI Group Common Stock, par value $1.00 per share, held of record by
the undersigned on [record date], at the Special Meeting of stockholders to be
held on [February 21, 1997] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele- Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of
Common Stock, (b) change certain rights and powers of each series of
Common Stock, and the qualifications, limitations or restrictions
thereof, to reflect the authorization of the Telephony Group Common
Stock, and (c) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
------------------------------- Address Change and/or
Series B TCI Group Common Stock Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
Dated: 1997
-----------------------------------,
--------------------------------------------------------
Signature
--------------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
-2-
<PAGE> 414
Preliminary Copy, dated December 19, 1996
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all shares of Tele-Communications, Inc.
Series A Liberty Media Group Common Stock, par value $1.00 per share, held of
record by the undersigned on [record date], at the Special Meeting of
stockholders to be held on [February 21, 1997] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele- Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of
Common Stock, (b) change certain rights and powers of each series of
Common Stock, and the qualifications, limitations or restrictions
thereof, to reflect the authorization of the Telephony Group Common
Stock, and (c) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
----------------------------------------- Address Change and/or
Series A Liberty Media Group Common Stock Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
Dated: , 1997
-------------------------------------------
--------------------------------------------------------
Signature
--------------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink.[x]
-3-
<PAGE> 415
Preliminary Copy, dated December 19, 1996
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all shares of Tele-Communications, Inc.
Series B Liberty Media Group Common Stock, par value $1.00 per share, held of
record by the undersigned on [record date], at the Special Meeting of
stockholders to be held on [February 21, 1997] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele- Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of
Common Stock, (b) change certain rights and powers of each series of
Common Stock, and the qualifications, limitations or restrictions
thereof, to reflect the authorization of the Telephony Group Common
Stock, and (c) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
----------------------------------------- Address Change and/or
Series B Liberty Media Group Common Stock Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
Dated: , 1997
-------------------------------------------
--------------------------------------------------------
Signature
--------------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink. [x]
-4-
<PAGE> 416
Preliminary Copy, dated December 19, 1996
TELE-COMMUNICATIONS, INC.
Post Office Box 5630
Denver, CO 80217
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John C. Malone and Donne F. Fisher as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all shares of Convertible Preferred
Stock, Series C, par value $.01 per share, of Tele-Communications, Inc. held of
record by the undersigned on [record date], at the Special Meeting of
stockholders to be held on [February 21, 1997] or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1.
(Continued, and to be signed and dated on reverse side)
1. PROPOSAL TO APPROVE the amendment of the Restated Certificate of
Incorporation of Tele- Communications, Inc. to (a) authorize two new
series of the Common Stock, par value $1.00 per share, of
Tele-Communications, Inc. (the "Common Stock") to consist of 750
million newly authorized shares designated Tele-Communications, Inc.
Series A Telephony Group Common Stock and 75 million newly authorized
shares designated Tele-Communications, Inc. Series B Telephony Group
Common Stock (collectively, the "Telephony Group Common Stock"), and a
corresponding increase in the total number of authorized shares of
Common Stock, (b) change certain rights and powers of each series of
Common Stock, and the qualifications, limitations or restrictions
thereof, to reflect the authorization of the Telephony Group Common
Stock, and (c) provide for the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of the Telephony Group Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
------------------------ Address Change and/or
Series C Preferred Stock Comments Mark Here [ ]
Please sign exactly as name appears hereon. When shares are
held by joint tenants, both should sign. When signing as
attorney, as executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
Dated: , 1997
-------------------------------------------
--------------------------------------------------------
Signature
--------------------------------------------------------
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD Votes MUST be Indicated
PROMPTLY USING THE ENCLOSED ENVELOPE (X) In Black or Blue ink. [x]
-5-
